Utilizing the CAFR obtained for Exercise 1-1 and your answers to the questions asked in Chapters 1 through 9, assess the financial condition of the government. For purposes of this project, financial condition is broadly defined as a city's ability to provide an adequate range of services on a continuing basis. Specifically, it refers to a city's ability to (1) maintain existing service levels, (2) withstand major economic disruptions, and (3) meet the demands of a changing society in a dynamic economy. Examine the following issues and questions.

  a. Analysis of revenues and revenue sources.

    (1) How stable and flexible are the city's revenue sources in the event of adverse economic conditions?

    (2) Is the revenue base well diversified, or does the city rely heavily on one or two major sources?

    (3) Has the city been relying on intergovernmental revenues for an exces sive portion of its operating expenditures?

    (4) What percentage of total expenses of governmental activities is cov ered by program revenues? By general revenues?

    (5) Do any extraordinary or special items reported in the statement of activities deserve attention?

  b. Analysis of reserves.

    (1) Are the levels of financial reserves (i.e., fund balances, contingency funds, and unrestricted net assets) adequate to meet unforeseen oper ational requirements or catastrophic events?

    (2) Is insurance protection adequate to cover losses due to lawsuits or dam age to property?

    (3) Is an adequate amount of cash and securities on hand, or could the city borrow quickly to cover short-term obligations?

  c. Analysis of expenditures and expenses.

    (1) Do any components of expenditures and, at the government-wide level, expenses exhibit sharp growth?

    (2) Is adequate budgetary control being exercised over expenditures?

    (3) How does the growth pattern of operating expenditures and expenses over the past 10 years compare with that of revenues?

  d. Analysis of debt burden.

    (1) What has been the 10-year trend in general obligation long-term debt relative to trends in population and revenue capacity?

    (2) Are significant debts of other governments (e.g., a school district, a county) supported by the same taxable properties? What has been the trend for this "overlapping" debt?

    (3) Are there significant levels of short-term operating debt? If so, has the amount of this debt grown over time?

    (4) Are there any significant debts (e.g., lease obligations, unfunded pen sion liabilities, accrued employee benefits) or contingent liabilities?

    (5) Are any risky investments such as derivatives disclosed in the notes to the financial statements? Are the types of investments adequately explained, and are their risks adequately disclosed?

  e. Socioeconomic factors. What have been the trends in demographic and economic indicators, such as real estate values, building permits, retail sales, population, income per capita, percent of population below the poverty level, average age, average educational level, employment and unemployment, and business licenses? (Note: Many of these items and other potentially useful information can be obtained from the County and City Data Book published by the U.S. Bureau of the Census. See your university library or get selected data from the Census Bureau's Web site www.census.gov.)

  f. Potential "red flags" or warning signs.

    (1) Decline in revenues.

    (2) Decline in property tax collection rate.

        (a) Less than 92 percent of current levy collected?

        (b) Property taxes more than 90 percent of the legal tax limit?

        (c) Decreasing tax collections in two of the last three years?

    (3) Expenditures increasing more rapidly than revenues.

    (4) Declining balances of liquid resources and fund balances.

        (a) General Fund deficit in two or more of the last five years?

        (b) General Fund balance less than 5 percent of General Fund revenues and other financial sources?

    (5) Reliance on nonrecurring i.e., special item) revenues to support current-period operations.

    (6) Growing debt burden.

        (a) Short-term debt more than 5 percent of operating revenues?

        (b) Two-year trend of increasing short-term debt?

        (c) Short-term interest and current-year debt service on general obligation debt more than 20 percent of operating revenues?

        (d) Debt per capita ratio 50 percent higher than four years ago?

    (7) Growth of unfunded pension and other employee-related benefits such as compensated absences and postemployment health care benefits.

    (8) Deferral of needed maintenance on capital plant.

    (9) Decrease in the value of taxable properties, retail sales levels, or dis posable personal income.

    (10) Decreasing revenue support from federal or state government.

    (11) Increasing unemployment.

    (12) Unusual climatic conditions or the occurrence of natural disasters.

    (13) Ineffective management and/or dysfunctional political circumstances.

Required

  a. Calculate, insofar as possible, the financial ratios in Illustrations 10-3 and 10 4 of the text. Evaluate the ratios in terms of the red flags and benchmarks provided in Illustrations 10-6 and 10-7 and long-term trend data for each ratio, if available. List any assumptions you made.

  b. Locate any additional data that you think may be useful in assessing the financial condition of this city; for example, see the U.S. Census Bureau's Web site at www.census.gov and the Web sites of cities you consider comparable in size or other attributes to this city.

  c. Prepare a report on the results of your analysis. The report should have an appendix providing a few graphs and/or tables to support your analysis. In particular, graphs showing revenues, expenditures, and key debt ratios for the past 10 years and selected demographic and socioeconomic trends are helpful. You may want to include some of the ratios calculated in part b in an appendix. Be succinct and include only data relevant to your analysis. Organize your report along the lines of the ratios evaluated in part a.