Utilizing the CAFR obtained for Exercise 1–17 and your answers to the questions asked in Chapters 1 through 9, assess the economic condition of the government. For purposes of this project, the term economic condition is as defined earlier in this chapter. 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 excessive portion of its operating expenditures?
(4) What percentage of total expenses of governmental activities is covered 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., unrestricted, assigned, committed, and restricted fund balances, contingency funds, and unrestricted net position) adequate to meet unforeseen operational requirements or catastrophic events?
(2) Do total governmental fund revenues exceed total governmental fund expenditures? Do General Fund revenues exceed General Fund expenditures? What has been the trend in the ratio of revenues to expenditures?
(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) How flexible are expenditures? That is, are there large percentages of relatively non-discretionary expenditures, such as for interest and public safety?
(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 pension liabilities, accrued employee benefits) or contingent liabilities?
(5) Are any risky investments such as derivatives disclosed in the notes to the financial statements?
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 level, and business licenses? (Many of these items and other potentially useful information can be obtained from the Census Bureau’s website 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 assigned and unassigned fund balance deficit in two or more of the last five years?
(b) General Fund assigned and unassigned fund balance less than
5 percent of General Fund revenues and other financial sources?
(5) Reliance on nonrecurring (e.g., special items and asset sales) 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 post employment health care benefits.
(8) Deferral of needed maintenance on capital plant.
(9) Decrease in the value of taxable properties, retail sales levels, or disposable personal income.
(10) Decreasing revenue support from federal or state government.
(11) Increasing unemployment.
(12) Unusual climatic conditions or the occurrence of natural or other 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, information provided in Illustration 10–3, benchmarks provided in Illustrations 10–5 and 10–6, 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 website at www.census.gov and the websites 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.