Academic journal article The Journal of Government Financial Management

Cities: Are They Financially Prepared for the Challenges Ahead?

Academic journal article The Journal of Government Financial Management

Cities: Are They Financially Prepared for the Challenges Ahead?

Article excerpt

Approximately one of every six Americans lives in one of the 75 largest cities in the country. Many more Americans live in surrounding areas and work in these cities or provide goods and services to those who do live and work in them. Still more of us visit major cities and enjoy what they offer. These major cities play vital roles in the fabric of America. The well-being of these cities is essential to the well-being of our nation.

In an earlier study published in the Spring 2007 issue of the Journal, we evaluated the financial readiness of states to meet critical challenges that arise unexpectedly from time to time, such as natural disasters. That analysis showed that many states are not in a favorable position for dealing with such challenges.

What about our cities? Where do they stand? Are they better prepared financially than states to handle the challenges created by natural disasters-or by similar emergencies that might result from the failure of aging infrastructure such as a bridge or from a terrorist act? How well might they be able to address an economic downturn without major tax increases or service cuts? Can the states help them? How much will the federal government assist? Are our cities prepared to deal with these and other crises? While the answers must come from multiple perspectives, one critical perspective is the financial ability of the cities to respond to future resource demands imposed by such challenges.

A comprehensive understanding of cities' financial ability to respond to such challenges requires in-depth study and analysis. However, insight can be gained through some simple financial measures that should signal the adequacy of a city's resources. Therefore, we gathered and analyzed selected information from the financial statements of 75 of the largest cities (including metro governments) in the U.S.1

For analysis and discussion purposes, we divided these 75 major cities into three groups of 25 based on population. We refer to the groups as Large Cities (over 550,000), Mid-Size Cities (between 330,001 and 550,000), and Small Cities (between 222,000 and 330,000). This study provides the same analysis of city data as was provided for states in the Spring 2007 issue. We will both compare the analysis of the cities with that of the states and consider the implications of a state's financial readiness on that of the major cities.

Financial Indicators

Four measures are analyzed and reported in this article using the same measures applied to states. Two are fund-based measures; two are based on government-wide financial statements. The measures include:

Fund-Based Measures

* Available General Fund fund balance (hereafter referred to as Fund Balance) presented as the number of months of General Fund (operating and intergovernmental) expenditures that could be financed by that Fund Balance.

* Available Fund Balance presented as a percentage of General Fund total revenues.

Government-wide Measures

* Governmental activities unrestricted net assets adjusted for available restricted net assets (hereafter referred to as UNA).

* UNA divided by governmental activities total expenses.

A brief synopsis of the rationale for these four measures follows.2

The Fund Balance measures are well-established levels recommended by the Government Finance Officers Association (GFOA). The recommended level of Fund Balance is considered necessary to help prevent service reductions or tax and fee increases because of revenue shortfalls or unforeseen one-time expenditures.3

The analysis considers the adequacy of each city's Fund Balance based on both expenditures and revenues. Fund Balance, as used here, includes not only unreserved Fund Balance of the General Fund but also appropriate General Fund Fund Balance reserves and the Fund Balance of appropriate Special Revenue Funds. This measure reflects most net financial resources available to address the effects of economic downturns, natural disasters and other challenges or emergencies. …

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