Academic journal article Public Administration Quarterly

Implementation of Financial Condition Analysis in Local Government

Academic journal article Public Administration Quarterly

Implementation of Financial Condition Analysis in Local Government

Article excerpt

ABSTRACT

One of the core objectives of financial reporting in local government is to provide information on financial position and condition of an organization. Financial position is accomplished when unqualified annual financial statements are provided to stakeholders at fiscal year end. Two additional steps are required, however, before interpretations can be made concerning the financial condition of a local government. Ratio analysis is conducted to evaluate financial relationships, and comparative analysis is used for building context. When the decision is made in local government to analyze, interpret, and communicate financial condition to elected officials, the next logical inquiry is to explore what management practices facilitate financial condition analysis and how do elected officials use the results for making policy decisions. This article presents three case studies in North Carolina, documenting lessons learned on transitioning from financial position to condition in local government.

INTRODUCTION

One of the core financial reporting objectives in local government is to provide users with information on the financial position and condition of an organization (GASB, 1987). The Governmental Accounting Standards Board (GASB) responded to this objective in 1999 with the passage of Statement No. 34, Basic Financial Statements-and Management's Discussion and Analysis-for State and Local Governments, expanding the financial reporting model to include fund-level and government-wide financial statements.1 Two of the seven purposes of the expanded reporting model as articulated by the GASB are to help users determine whether the government's overall financial position has improved or deteriorated and to help users make better financial comparisons between governments when analyzing financial condition (GASB, 1999). Mead (2002) concluded that the new reporting model does strengthen a government's ability to provide comprehensive information on financial position. He hedged, however, on financial condition, stating that additional analysis is often needed to assess fiscal strength.

One of the main purposes of embracing an approach to financial condition analysis in local government is to provide elected officials, who possess the ultimate fiduciary responsibility of the organization, with information on a government's ability to meet its ongoing financial, service, and capital obligations based on the status of resource flow and stock as interpreted from annual financial statements (Rivenbark, Roenigk, and Allison, 2010). When information on financial condition is provided to elected officials, the next logical inquiry in local government is to explore implementation outcomes. We begin this article with an overview of four models available to help local officials move from financial position to condition. We then offer three cases conducted in North Carolina on presenting elected officials with information on financial condition at fiscal year end, concluding with lessons learned on transitioning from financial position to condition in local government.

APPROACHES TO FINANCIAL CONDITION ANALYSIS

Analyzing the financial condition of any organization is complex-public or private. One aspect of this complexity is that financial statements are designed to report on resource flow (operating statement) for a given time period, and on resource stock (balance sheet) at a point in time. There also are numerous financial dimensions that align with flow and stock, along with numerous financial indicators to measure each dimension. For example, Kloha, Weissert, and Kleine (2005) found that state officials providing financial condition oversight for their respective local governments used approximately 174 indicators in various forms to monitor fiscal stress, ranging from one indicator in Alaska to thirty in Michigan.2

Another aspect of this complexity is the need for contextual data for interpreting the results of the financial indicators, including how they change over time and how they compare against industry standards or results from other organizations. …

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