Finance officers and managers need to continuously monitor and evaluate the fiscal condition of their jurisdictions. This is especially true in the face of the current recession, coupled with the trend since the 1980s of transferring expenditure responsibilities and revenue assignments to lower levels of government (i.e., from federal to state a local governments). U.S. Census Bureau data show that the sources of local government funding have been shifting away from relatively stable property taxes to more volatile sales and income taxes over the past 2030 years. And in fiscal year 2006, local governments were responsible for 62 percent of their own revenues, compared with 52 percent in 1978. For example, property taxes accounted for 58 percent of local government own-source revenues in 1978 and accounted for 45 percent in 2006? To make up for this difference, local governments have adopted sales taxes and, to a lesser degree, imposed income taxes and expanded fees and charges?
Most of the academic research on measuring government fiscal health over the past couple of decades has focused on developing and justifying measures of fiscal condition. One of the most commonly used studies is Kenneth Brown's 10-point test, which was based on data from 1989. (3) This article builds on Brown's strengths and addresses the shortfalls mentioned above by providing ten indicators of financial condition for 2003-2006. This information can help a jurisdiction develop a better understanding of its financial condition, identify hidden or emerging problems, present a picture of strengths and weaknesses, introduce long-term considerations, and provide a starting point for cities to consider financial policies that pertain to their particulate city government. It can also help a local government present the state of its financial condition to its policy body, citizenry employees, and outside entities such as bond rating agencies.
Brown used a large national sample for benchmarking, relying on financial data provided by the Government Finance Officers Association (GFOA) on more than 700 municipalities. Brown's article makes it possible for practitioners and academics alike to follow the calculations for each of the 10 indexes used and to evaluate municipal financial condition relative to national comparisons, based on population size. The strength of Brown's work is its simplicity--the data required for calculating the ratios is easily accessible from audit reports--and that it provides financial condition benchmarks based on community size. Brown did admit two weaknesses associated with his ratios:The data are a snapshot from 1989 and, therefore, may be time sensitive, and the ratios ignore enterprise funds (e.g., public utilities) and focus exclusively on governmental funds. It can also be argued that several indicators Brown included might not be significant in assessing financial condition, including general fund sources from other funds divided by total general fund sources, total general fund liabilities divided by total general fund revenues, and operating expenditures divided by total expenditures. These ratios of financial condition do not provide a long-term comparable perspective or provide insight into the financial condition of the city.
The updated data used for this article were provided by the GFOA, the same source Brown used. As Brown discussed,the strength of the dataset is that it provides a consistent collection of audited financial data for municipalities throughout the country. The weakness is that the data do not reflect a true sample of municipalities, as the municipalities that submitted data did so in hopes of receiving a financial reporting award from GFOA. Therefore, one might think of the respondents as high-performing communities and thus providing a benchmark for all municipalities.
MEASURING FINANCIAL CONDITION
Financial condition--an organization's ability to maintain existing service levels, withstand economic disruption, and meet the demands of growth and decline--can be defined by:
* cash solvency (the ability to pay obligations in the next 30 to 60 days)
* budgetary solvency (the ability to generate enough revenues to pay expenses within the budgetary period)
* long-run solvency (the broader sense of finances, addressing the ability to pay all long-term costs of operations such as pensions)
* service-level solvency (the ability to provide services at the level and quality appropriate to ensure the health, safety, and welfare of the community)
This article focuses on the first three measures. …