The State Auditor's Office provides local governments with ratio indicators to benchmark financial performance and identify fiscal distress.
Editor's note: Each year the Government Finance Officers Association bestows its prestigious Award for Excellence to recognize outstanding contributions in the field of government finance. The awards stress practical, documented work that offers leadership to the profession and promotes improved public finance. This article describes the 1998 winning entry in the Communications and Reporting subcategory of the Budgeting and Financial Planning category.
Predicting when financial calamity may strike is very difficult for local governments. In the wake of recent fiscal crises, many officials are asking themselves how to assess and measure financial distress. What indicators should be analyzed to get a complete and accurate picture of their fiscal situation?
The State of Ohio Office of the Auditor has taken a unique approach to help clarify the picture for many local governments. Last year the Auditor's Office initiated a series of reports detailing key indicators developed from financial statements to measure and benchmark performance. These basic indicators illustrate financial practices among governments and may provide early warning signals for governments drifting toward crisis.
Several factors may make it difficult for officials, especially those in smaller units of government, to assess and thoroughly analyze their "financial condition" or "fiscal health." In its basic form, these terms refer to a government's ability to have resources available to meet both current and future obligations while maintaining services. Analytical problems include the following.
* There are very few standards against which local government finances can be measured with confidence.
* Fiscal difficulties emerge gradually and incrementally, making potential difficulties less obvious.
* It is difficult to compare one local government against another because of differences in populations, enrollments, or other demographic characteristics.
* There is a lack of "useable" and "understandable" dissemination vehicles and formats to assess financial condition.
The barometers vary for assessing a local government's financial condition. Bond rating agencies may employ complex economic models, while an individual legislator may be satisfied if receipts exceeded expenditures for the past fiscal year. The ratio analysis format developed by the Auditor's Office attains the goals of presenting sophisticated financial information and making the information user friendly.
The financial information in these reports are from financial statements based upon both Generally Accepted Accounting Principles (GAAP) and cash basis accounting since not all local governments in Ohio are required to report on the GAAP basis of accounting. Often both bases will be covered in a single report to accommodate governments that have not converted to GAAP - though separate comparison groups are maintained for both bases.
The techniques discussed herein are intended to provide an overview of fiscal health. The results obtained from the benchmark reports are a good starting point for analysis but not a conclusion. With this caveat in mind, there are many advantages to the format presented here.
The most obvious advantage to benchmarking local government finances is the potential to detect impending financial difficulty by plotting trends. Ohio law requires the Auditor's Office to issue - by class of government - summaries of government financial information filed every year. Unfortunately, simply rehashing these summaries as filed does not provide a real basis for identifying trends. This is especially true if one was trying to compare practices among similar governments.
The answer was found through benchmarking certain practices from these financial statements. …