Solutions to Cases

 

10-1.    a.  The performance measures shown in Illustration 10-4 use data from the basic financial statements, which includes the government-wide financial statements as well as the fund financial statements.  The measures that can be calculated using the government-wide financial statements presented in this case are:

 

(1) unrestricted net assets

(3) debt to assets

(4) capital asset condition

(5) current ratio

(6) quick ratio

(8) change in net assets

(9) interperiod equity

(10) business-type activities self-sufficiency

(12) revenue dispersion

 

Measures (14) financing margin¾bonded debt per capita and (15) financing margin¾legal debt limit, and (16) financing margin¾property taxes per capita can be calculated using the additional data on population and debt limit presented in this case.  Measure (17) Financing margin¾sales tax rate could perhaps be calculated from information in the CAFR if tax revenue was sufficiently broken down to show the portion from sales and tax revenue.

 

Measures (2) General Fund budgetary fund balance, (11) debt service coverage, and (13) debt service load require fund financial statements.  Measure (7) pension plan funding requires information that would be in required supplementary information, such as the notes to the financial statements.

 

b.                                                                     Catalpa City                                                               Government-wide Financial Performance Measures

 

 

2008 Calculations

2008

2007

2006

 

 

(see Ill. 10-4 for definition of ratios)

$ or % or number of times

1.

Ending  unrestricted net assets as a % of annual revenue

Governmental activities:

4,597

20,302+3,860+1,886+495

Business-type activities:

3,546

5,218+7

 

17%

 

 

68%

 

14%

 

 

51%

 

13%

 

 

85%

3.

Debt to assets (total liabilities as a % of total assets)

Governmental activities:

19,266

34,040

Business-type activities:

7,167

14,740

 

57%

 

 

49%

 

61%

 

 

61%

 

68%

 

 

57%

4.

Capital asset condition (% of useful life left in depreciable capital assets)

Governmental activities:

15,039

(37,183+37,600)/2*

Business-type activities:

3,681

(17,775+14,455)/2*

 

40%

 

 

23%

 

44%

 

 

40%

 

50%

 

 

50%

5.

Current ratio

Governmental activities:

9,299

3,366

Business-type activities:

3,966

667

 

2.76 times

 

5.95

times

 

4.49

times

 

6.19

times

 

2.03

times

 

6.86

times

6.

Quick ratio

Governmental activities:

9,299-253-26

3,366

Business-type activities:

3,966-8-58

667

 

2.68

times

 

5.85

times

 

4.31

times

 

6.10

times

 

 

1.92

times

 

6.75

times

8.

Change in net assets from the prior year (governmental and business-type activities total)

22,347 – 17,447

$4,900

$3,220

$3,867 (change in total net assets from 2006 statement of activities)

9.

Interperiod equity (number of times revenue exceeds expenses)

Governmental activities:

20,302+3,860+1,886
+495-100

23,973

for BTA see next ratio

 

 

1.10

times

 

 

1.16

times

 

 

 

1.15

times

 

10.

BTA self-sufficiency

5,218

2,895

1.80

times

1.00

times

1.41

times

12.

Revenue dispersion (% of own-source revenue)

Governmental activities:

3,860+1,886+495+2,190+716

20,302+3,860+1,886+495-100

Note: business-type activities revenue is almost 100% charges for services for each year.

 

34.6%

 

 

 

 

37.7%

 

35.2%

14.

Financing margin¾bonded debt per capita

Governmental activities:

15,900,000

30,420

 

 

$522.68

 

$597.36

 

$602.87

 

15.

 

Financing margin¾legal debt limit (remaining % of debt limit available)

 

Governmental activities:

15,900,000

20,000,000

 

79.5%

 

15.5%

 

20.5%

16.

Financing margin¾property taxes per capita

Governmental activities:

17,296,000**

30,420

 

$568.57

 

$481.39

 

$496.70

 

*  Insufficient information is available (i.e., the beginning of the year balance of depreciable assets) to calculate average depreciable assets for the year 2006.  Thus, for 2006, the end of year balance was used in the denominator of the ratio.

 

**  Actual property tax levy information was not provided.  Used property tax revenues instead.

            c.         Catalpa City appears to be in strong financial condition based on the following interpretations of the ratios calculated for part b:  Unrestricted net assets have increased each of the three years in both governmental and business-type activities; capital assets still have at least half of their useful lives to go; the current and quick ratio indicate that the government is liquid and can pay its current liabilities; there is still capacity to issue more debt if need be.  Some indicators that should be watched include the relatively high amount of debt as a percent of total assets. 

 

10-2.       Organizations’ Web sites are continually changing and evolving.  One can expect, however, that over time more rather than less information will become available. At this time, helpful sites to visit are

 

www.standardandpoos.com for Standard and Poor’s

www.moodys.com for Moody’s Investor Services

www.fitchratings.com for Fitch Investors, Inc.

 

Each of the services does provide information about the process of evaluating municipal bonds and Moody’s provides benchmark information about financial ratios for governments classified by type and size.


 

Ch. 10, Solutions (Cont’d)

 

10-3.

a.                  The solution to this case will depend on which year’s Financial Trends report each student obtains.  In the October 2004 report, the following indicators are labeled as “negative” rather than “positive” or “neutral”:

 

FINANCIAL FACTORS:

Revenues: revenue per capita

Expenditures:  fringe benefits

Contingent Liabilities:  pension benefit obligation

 

 

b.                  Students will, of course, formulate different questions; however, you should expect them to address the negative trends identified in part a.  For example:  Is our revenue per capita going down because total revenue is decreasing or population is increasing?  Is the cost of fringe benefits increasing because of escalating health care costs?  Do we have an unfunded pension obligation that is as serious as San Diego, California faced in 2005? 

 

Encourage students to go beyond a simple question, such as “Why is this ratio negative?” to one that suggests a cause for the negative trend that helps frame the response of the financial manager at a public meeting where time is always a constraint.

 

10-4.    a.        

 

 

Computation

Rating

Weight

Score

Unrestricted net assets as a percentage of annual revenue

32%

6

3

18

Percentage of assets funded with outstanding debt

36%

8

1

8

Change in net assets

3.4%

3.4

3

10.20

Interperiod equity

114%

10

2

20

Totals

 

 

9

56.20

Maximum score possible

 

 

 

90

Reading (Total score/maximum)*10

 

 

 

6.24

 

b.           This city is in above average health compared to other cities in the sample that is used to establish weights in the Crawford Performeter® and, overall, in good shape.  That is, 6.24 is greater than the mid-point of 5 on a scale of 1 to 10 with 10 indicating the best possible reading.  The change in net assets is the indicator with the lowest score and, as such, the city should analyze why this is so and take steps to improve this measure.  Unrestricted net assets as a percentage of annual revenue is the other indicator that is just above average (with a rating of 6) and, if improved, would significantly increase the city’s overall reading.

Ch. 10, Solutions, Case 10-3, (Cont’d)

 

c.                   There are 13 other performance measures listed in Illustration 10-7 that can be calculated from the city’s basic financial statements.  This information, along with other required and other supplementary information in the city’s comprehensive annual financial report (CAFR) would be helpful in analyzing the city’s overall financial health and performance for the year.  Any benchmarks for comparable cities (based on size, geographic location, range of services provided, etc.) would also be useful in an analysis of performance.