INTRODUCTION

Financial Condition

Financial condition is defined as the ability of a local government to balance recurring expenditures with recurring revenues, allowing cities to provide necessary services on a continuing basis. A city in good financial condition can maintain adequate service levels during economic downturns and is able to develop resources to meet future needs. In contrast, a city in fiscal stress struggles to balance the budget, experiences service disruptions and has limited resources to finance future needs. Maintaining a sound financial condition requires governments to adjust to long-term changes in community needs and develop the ability to plan.

There is no single measure that fully captures the financial condition of a governmental entity therefore it is necessary to take a comprehensive approach that focuses on both external and internal fiscal factors.

Financial Indicators for a Fiscal Condition Analysis

There are over 40 standard indicators that can serve as an evaluation basis for the financial condition of a city. The indicators used in this course will be as follows:

Revenues

Total Revenues

Total Revenues per Household

Intergovernmental Revenues as a Percent of Operating Revenue

Property Tax Revenues

Sales & Use Tax Revenue per Household

Restricted Revenues

Expenditures

Total Operating Expenditures per Household

Fringe benefits

Fixed Costs as a Percent of Operating Expenditures

Debt per Household

This fiscal condition analysis, however, will focus only on the five (5) most important financial indictors:

Revenues

Total Revenues

Property Taxes

Sales Taxes

Expenditures

Operating Expenditures

Personnel Costs

Adjusting for Constant Dollars

Adjusting for inflation converts current dollars into constant dollars. The conversion from actual dollars to constant dollars allows for analysts to consider the appearance of growth that may be due to inflation. When dealing with dollars over time:

Before entering the budgeted amounts in the excel spreadsheets, you need to convert each dollar amount to constant dollars. Due to inflation, the purchasing power of the dollar changes over time, so in order to compare dollar values from one year to another, they need to be converted from nominal (current) dollar values to constant dollar values.

The easiest way to do that is to use an inflation calculator, such as the US Inflation Calculator found in the assignment resources.

REVENUE INDICATORS

Revenues determine a citys capacity to provide services. Important issues to consider relative to revenues are growth, diversity, reliability, flexibility, and administration. Under ideal conditions revenues will grow at a rate equal to or greater than the combined effects of inflation and expenditure pressures from new and/or expanded services. They should be sufficiently flexible to allow necessary adjustments in response to changing conditions. They should be diversified in their resources so as not to be overly dependent on residential, commercial, or industrial land uses or on external funding sources such as federal grants or discretionary state aid. User fees should be regularly evaluated and revised to cover the true cost of providing services. Analyzing a revenue structure will aid in identifying the following types of problems:

Deterioration in revenue base

Internal procedures or priorities that may adversely affect revenue

Over-dependence on obsolete or external revenue sources

User fees that are not covering the cost of providing services

Changes in tax burden

Inefficiency in collection or administration of revenue

Total Revenues per Household

Description: The warning trends that should raise a red flag for the city are decreasing net operating revenues per household. This was largely because of an increase in the county property taxes collected. Also the DPS and the Municipal Court substantially increased their revenues. And finally the city received income from a federal grant, which it had never received before. The period between 2018 and 2020 shifted back to normal, and this is why one sees another slight decrease.

Warning Trend: Decreasing total revenues per household.

Property Tax Revenue

Description: Property tax revenues are conditioned on ownership of property and measured by its assessed value. The warning trend suggests that a decline in property tax would be harmful to a citys operation. Maumelles property tax revenues have been increasing every year. The pattern of increasing property tax revenues should continue in future years due to growth and Maumelle establishing a charter school.

Warning Trend: Declining or negative growth in property tax revenues

Sales Tax Revenue as Percentage of Total Revenues

Description: Sales and...…of the most important sources of revenue for cities, and a decrease in sales tax revenue can have a significant impact on a city's budget. In addition, a decrease in sales tax revenue can also lead to a decrease in property tax revenue, as properties become less valuable when there are fewer people buying homes and businesses in the city (Otiso et al., 2013). As a result, a decrease in sales tax revenue can have a ripple effect on a city's finances, and it is important for cities to monitor their sales tax receipts closely (Jenn et al., 2015).

However, one of the most important indicators is a city's property tax revenues, which can be a useful leading indicator of the municipality's financial health. When property values are increasing, so too are the tax revenues generated from them. However, when property values stagnate or decline, it puts downward pressure on tax revenues. This can e a warning sign that the city is facing economic headwinds. If left unaddressed, these headwinds can lead to further declines in property values and tax revenues, creating a downward spiral that can be difficult to break out of (Anderson, 2011). Therefore, it is important for city officials to closely monitor property tax revenue growth (or lack thereof) as a leading indicator of the city's financial health. By taking proactive measures to address declining tax revenues, cities can avoid more serious financial problems down the road.

Finally, a city's total revenue per household is a key metric for measuring its financial health. If this number is decreasing, it is a warning sign that the city is in danger of becoming insolvent. There are a number of reasons why this might happen. For example, if the city's tax base is shrinking, it will have less money to work with. Additionally, if expenses are increasing faster than revenues, the city will also find itself in a difficult financial position. To avoid insolvency, city officials must take steps to increase total revenues or reduce expenses. Otherwise, the city may find itself unable to pay its bills…