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Weekly UpdatesMost governments have now implemented the new reporting requirements mandated by Governmental Accounting Standards Board Statement No. 34, and are now faced with the task of explaining the results to citizens, policymakers, and government officials. When the new reporting model was adopted, the GASB issued the following statement in a news release:
How can this information be used to analyze the financial performance of a government? The reporting model under Statement No. 34 provides new information that enables users to assess financial position and results of operations for local government. This article will discuss analytical techniques by which citizens, policymakers, and government officials can use GASB 34 information to indeed achieve a clearer picture of a local government's finances.
WAYS TO USE FINANCIAL INFORMATION
Government financial statements contain a lot of numbers and can be difficult to analyze. Numbers by themselves provide little useful information. Reporting dollar amounts for such items as cash, net assets, and certain revenues and expenses has limited value. Even comparing dollar amounts from the financial statements of different governments can have limited value because localities vary significantly in terms of size, making direct dollar value comparisons inappropriate. However, there are tools that can be used to bring more meaning to the numbers presented in financial statements. This article examines four of these tools.
The first tool is trend analysis. This technique tracks the change in financial statement accounts over a period of time, and can be very useful in identifying significant relative changes. Unfortunately, most governments only have one or two years of reporting completed under GASB 34. Trend analysis will be more valuable in the future as more GASB 34 data becomes available.
A second technique is to express financial statement information on a per capita basis. This allows for meaningful comparisons among localities of different sizes. The ability to compare financial resources, debts, and certain revenues and expenses on a per capita basis provides useful information about a government's finances to policymakers, citizens, and other stakeholders.
A third tool that can be used is common size statements. The items in the statement of net assets can be stated as a percentage of total assets, and the items in the statement of activities can be stated in terms of either total general revenues or total expenses. These percentages can reveal important information about a government's finances, and they lend themselves to comparisons among governments. For example, a government may compare its proportional spending on various functions to that of similar entities.
Another tool that can be used to analyze financial information is ratio analysis. Ratios are often used to express a relationship between two elements on the same financial statement or between two elements from different statements. In addition to providing information about the relationship between elements for a particular government, ratios are a good way to make comparisons among governments of different sizes. For example, a government's unrestricted net assets can be expressed as a percentage of total expenses, thus providing helpful information about the level of unrestricted reserves.
These four tools provide a useful way to analyze and explain the information contained in the new financial statements under GASB 34, as will be illustrated in the rest of this article.
THE NEW STATEMENTS
GASB 34 requires two new financial reports: the statement of net assets and the statement of activities. These statements provide new information about the financial position and results of operations for local government. The statements not only provide more meaningful information about individual governments, but they also facilitate much more meaningful comparisons among governments.
The new reports include information that is useful in measuring the performance of government activities for three main reasons. First, financial information is aggregated for the government entity and not just reported by funds. This is an improvement over the prior reporting model in which government activities (public safety, parks and recreation, community development, etc.) were often reported in several separate funds. Second, financial information under GASB 34 is reported under the accrual method of accounting. This method uses a business-type approach to measuring the cost of government, which more accurately reflects economic activity. Finally, the statements report the net cost to the taxpayer of the different services of government. Prior reporting models showed only total costs of an activity and not the amount supported by taxes and other general revenues.
STATEMENT OF NET ASSETS
The statement of net assets reports what a government owns (assets) and owes (liabilities), as well as the net difference between the two (net assets). The statement reports the financial position of a government at a particular point in time. Although the net assets amount represents what is left after liabilities are subtracted from the assets, the entire amount does not represent resources available to finance current operations. This is true for two reasons. First, some of the net assets represent capital assets (such as land and buildings) less related debt. Second, some net assets have external restrictions and can only be used for specific purposes. Therefore, net assets on the new statements are classified as invested in capital assets net of related debt, restricted net assets, or unrestricted net assets.
How can citizens and elected officials use the information in the statement of net assets to analyze a government's financial position? The analytical tools discussed earlier can help with this evaluation. For example, the common size technique can be used to determine how a government finances its assets. Because assets, liabilities, and net assets are expressed as a percentage of total assets, this technique will reveal the percentage of total assets financed with debt and the percentage of total assets that represents residual value.
Using the per capita technique, information can be compared on a "per citizen" basis for major components of assets, liabilities, and net assets. This information can be used to address such questions as whether a government possesses an appropriate level of assets for an entity of its type and size. Similar questions can be answered about debt and the components of net assets.
Both the common size and the per capita techniques allow for comparisons among governments of different sizes. Exhibit 1 is an example of a per capita comparison of assets, liabilities, and net assets for governmental activities. This information was taken from a Web site created by Radford University for local governments in Virginia (see sidebar), and reports information for cities using the GASB 34 reporting model for fiscal year 2003.
Notice that Newport News and Roanoke are very close in terms of liability per capita: $2,494 for Newport News and $2,456 for Roanoke. If you were to use absolute dollar amounts to compare these two jurisdictions, however, the story would be much different. Newport News has almost twice as much debt as Roanoke.
STATEMENT OF ACTIVITIES
The statement of activities reports the results of operations for a single fiscal year. In some regards, it is like an income statement for a business. However, the statement's format is different from a typical income statement used by a business. An income statement for a business starts by listing revenues and then subtracts expenses to arrive at net income. The statement of activities begins with expenses and subtracts program revenues to arrive at the net burden to the taxpayer, and then subtracts general revenues to arrive at the change in net assets during the period.
The format of the statement of activities is designed to report the net expenses or revenues for the different functions of local government. This is accomplished by first reporting total expenses for these functions and then reporting the different types of program revenues. Program revenues reduce the net cost of each function. The net revenue (expense) for each function is computed by subtracting program revenue from expenses. This figure represents the relative burden of each function o[I the taxpayers and on other general revenues of the government.
Finally, the statement of activities reports the change in net assets for the year. This is the "bottom line" measure for a local government. It shows whether a government's financial position improved or declined for the year.
How can citizens and elected officials use the information in the statement of activities to measure financial performance? Again, the tools discussed earlier can help with this evaluation. For example, the per capita technique can be used to express individual revenue sources--as well as total revenues, expenses, and change in net assets--on a per capita basis. This information is useful for comparing the financial performance of local governments.
Exhibit 2 is an example of a per capita comparison of local government spending in the area of public safety. This table reports expenses, program revenues, and net expense for reporting cities in Virginia. The table is sorted by the per capita expense column--from highest to lowest. Note that Norfolk and Charlottesville spend a similar amount per citizen on public safety. Again, a comparison of absolute dollar amounts would have been misleading. Charlottesville spent about $20 million on public safety during fiscal 2003, while Norfolk spent $122 million.
Another analytical tool that can be used with the statement of activities is the common size technique. Here the items in the statement of activities can be expressed as a percentage of either total expenses or total general revenues. For example, expenses for governmental activities like highways and streets, economic development, and culture and recreation can be divided by total expenses for governmental activities. This allows stakeholders to determine what percentage of total expenses is going toward each functional area. Exhibit 3, which expresses public safety spending as a percentage of total expenses, shows that Richmond devotes a higher percentage (25 percent) of its total expenses to public safety than any of the other reporting governments.
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