Finance

A Measure of Financial Fitness

A new online tool in North Carolina provides a systematic approach in analyzing financial conditions for local governments.
by | February 10, 2011

How can you tell if your government is in good shape financially? That was a question a city manager put to Bill Rivenbark. Rivenbark is a former city official and University of North Carolina (UNC) professor who runs budget workshops for local officials. When he mentioned the query to two UNC colleagues, Dale Roenigk and Greg Allison, they agreed that, as Roenigk puts it, "a clean audit only tells you that you followed the rules of the audit. It doesn't tell you whether you're in good financial shape or bad."

The three decided to develop a dashboard that would give local governments a way to analyze the state of their finances. As Roenigk puts it, the idea was to "consolidate and organize financial information into concise and visual chunks so that elected and other public officials could think about what to do with the data."

It took them nearly four years, but localities in North Carolina now have such a tool. In an interview with the three professors, I asked how localities are using it and whether it's replicable for use in other states. Here are highlights from our conversation:

What was the problem you were solving?

Dale Roenigk: You may look at a balance sheet and see you have $10 million cash in the bank. But that doesn't tell you whether or not that's the right amount. If you're a small local government, that may be healthy. If you're Charlotte, you're not going to make payroll next week. The numbers are accurate but are you in the right financial shape to handle the systemic and unsystematic risks coming at you? The key is to create ratios that allow you to compare yourself over time and [to compare yourself] to other jurisdictions over time.

Greg Allison: The most recognized ratio in local government is fund balance as a percentage of expenditures, or how much of your total expenses for the entire year you have in savings at any point in time. If you have $10 million in your fund balance and your annual expenditures are $200 million a year, you divide 10 by 200 and that calculates out to 5 percent. If that's the case, we'd say, you should be very worried. But if you had $40 million in your fund balance, you're at 25 percent, and we'd say, you should feel comfortable.

DR: Here's another way to look at it. Let's say Greg's son comes home with a 75 on a test. If everyone else got 60, Greg's going to take his son out for dinner to celebrate. But if everyone else got 90, we're talking about hiring tutors. So it's a relative context that gives you some sense of whether you've got a good number or a bad number.

Once you developed the dashboard tool, how did you move forward?

DR: We had two to three beta sites and had some local governments implement them on a manual basis to make sure we were going down the right road. We also presented this information at conferences on budget and finance to make sure we weren't sitting in a vacuum putting a model together. We made changes based on the beta sites and feedback. But the utility of the model [came from working] with the state treasurer.

Tell me about the role the treasurer played.

DR: North Carolina is unique in that we have an agency -- the Local Government Commission -- that is a division of the state treasurer's office. Its purpose is to oversee fiscal and debt management of local governments. As part of that oversight, all cities, counties, school districts and public authorities are required to submit audited financial statements and additional financial information about their jurisdiction each year. So the commission's database of financial information was perfect for developing the tool we were envisioning. It relies on accessing data for all cities and counties and all areas of financial reporting. We could run numbers and figure out ratios: Everything for all 100 counties and 551 municipalities was in a central location.

How is the tool working out?

DR: We went live in July. We ran training seminars across the state. At each seminar we've gotten feedback about what an eye-opening tool it is, and how useful it is in communicating information for officials and citizens.

Can you give me specific examples of what it can do?

Bill Rivenbark: Let's say a locality wants to issue debt to build a new city hall. Does it have capacity to do that? And when it issues additional debt, how will it impact the financial condition of the organization? Compared to other localities, is the debt service getting to be too large a portion of the budget? This tool gives you the context to analyze where you currently are and where you will be when you issue new debt.

Another example would be public water and sewer utilities. The tool lets you look at all the money you get in as a function of charges -- the fees for delivering water to houses as a percent of expenditures. For a lot of jurisdictions, we find they are not actually collecting enough from charges to cover all expenditures. That raises questions: Should they? Is the locality transferring money in? So, the tool gives you a rational way to look at the situation and have a discussion you might not have otherwise.

Many of the costs we're dealing with here are not readily apparent in a checkbook, such as aging infrastructure. Cash flow may be adequate but if you've not kept up equipment, you're a step away from being crippled by an infrastructure failure. This is not always on the radar of an elected official who may be more concerned, politically, with water rates. For example: One financial measure is the capital asset condition ratio, or how much life appreciable capital assets have left in them? It's a good benchmark on the age of infrastructure. This tool lets you look at a wider picture. You may be house rich and cash poor.

Is this replicable outside of North Carolina?

DR: Any locality can take our model and manually implement it on an individual basis. You could create a dashboard by manually going through your financial statement and pulling out numbers. But you don't get context unless you have statements from other localities. To do it the way we do it in North Carolina, a state would have to collect all annual financial statements on an annual basis. You wouldn't need everything digitized, you'd just have to pull out 15 to 16 numbers for each jurisdiction. If you hired some graduate students for a couple of months, any state could do this. It would take about four hours per city to pull together four to five years of data. You can read more about how things work on these websites: www.nctreasurer.com/dsthome/StateAndLocalGov/lgcreport and www.sog.unc.edu/news/FiscalAnalysisTool.

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