1993 The10PointTestofFinancialCondit
- (Brown, 1993) ⇒ Ken W Brown. (1993). “The 10-point Test of Financial Condition: Toward An Easy-to-use Assessment Tool for Smaller Cities.” In: Government Finance Review, 9.
Subject Headings: 10-Point Test of a City's Financial Condition.
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Abstract
An evolving method for assessing the financial condition of a smaller city uses data from GFOAs Financial Indicators Database for comparing a city's key ratios with those of hundreds of similar size cities across the nation.
1. Introduction
A thorough financial-condition assessment that involves a large number of factors and related indicators can be very time consuming for a municipality. As a result, analysis of financial condition may not be a regular part of financial management. When these comprehensive financial-condition assessments are conducted, the large amounts of data involved can make it difficult to communicate the results to a city's management, governing board and citizenry.
This article describes a short test of financial condition that municipal finance officers can conduct for cities with populations under 100, 000. Called the 10-Point Test, the exercise suggested in this article allows finance officers to compare 10 key financial ratios for their city to similar ratios calculated for 750 smaller cities across the nation. The 10-Point Test includes a scoring procedure by which a municipal finance officer can grade his / her city and provide some evidence of the city's financial condition. The test was developed because of 1) the need for a quick and effective financial-condition assessment tool and 2) the improved availability of comparative city data provided by the Financial Indicators Database published in 1992 by the Government Finance Officers Association (GFOA). (1) The 10-Point Test of financial condition provides a concise and easy-to-use vehicle for the communication of financial condition to a city government's constituents. It is based on 10 ratios, listed in Exhibit 1, that are considered useful for assessing four basic financial factors for a city: revenues (ratios 1-3), expenditures (ratio 4), operating position (ratios 5-7) and debt structure (ratios 8-10). (2) The test consists of three steps, which will be described in detail in this article: 1) calculation of 10 key financial ratios based on data contained in the city's current annual financial report, 2) comparison of the city's ratios to ratios of similar-sized cities reported in this article and 3) grading the city's financial condition based on the comparisons in step 2.
A city has a limited ability to interpret its financial condition other than through comparisons with similar-sized cities. The GFOA's Financial Indicators Database, therefore, is valuable as a source of data for determining the 10 key ratios for cities across the nation. The database contains FY89, FY90 and FY91 financial data for all cities that were awarded the GFOA's Certificate of Achievement for Excellence in Financial Reporting in those fiscal years. All of the data have been presented in conformity with generally accepted accounting principles (GAAP) and most of the data have been subjected to independent audit. In using these data, however, one must recognize that the cities receiving this award do not represent a random sample of the nation's cities.
Without financial information such as ratios, informed decisions about financial condition are not possible. Even with financial information, the assessment of financial condition usually remains subjective. While city finance officers, city managers and governing board members may reach conclusions about their city's financial condition, their conclusions may be based on a few key indicators of their choice. On the other hand, some may obtain a perception of the city's financial condition and not able to identify the basis for that perception. The 10-Point Test, however, attempts to provide an objective scoring technique to help bring closure to financial-condition decisions.
Step 1: Calculation of Ratios
The first step of the test consists of calculating the 10 ratios for one's city, using the definitions in Exhibit 1. All data required for the ratios usually are available in the city's comprehensive annual financial report and current general purpose financial statements.
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| Author | volume | Date Value | title | type | journal | titleUrl | doi | note | year | |
|---|---|---|---|---|---|---|---|---|---|---|
| 1993 The10PointTestofFinancialCondit | Ken W Brown | The 10-point Test of Financial Condition: Toward An Easy-to-use Assessment Tool for Smaller Cities | 1993 |