Internal Audit Report Financial Condition Analysis January 2014

Transcription

1 Internal Audit Report January 2014 City of Sioux Falls Internal Audit Department Carnegie Town Hall 235 W. 10 th Street Sioux Falls, SD

2 January 2014 FINANCIAL CONDITION ANALYSIS INTERNAL AUDIT REPORT INTRODUCTION This review of the City of Sioux Falls (the City) financial statements is intended to encourage discussion of the City s financial condition. Internal Audit selected various financial ratios and indicators for analysis based upon research of useful indicators and ratios. Comparison data from other regional cities is reported for additional perspective on the City s finances. Internal Audit has done similar analysis in past years. BACKGROUND The City s financial statements are required by state law to be audited by an external audit organization each year. These financial statements are included in a Comprehensive Annual Financial Report (CAFR) along with the auditor s report, management s discussion and analysis, background on the City, and statistical information. The Government Accounting Standards Board (GASB) requires that financial statements for governments be prepared and presented under uniform accounting rules and principles. Data for our analysis came from the CAFRs of Sioux Falls for the years 2003 through Data for comparison to other cities came from their most recently available CAFRs. A list of the comparison cities is included in the appendix at the back of this report. The strengths of this approach include: Sioux Falls data and comparative data was compiled under consistent accounting principles and audited under Government Auditing Standards. Analysis was performed independent of City management and offers a new perspective of the City s financial condition. Limitations of this approach include: The analysis is historical rather than a projection of future financial condition. The analysis provides a broad overview rather than detailed analysis. The analysis does not attempt to measure level and quality of services. OBJECTIVES We analyzed the City s CAFR for financial trends for ten years to determine: 1. If there are trends, favorable or unfavorable, in liquidity, debt service, capital asset condition and dependency on revenue from other governments. 2

3 2. How the City s financial performance compares to ten other cities in our region. The specific comparisons are in long-term liabilities, debt per capita and percentage of unreserved fund balance compared to expenditures. SCOPE AND METHODOLOGY RESULTS The scope of this project included an analysis of the financial data contained in the audited financial statements of the City of Sioux Falls for the years 2003 through Comparisons were made to audited financial data from a group of cities in our region. We also researched commonly used financial indicators and ratios for local governments. See the appendix of this report for sources consulted. NOTE: Governmental funds includes the City s general fund (the largest fund), the special revenue funds such as the 2 nd penny sales/use tax fund, permanent funds such as the library memorial fund and capital projects funds such as the culture and recreation bond construction fund. Business-type funds include enterprise funds such as the water fund and internal service funds such as the workers compensation fund. Short-term Solvency Short-term solvency ratios or liquidity ratios measure how well a government can pay its bills as they come due without straining their cash flow. The current ratio is a common liquidity ratio which compares current assets to current liabilities. A good benchmark is a ratio of at least two to one. Sioux Falls Current Ratios (Combined governmental and business-type funds) Conclusion: No warning trend. Liquidity exceeds the benchmark. The City of Sioux Falls is in good financial position to pay its short-term obligations. Service Flexibility The debt service ratio is a measure of how much of governmental funds expenditures are for debt service (principal and interest payments.) A high ratio suggests that much of the government s expenditures are for debt payment with less left over for operating expenditures and capital outlays. The debt service ratio is a measure of service flexibility. Service flexibility decreases as more expenditures are committed to annual debt services. A suggested benchmark is no more than.15 or 15 percent. 3

4 Sioux Falls Debt Service Ratios (Governmental funds) Conclusion: The ratio is steady and low. This suggests that there are sufficient resources available for operating expenditures and capital outlay. Debt service payments do not consume a very large portion of financial resources for the governmental funds. Capital Assets Condition A measure of the extent to which a government is investing in capital assets is the capital asset condition ratio. It is calculated by dividing the accumulated depreciation by the capital assets being depreciated. The result of this calculation is subtracted from one to come up with a ratio. A high ratio suggests that the government is investing in capital assets. Sioux Falls Capital Asset Condition Ratios (Combined governmental and business-type funds) Conclusion: Consistently high results over the past ten years. This ratio suggests that the City is investing in capital assets and doing so consistently. Dependency Some local governments are very dependent on other levels of government (e.g. state, federal) for revenue. A measure of how dependent a government is on other levels of government is the intergovernmental ratio. This is calculated by dividing the total intergovernmental revenue by the total revenue. Sioux Falls Intergovernmental Ratios (Governmental funds) Conclusion: The intergovernmental ratio has been steady for the last ten years. The ratio is low indicating that the City is not overly reliant upon other governments for financial resources. 4

5 Long-term Solvency Long-term solvency is the ability of an organization to pay its long-term obligations. The long-term liabilities ratio is a measure of long-term solvency. It is calculated by dividing the long-term liabilities by the total assets. A high ratio suggests that an organization has less ability to pay debt compared to an organization with a lower ratio. The average long-term liability ratio for the ten comparison cities is 0.3. Sioux Falls Long-term Liabilities Ratios (Governmental funds) Conclusion: The long-term liability ratio is low and is lower than the average of the ten comparison cities. The Events Center bond issue in 2012 is responsible for the increase from 2011 to Debt per Capita The debt per capita financial indicator compares outstanding debt of a city government to the population of the city. It is calculated by dividing the outstanding debt of a government by the population. Outstanding Debt per Capita $3,000.0 $2,500.0 $2,000.0 $1,500.0 $1,000.0 Sioux Falls Comparison Cities $500.0 $- Conclusion: Outstanding debt per capita for Sioux Falls has been rising significantly since It is still below the average debt per capita of the ten comparison cities. 5

6 Ability to Withstand Fiscal Stress The City of Sioux Falls has a reserve policy target of 25 percent (unassigned and assigned) of the balance in the general fund compared to expenditures at the close of the fiscal year. 1 The general fund is the City s largest fund and includes the police department, fire rescue, parks and recreation, libraries, street, health and many other departments. It does not include the various business-type activities such as the water department, public parking facilities, and the sanitary landfill. The percentage of reserve in a city s general fund compared to expenditures is a commonly accepted measure of ability to withstand financial stress. This reserve is sometimes referred to as the City s rainy day fund. A good benchmark is 16% (to cover two months of operations) or greater. Percentage of Unreserved Fund Balance Compared to Expenditures In the General Fund 40% 35% 30% 25% 20% 15% Sioux Falls Comparison Cities 10% 5% 0% Conclusion: The City has consistently exceeded the goal of finishing the fiscal year at 25% of unreserved fund balance remaining compared to expenditures in the general fund. Sioux Falls is in good position to withstand financial stress. The City is markedly better than the average of the ten comparison cities. 1 The City of Sioux Falls fiscal year is the same as the calendar year, January 1 st to December 31 st. 6

7 Percentage of 2 nd Penny Sales/Use Tax Used for Debt Service The second penny sales/use tax is the City s primary source for funding capital assets either through direct purchase or as debt service on borrowing for capital projects. 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Sioux Falls Percentage of 2 nd Penny Used for Debt Service Conclusion: There is not a consistent trend over the past ten years. Except for 2007, the percentage has ranged from 21% to 35%. The average for years 2003 through 2012 is 28%. CONCLUSION Overall, the City is in good financial shape on the basis of the financial indicators and ratios analyzed. Sioux Falls compares favorably to the comparison cities used in this report. Long-term debt has steadily increased during the past ten years primarily due to the City s investments in the Lewis & Clark water project ($70 million) and the Events Center ($115 million.) However, this long-term debt is still less than the average debt of the comparison cities. The City has the ability to pay its long-term liabilities based upon consistently high reserve in the general fund and capacity in the second penny sales/use tax for debt service. Bond rating companies who objectively analyze the City s ability to service outstanding debt have given Sioux Falls high bond ratings 2. 2 The City carries an Aa2 bond rating from Moody s and an AA- rating from Standard & Poor; page 24 of 2012 Comprehensive Annual Financial Report. 7

8 AUTHORIZATION The Sioux Falls City Council approved this audit by resolution in December 2012 as part of the 2013 Annual Audit Program. The Internal Audit division operates under the authority of an Internal Audit Charter adopted by City Council resolution STATEMENT OF INDEPENDENCE Internal Audit is administratively and operationally independent of the programs and departments it audits, both in appearance and in fact. The Internal Audit Manager is accountable to an Audit Committee appointed by the City Council per section of the Code of Ordinances of Sioux Falls, SD. DISTRIBUTION OF REPORT This report is intended for the information and use of the Mayor and City Council, management, and others within the City of Sioux Falls. However, the report is a matter of public record and its distribution is not limited. PERFORMED BY Rich Oksol, CPA, CGAP Internal Audit Manager 8

9 APPENDIX Comparison Cities Cedar Rapids, Iowa Des Moines, Iowa Duluth, Minnesota Fargo, North Dakota Lincoln, Nebraska Omaha, Nebraska Rapid City, South Dakota Rochester, Minnesota Saint Paul, Minnesota Sioux City, Iowa Sources Consulted Communicating Financial Condition to Elected Officials in Local Government by W. Rivenbark, D. Roenigk, and G. Allison, published in Popular Government, fall 2009 Evaluating Financial Condition: a Handbook for Local Government published by International City/County Management Association, 2003 Learning to Love the Numbers of Government by Mark Funkhouser, column in December 6, 2013 Your Money and Your Debt report by Texas State comptroller, Susan Combs,