Understanding Financial Documents

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1 Understanding Financial Documents Financial Training and Grant Writing Workshop for Mayors of Underserved Communities Stacey Isaac Berahzer October 11, 2012 Georgia College and University Macon, GA

2 Outline Fund Accounting Financial Reporting Getting Information from Financial Reports 2

3 FUND ACCOUNTING 3

4 Government Accounting GAAP Generally Accepted Accounting Principles establishes the rules & conventions that guide the form and content of general-purpose financial statements GASB Governmental Accounting Standards Board the primary standard-setting authority for gov t, excluding the federal gov t 4

5 Fund Accounting An accounting system that is unique to state & local gov t A government s resources are segregated into categories, (i.e. funds ) to identify both the source of funds and the use of funds State and local governments use three broad categories of funds: governmental funds, proprietary funds and fiduciary funds Normal/repeated transfers between funds is not recommended 5

6 FUNDS Fund Accounting General Special Revenue Government Debt Service Capital Projects Permanent Proprietary Fiduciary Enterprise Internal Service 6

7 FUNDS Fund Accounting General Special Revenue Government Debt Service Capital Projects Proprietary Fiduciary Permanent Enterprise Internal Service Example: Water/Sewer 7

8 Fund Accounting Examples of Government Funds: General Fund each gov t has one account for all resources that are not required to be accounted for in other funds. Includes most major gov t functions such as police, fire, sanitation etc. special revenue established to account for resources that are legally restricted for specific purposes, e.g. lottery money for education capital projects used when buying/building major capital facilities 8

9 Exercise Fun with Funds Which fund(s) should be used to account for the following activities: Activity Police An electric utility system Construction of a new wastewater plant Public Transit Municipal motor vehicle pool (maintenance) Fund(s) 9

10 FINANCIAL REPORTING 15

11 Depreciation - Revisited Loss of use & value; or The systematic & rational allocation of the cost of tangible noncurrent operating assets over the period benefited by the use of the asset Source: Government and Not-for-Profit Accounting: Concepts and Practices, By Michael H. Granof, Saleha B. Khumawalas 16

12 GASB 34 Passed in 1999; should have been implemented by every local gov t by FY 2004 It states that gov ts need to include depreciation in the financial statements, in order to: Evaluate whether the government's current-year revenues were sufficient to pay for current-year services See the cost of providing services to its citizenry Understand the extent to which the government has invested in capital assets Source: GASB 34 Preface and Summary, GASB 17

13 GASB 34 Software provider and Consulting Services say Compliance with GASB 34 will be the single greatest element affecting daily lives for all Americans today. Source: web site advertisement for software provider GASB 34 is the "most significant pronouncement in the history of financial reporting requirements for local governments in the United States." GASB 34 will have a major impact on the way that Municipalities manage all infrastructure assets. Source: web site for consulting services American Public Works Association says The inclusion of depreciation charges for which there is no actual cash expenditure-as a government expense distorts financial statements and reduces their values as a management tool. Source: APWA Policy Statement adopted by APWA Board of Directors on 12/2/00 18

14 Capitalizable Asset Two years or more of useful life and has materiality (e.g. cost $500 or more; or cost $10,000 or more) 19

15 Financial Planning and Reporting Tools Annual reports Financial Statements Accounting reports CIPs Cash flow plans Annual budgets Performance measures 20

16 Planning Tools - Examples 10 Year Needs 5 Year Capital Improvement Plan 8 year Financial Plan 1 Year Budget 21

17 Budgeting Budget - An instrument to implement and manage public policy by obtaining and appropriating the necessary resources for service delivery Budget Process activities that encompass the development, implementation, and evaluation of the budget for the provision of services 22

18 Budgeting Tools Inflationary Adjustment converting current dollars into constant (real) dollars based on a selected index Consumer Price Index an indicator that measures the change in prices paid for a fixed basket of goods and services with constant quantity and quality as purchased by average urban consumers 23

GFOA Government Finance Officers Association Offers awards in several categories for proper finance documents Mission to enhance and promote the professional management of governments for

19 GFOA Government Finance Officers Association Offers awards in several categories for proper finance documents Mission to enhance and promote the professional management of governments for the public benefit by identifying and developing financial policies and best practices and promoting their use through education, training, facilitation of member networking, and leadership 24

20 GETTING INFORMATION FROM FINANCIAL REPORTS 25

21 Financial Ratios/Benchmarks Operating Ratio Operating Ratio including Depreciation & Amortization Quick Ratio Days Cash on Hand Debt Service Coverage Ratio Debt-to-Equity Ratio 26

22 Operating Ratio A measure of self sufficiency. Natural Benchmark: > 1.0 The revenue you get from daily operations, divided by the expenditures or expenses you make to keep operations running (see next slides)

23 Quick Ratio Accepted Benchmark: > 2 A measure of short-term liquidity: ability to pay your current bills

24 Days Cash on Hand Benchmark? At the very least, enough to last a billing cycle or when you expect a substantial inflow of cash A measure of the ability of the utility to weather a significant temporary reduction in revenue to continue paying for daily operations

25 Debt Service Coverage Ratio Natural Benchmark: > 1 A measure of the ability to pay debt service with operating revenue: Operating revenue left over after daily operation expenditures, divided by debt service

26 Exercise Reading Financial See Handout Statements 31

27 Will post materials to: Stacey Isaac Berahzer

Generating the Funding at the Utility

Generating the Funding at the Utility Tennessee Water & Wastewater Utilities Partnership Energy Management Workshop #3 Murfreesboro, TN 06/21/12 Stacey Isaac Berahzer Glenn Barnes www.efc.unc.edu Session