Financial Accounting in Government and Non-Profit Organizations (Research Paper Sample)

Financial Statement Analysis
By:Grant Osborne
To: Melissa Shirah, CPA
ACCT421: Financial Accounting in Government and Non-Profit Organizations
November 29, 2014
City of Escondido, Fiscal Years 2013 and 2012
City of San Marcos, Fiscal Year 2013 [Comparable entity]
Description of services and activities provided by City of Escondido
The city of Escondido provides many services for its residents. According to pages 8 to 9 of Escondido’s CAFR for 2013, these services include street and park maintenance, police, fire protection, refuse collection, water utilities, wastewater management, inspection of buildings, planning, zoning, recreational programs, senior centers, libraries and public facility capital improvement constructions. Along with these items, the city also provides community services, information systems, human resources and finance services from its operating departments.
Description of the industry environment of Escondido
Based on the Principal Employers section on page 175 of Escondido’s CAFR for 2013, it appears that the city is primarily focused on services with the Palomar Medical Center, which takes up around 4% of total employment within the city followed by the Escondido Union School District with 2.55%. Escondido itself has municipal employees that comprise 1.48% of the total employment within the city. Other principal employers include Welk Group Inc., Escondido Union High School District, Home Depot, San Diego Wild Animal Park, Nordstrom Inc. and Vons Grocery Stores. Escondido is experiencing high rates of unemployment, around 9.3% as of 2012 according to the Demographic and Economic statistics section on page 174. Furthermore, the per capita income for the same year is around $20,836 for 2012. Compared to 2003, which was $31,600 and 5.2% respectively, this is a sign of weak economic health for the city. Based on this analysis, the high rates of unemployment would have a detrimental impact on the city’s ability to generate income taxes from its inhabitants.
Financial Analysis over a Two year Period
Overall, it seems that the city of Escondido is not doing well in terms of financial health, based on selected ratios. Due to the severe decline in Escondido's Fund balance ratio, from 0.564 in 2012 to 0.273 in 2013, the city is half as able to withstand any decreases in revenues and fiscal emergencies as it could have in the previous year. The current liabilities to the operating revenues ratio is very high, even though it has decreased from the previous year. The recommended amount has to be less than 5%. However, for 2013, Escondido has 19.9% fortheir current liabilities to operating revenues ratio. This indicates that the city would have trouble in paying its debts off, even though this is just comparing current liabilities to operating revenues rather than considering revenues from other sources such as taxes.However, what this does indicate is that the city would possibly rely more on other areas of revenues than operating revenues to pay off their overall liabilities, even though they have enough to cover them. Also, there is a lot of debt outstanding for the government as a whole which indicates that the governmental entity does not substantially own itself in a fiscal manner. This is apparent due to the fact that, in 2013,net bonds comprise about 137 of the 276 million dollars in total liabilities. Because of this, the city’s debt to assets ratio for both 2012 and 2013 was around 0.34.
There are some redeeming qualities about Escondido’s financials however. First, due to the increase in the revenues per capita, $526.16 in 2013 versus $470.65 in 2012, the government would be able to continue current service levels without trying to obtain new revenue sources, such as increasing the tax rate. The government seems like it can handle its own when it comes to its ability to pay its short- term obligations as they become due. While the current ratio has decreased by 10% from 2012 to 2013, the ratio is still incredibly high at around 17.6 in 2013. This means that the government's current assets are at least 17 times that of its current liabilities, making it more than able to pay off its short-term obligations which is seemingly contrary to its operating revenues ratio. However, this is just for its current liabilities, not long term debt such as its bonds which were an entirely different case. The BTA self-sufficiency ratios for 2013 and 2012 are both more than 1.00, 1.035 for 2013 and 1.019 for 2012. This means that the business-type activities run by the city of Escondido are self-sufficient and do not require any other payments from the city, such as taxes and the like that are not related to the business-type activities themselves.
Other financial ratios of note are the employees per capita and property taxes per capita. There is barely a change in the number of (municipal) employees per capita, 0.0075 for 2013 and 0.0074 for 2012. Also, for Escondido's CAFR for 2013 and 2012, there is no distinction between part-time and full-time employees. Finally, there are no personnel costs displayed anywhere in Escondido's CAFR for 2013 or 2012. However, based on page 176 of Escondido's CAFR for 2013, the total number of municipal employees have largely remained stable for the past ten years, only spiking in 2006 to 2008, so it seems that these employees are reasonable in number considering this factor. Based on Escondido’s property taxes per capita for 2013, taxpayers are burdened with $70.32 in property taxes, up from $68.12 for the previous year. However, the population between these two years barely changed as it increased by 150 from 2012 to 2013, reaching a current total of 146,057. This means that the property tax rate, or other factors, primarily caused the increase.
Based on my analysis of the city of Escondido’s financial statements using the selected ratios, it appears that the city is in weak financial health. This is largely due to the significant decline in the city’s fund balance which, as mentioned before, hinders its ability to deal with decreases in revenue or fiscal emergencies. What’s more is that the current liabilities to operating revenue ratio is around four times greater than the 5% ideal ratio.Also, the city has a very high amount of total liabilities, which account for around 34% of its total assets and a significant portion of these liabilities are comprised of net bonds. These factors, even when considering Escondido’s high unemployment rate and low personal income per capita, are signs of weak financial health. The fact that the city seems to be taking in a lot of bonds when its own economy doesn’t appear to be strong enough to withstand the burden does not appear to be a fiscally sound move based on the selected ratios and the analysis derived from them.
Financial comparison to a similar entity for a one year period
San Marcos is a city to the west of Escondido that contains a population of around 87,000 and it offers, more or less, the same services as Escondido. This includes police, fire departments, community services, public works and others. Like Escondido, San Marcos’ economic environment seems to be service-based with top employers such as United Parcel Service, Wal-Mart store, Inc., Fry’s Electronics and others. Of note is Hunter Industries Inc. which has around 2.45% of total employment as of 2013, or 725 total employees. Also, San Marcos has a higher per capita personal income in comparison to Escondido. San Marcos has $49,719 as of 2012 while Escondido has $20,836 in the same year. Also, San Marcos has an unemployment rate of 7.35% in the same year while Escondido has 9.3%. Another notable difference is that San Marcos has only one business type activity, the Creekside Marketplace, while Escondido has at least two which is its water and wastewater services. These factors are taken into consideration for the financial ratio comparison of these two cities.
Escondido takes in far more revenues per capita compared to San Marcos, $526.16 versus $47.15. This is due primarily to the fact that Escondido has far more business-type activities than San Marcos. Escondido has around $76.8 million while San Marcos has only $4.1 million. Escondido also has more employees per capita compared to San Marcos, 0.0075 versus 0.0045. This is probably expected as Escondido has more business-type activities than San Marcos. San Marcos has a far higher general fund balances ratio compared to Escondido, 34.59 to 0.27, which means that San Marcos' government can easily withstand financial emergencies that would appear trivial to it while being catastrophic for Escondido. Since San Marcos has very little operating revenues from its business type activities, its current liability ratio is extremely high compared to Escondido, 310% to 19.9%. However, what is even more apparent is that San Marcos's current liabilities account for nearly half of the city's total liabilities, around $12.7 million out of $23.2 million, indicating that San Marcos has far less long term debt relative to Escondido. On the other hand, the ideal current liabilities to operating revenues ratio should be 5% and neither one of these cities have achieved that ideal benchmark. Since San Marcos' total liabilities are extremely small compared to Escondido's, and that San Marcos' total assets are also greater, the city's Debt-to-assets ratio is only a fraction of Escondido's. San Marcos has a debt-to-assets ratio of 0.024 versus Escondido's 0.343, indicating that San Marcos' assets are primarily funded by sources other than debt. Like Escondido, San Marcos is more than able to pay off its short-term obligations as they become due, though San Marcos is slightly better with a ratio of 20.8 versus Escondido's 17.6. In spite of the fact that San Marcos draws in very little operating revenue...