City Council Memorandum
TO: HONORABLE MAYOR AND CITY COUNCIL DATE: april 12, 2022 FROM: FINANCE DEPARTMENT WARDS: ALL
SUBJECT: MANAGING CITY’S FINANCIAL HEALTH THROUGH THE USE OF FINANCIAL HEALTH INDICATORS TO MAINTAIN FISCAL RESPONSIBILITY ISSUE:
Receive and provide input on the use of Financial Health Indicators to report on and manage the overall financial fiscal health of the City and maintain fiscal responsibility.
RECOMMENDATIONS:
That the City Council receive and provide input on the Financial Health Indicators discussed herein.
BACKGROUND:
To maintain the City’s goal of fiscal responsibility, Financial Health Indicators (FHI) have been produced to measure the City’s overall financial health compared to similar and surrounding cities.
There are many ways to evaluate a city’s financial health. The City prepares numerous financial and budgetary reports every year. In addition, there are continuous rating agency analyses, as well as several different proposed measures of financial condition.
Financial Health Indicators are a proactive approach to monitoring or assisting local governments in identifying early signs of fiscal stress. The City can use FHIs to recognize early signs of fiscal stress and take a proactive approach while monitoring the fiscal health of the City.
This report explores one perspective on how to measure the City’s financial condition. It does not give a grade to the City’s financial condition, but rather looks at 11 different aspects of the City’s finances to see how the City was doing as of the end of the 2020-21 fiscal year. This includes the City’s trend over the previous five (5) years and how the City compared to other similar California jurisdictions. Since the comparative data used for this analysis is only produced on an annual basis and is derived from the Annual Comprehensive Financial Report (ACFR) of each City, an annual update will be presented after all comparative reports are made available to the public. Cities are required to complete and issue the ACFR by December 31 of each year; however, it is not unusual for a City to complete a report after the required due date. The Finance Department will return each year following the publication and availability of all comparative ACFR’s with an updated FHIs report.
The cities used for comparative purposes were selected due to their similar size and characteristics to that of the City of Riverside. They were also selected from the Market Basket recommendations presented by Human Resources to the City Council on October 1, 2019. The comparison data from the other cities is derived from each respective City’s ACFR. This is audited information and is used for comparative purposes against the City’s financial results as presented in the ACFR for the fiscal year ended June 30, 2021; however, the City of Ontario has not issued its ACFR for the fiscal year ended June 30, 2021, and therefore, they are excluded from the analysis this year in order to avoid any delays in this reporting. Trend information is provided to show the City’s performance over the last five (5) fiscal years (Attachment 1).
This report is meant for the City’s government leaders, decision makers, residents, businesses, and taxpayers. It provides financial context for the impacts on services and maintenance that the City has seen over the last five years. It simplifies the detailed information contained in the City’s Annual Comprehensive Financial Report (ACFR) and gives residents a sense of how the City is faring compared to its peers.
DISCUSSION:
Sound fiscal health is imperative to ensuring the effective operation of the City. It is critical that the City continuously assesses its financial condition and fiscal health. On a quarterly basis, staff reports the financial condition analysis of the City which contains valuable information on the current and future state of City finances. Regular analysis can highlight potential fiscal problems and provide information necessary for timely corrective action. By taking action to address weaknesses and strengthen fiscal health, the City can better ensure that resources are available to fund the level and quality of services expected by our citizens.
The FHIs discussed below correlate to the City’s ability to meet its financial commitments now and into the future and have been identified as useful in determining signs of fiscal stress. The FHIs are based on information derived from the City’s Annual Comprehensive Financial Report (ACFR).
These financial health indicators are designed to open a dialogue and provide clear and useful information. Staff has centered the discussion of financial condition on three (3) basic questions and 11 measures to evaluate financial condition. At the core of each question is an evaluation of the City’s ability to provide services to the residents of Riverside. Additionally, one new financial health indicator and one new resource allocation indicator were added at the request of the Budget Engagement Commission. The resource allocation indicator was provided to assist in better understanding how the City is allocating its resources to the community.
FINANCIAL POSITION - Can the City Pay its Bills Now?
The City’s financial position is strong if it has plenty of cash and other liquid resources available. Without those resources, it will have to borrow money, delay payments, or liquidate some of its other assets, all of which carry significant financial costs.
FHI #1 General Fund Reserve Ratio
What it means: This indicator identifies changes (increases or decreases) in General Fund reserves from the prior year to the current year and is useful in identifying if the City’s fund balance reserve is deteriorating.
Why it is important: A declining fund balance reserve can be a sign of fiscal stress. This indicator is important in identifying a trend of a deteriorating fund balance reserve as well as how rapidly it is deteriorating. A higher ratio suggests larger reserves for dealing with unexpected resource needs in the long run.
FHI #2 General Fund Liquidity Ratio
What it means: This indicator identifies changes (increases or decreases) in available cash and is useful in identifying the City’s ability to pay bills on time by measuring readily available cash, such as unrestricted cash and investments.
Why it is important: A declining ratio indicates that the City does not have sufficient cash available to meet its current obligations as they come due. This indicator is important in identifying a trend of deteriorating cash as well as how rapidly it is deteriorating. For this measure, a higher ratio suggests a greater capacity for paying off short-term obligations.
FINANCIAL PERFORMANCE - Can the City’s Revenues Cover its Expenses? The City does not only need to pay bills now, but it needs to make sure that the money it brings in regularly is enough to cover its annual expenses. Missing this mark can negatively affect service levels and the City’s credit rating which is important for current loan covenants and any future potential debt financing.
FHI #3 General Government Growth in Net Position Ratio
What it means: A growth in net position indicates that the City can pay its expenses with its revenue and is able to establish appropriate reserves for future allocation.
Why it is important: Revenues from the City’s programs ideally should cover the expenses that the City incurs for those programs, otherwise reserves may need to be used to meet the needs. A higher ratio suggests that annual costs are adequately funded, and the financial condition is improving.
FHI #4 General Government Operating Margin Ratio
What it means: The City funds certain programs via grants and intergovernmental aid from other government agencies (e.g. Federal and State) and also charges for services that are offered to its residents. This measurement illustrates how much of the City expenditures are funded by charges, fees, and grants rather than general tax dollars to fund program expenditures.
Why it is important: The City charges for services and may receive grants and aid from other governments (e.g. Federal and State). For this measure, a higher ratio suggests basic government services are more self-sufficient through charges, fees, and grants and less reliant on general tax dollars to fund program expenditures.
FHI #5 General Government Own Source Revenue Ratio
What it means: The City receives grants and intergovernmental aid from other government agencies, such as the state and federal governments. While the City welcomes grants and aid to support City services, the less reliant the City is on money from those sources, the more independent the City’s financial condition is.
Why it is important: Revenues from grants are used to support some City functions. Other functions, such as public safety, are mainly funded by general tax dollars. This ratio illustrates the extent to which general government revenues were supported by grants. A lower ratio suggests that the City is not heavily reliant on grants and more reliant on general tax dollars and charges for services.
LONG TERM SOLVENCY – Can the City Pay its Bills in the Future? The City will have bills in the future and its current financial condition will influence its ability to pay them. For the long-term future, the City needs to ensure that its revenue sources can cover long-term spending needs and provide services to a growing and changing population.
FHI #6 General Government Near-Term Solvency Ratio
What it means: The City has both short-term and long-term obligations that must be paid in the future. The fewer number of years of annual revenue needed to pay the City’s obligations, the stronger the City’s financial condition.
Why it is important: This ratio demonstrates that the City is able to pay a larger portion of its debts with annual revenues. For this measure, a lower ratio indicates a stronger financial condition.
FHI #7 General Government Debt, Pension Liability, and OPEB Burden per Resident Ratio What it means: The City issues debt for a variety of reasons and pays for employees’ pensions, including other post-employment benefits. Having a low debt per capita, would put the City in a stronger financial position.
Why it is important: Lower bonded debts, pension liability, and other post-employment benefits (OPEB) per capita result in a smaller debt burden on taxpayers. For this measure, a lower ratio indicates a stronger financial condition.
FHI #8 Governmental Funds Coverage Ratio
What it means: If a large portion of the City’s expenses go towards paying debt principal and interest, it shows that the City is less able to spend money on services and capital improvements.
Why it is important: The City has principal and interest payments on debt. The lower the amount of these payments compared to all the other expenditures it has, the stronger its financial condition. For this measure, a lower ratio indicates a stronger financial condition.
FHI #9 Enterprise Funds Coverage Ratio
What it means: This measure compares the interest expense owed on debts annually to the ongoing, typical operating revenues from which that expense will be paid. This is similar to a small business owner making sure that the interest payments on the mortgage for her office aren’t too large compared to the revenues she brings in each year.
Why it is important: Just like the City’s governmental services need to pay their debts (e.g., bonds) in the long-term, the City’s Enterprise Funds need to do so as well. The City’s Enterprise Funds include Electric, Water, Sewer, Airport, Refuse, Transportation, Public Parking, and Civic Entertainment Funds. For this measure, a higher ratio indicates a stronger financial condition.
FHI #10 General Government Capital Asset Value Ratio
What it means: A negative ratio indicates that the City’s capital assets decreased in value—that is, the value at the end of the year was less than the value at the beginning of the year. This indicates that the depreciation of capital assets was greater than the value of capital assets added, and that some capital assets may need to be renovated or replaced. The City needs to make sure that as capital assets age, it is renovating or replacing them. For this measure, a higher ratio indicates a stronger financial condition.
Why it is important: Capital assets include land, buildings, vehicles, and public infrastructure. Most of the City’s capital assets decrease in value over time due to depreciation. A negative ratio means that the overall value of the City’s assets decreased over the year indicating some assets may need to be renovated or replaced. For this measure, a higher ratio indicates a stronger financial condition.
FHI #11 Enterprise Funds Capital Asset Age Ratio (New)
What it means: This ratio explains the percentage of Enterprise Funds capital assets that have been depreciated. A lower ratio indicates that the City’s Enterprise Funds capital assets are newer.
Why it is important: Depreciable capital assets include buildings, vehicles, and public infrastructure. Assets are depreciated over their useful life as they age, and their value is reduced. A lower ratio indicates Enterprise Funds capital assets are newer and may not require as much replacement and/or maintenance costs compared to older capital assets.
Based on prior year recommendations from the Budget Engagement Commission, a resource allocation indicator has been added this year in order to provide a better understanding of how the City is allocating its resources and is for informational purposes only.
Indicator #12 General Fund Public Safety Costs Ratio (New) What it means: This ratio compares the total costs of the General Fund public safety, which includes police and fire, to the total General Fund expenditures. A higher ratio indicates more funds are dedicated to public safety.
Financial health is more than a grade; it is about whether a local government has sufficient resources to deliver the services its residents expect. The FHIs described herein are designed to provide explanations for some measures of financial condition and are part of an ongoing conversation about financial health and service delivery in the City. The Finance Department has presented this report to the Budget Engagement Commission on April 7, 2022 and the Financial Performance and Budget Committee on April 8, 2022.
STRATEGIC PLAN ALIGNMENT:
This item contributes to Strategic Priority No. 5 High Performing Government and the following four Goals:
5.2 – Utilize technology, data, and process improvement strategies to increase efficiencies, guide decision making, and improve access to and delivery of financially sustainable city services.
5.3 – Enhance communication and collaboration with community members to improve transparency, build public trust, and encourage shared decision making.
5.4 – Achieve and maintain financial health by addressing gaps between revenues and expenditures and aligning resources with strategic priorities to yield the greatest impact.
5.5 – Foster a culture of safety, well-being, resilience, and sustainability across the city organization.
The Report utilizes City and comparative data to present informative measures of the City’s financial health that can help guide decision making related to providing City services in alignment with strategic priorities. The information is provided publicly to enhance transparency surrounding City finances and encourage community input.
This item aligns with each of the five Cross-Cutting Threads as follows:
Community Trust – The Financial Health Indicators Report enhances transparency regarding City finances and shares important information about the City’s fiscal health with the public in relation to comparative cities.
Equity – The Financial Health Indicators Report is available to all members of the public and provides data that can help guide financial decision making regarding the equitable distribution and fiscal sustainability of city services.
Fiscal Responsibility – The Financial Health Indicators Report demonstrates fiscal responsibility through the monitoring of the City’s financial health. The Report is designed to facilitate open dialogue and provide clear and useful information using 11 fiscal health measures to evaluate the financial condition of the City.
Innovation – The Financial Health Indicators Report utilizes the most currently available data alongside that of comparative cities to help guide decision making for the delivery of financially sustainable City services.
Sustainability & Resiliency – The Financial Health Indicators Report uses 11 fiscal health measures to evaluate the City’s fiscal sustainability and resiliency and provide useful information for decision making related to the provision of city services and funding of long-term needs.
FISCAL IMPACT:
There is no direct fiscal impact associated with this report.
Prepared by: Nancy Garcia, Controller
Certified as to
availability of funds: Edward Enriquez, Chief Financial Officer / City Treasurer Approved by: Kris Martinez, Assistant City Manager
Approved as to form: Phaedra A. Norton, City Attorney
Attachments:
Financial Health Indicators 5-Year Trend and Comparable Cities Presentation
Financial Health Indicators Report ● Page 6