worksheet

Fiscal Condition Analysis for Maumelle, Arkansas

Angel Cuffie

Liberty University

Introduction

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Financial Condition

Financial condition is described as the ability of organizations or institutions to create a balance between recurring expenditures and recurring revenues. According to Singla et al. (2018), it is the ability of institutions to raise funds. A strong financial condition indicates effective operations which results in profitability and the revenues exceed expenditure. On the other hand, a weak financial condition reflects a situation where institutions are unable to cater for their expenditure. For government entities, a good financial condition gives the entity the ability to provide essential services in an effectively and in a continued manner. It also ensures that services are offered even at adverse financial situations. In the contrary, government entities with weak financial conditions are unable to provide services and are faced with challenges such as disruptions in service delivery and have limited resources to cater for its needs (Singla et al., 2018). To maintain a strong financial condition, the government must take considerations to make long-term changes especially planning for developments for the future.

Financial Indicators for Fiscal Financial Analysis

A single measure cannot effectively capture the financial condition of an entire government entity therefore a comprehensive technique that emphasizes on both internal and external fiscal factors. There are numerous indicators for fiscal financial analysis (Sebestova et al., 2018). The financial indicators are broadly categorized into revenues and expenditures. Revenue financial indicators include total revenues, total revenues per household, intergovernmental revenues as a percentage of operating revenues, property tax revenues, sales & use tax revenues per household, restricted revenues to mention a few. On the other hand, expenditure financial indicators include total operating expenditure per household, fringe benefits, fixed costs as a percentage of operating expenditures, debt per household among others.

However, this fiscal condition analysis will only focus on the following five indicators;

Revenues

· Total Revenues

· Property Taxes

· Sales Taxes

Expenditures

· Operating Expenditures

· Personnel Costs

Adjusting for constant dollars

While dealing with dollars in a range of time, the dollars have to be converted into constant dollars. According to Johnson (2020), converting current dollars to constant dollars helps financial analysts to take into account the appearance of growth that maybe accrued to inflation. Inflation changes the purchasing power of the dollar over time. In this fiscal condition analysis, all the dollar values are converted into constant 2020 dollar values.

Revenue Indicators

Total Revenues per Household

Description: As a city’s population grows, it is anticipated that the needs for services will increase in a direct relationship. Therefore, the level of revenues per households should at least remain constant and at a minimum, equal to operating expenditures per household. If operating revenues per household decrease or become lower than operating expenditures per household, it may hamper a city’s ability to maintain the existing level of services unless new sources of revenues or ways of trimming expenses can be found.

Warning Trend: Decreasing total revenues per household

Revenues determines the ability of government entities to provide services. The essential issues that should be observed in relation to revenues of a government entity are the growth, reliability, diversity, and administration (Kopanska, 2018). Revenues is expected to grow at a relatively higher rate compared to both inflation and expenditures combined. Revenues should depict flexibility to accommodate for the changes and adjustments that may be necessary in the government service provision. Revenues should also show diversity in the manner that resources are not only relied from same sources such as residential reliance, commercial or on external funding from grants and discretionary states. User fees are to be evaluated and revised on regular patterns to ensure the true cost of services provided is effectively represented. Effective analysis of the revenue structure helps to depict challenges such as deterioration of the revenue base, internal procedures that may negatively affect the revenue, over dependence on some sources for revenue, user fees that may not cover provision of services effectively, the changes in tax burdens, and inefficiency in revenue collection.

Total revenue per household

It is expected that as the population of Maumelle, Arkansas grows, the need for services provided by the government also increases. Therefore, it is essential for the levels of revenue per household to remain in the constant or maintain a level that is able to cater for household expenditure per household (Chernick & Reschorsky, 2017). A reduction of the of the operating revenue per household to a lower level compared to the operating expenditure per household may cause inabilities of the government to provide services effectively. This is because it hampers the ability of the government to maintain the provision of services. New ways of revenue collection may be needed, or a reduction in operating expenditure per household to curb the challenges created by a reduction in total revenue per household.

According to the analysis of the Maumelle, Arkansas, there is an increase in total household per household which does not indicate a red flag since the warning trend is a decrease in total revenue per household. A decrease in total revenue per household is depicted from 2018 to 2019. This may be accrued to a reduction in revenue margins, an increase in household, or even an increase in operating expenditure per household (Chernick & Reschorsky, 2017). An increase in total revenue per household is depicted from 2019 to 2020 which is a positive move for the government. The increase may be due to introduction of new revenue sources such as grants and donations, reduction in taxes, or a reduction in operating expenditure. The implication of the reduction that was observed in 2018 to 2019 would include increased taxation to curb for the deficits, or in adverse situations, the government may be unable to provide services effectively. On the other hand, the increase in total revenue per household registered in 2019 to 2020 may imply better services from the government and reduction of taxes.

Table 1. Total Revenues per Household (2020 Dollars)

201820192020

Total Revenues $13,418,116$13,943,768$19,817,189

Total Revenues (2020 $) $13,829,786$14,115,790$19,817,189

Households 3,782 4,046 4,394

Total Revenues per Household (2020 $) $3,657$3,489$4,510

Chart 1. Total Revenues per Household

$3,657$3,489$4,510$0$500$1,000$1,500$2,000$2,500$3,000$3,500$4,000$4,500$5,000201820192020Total Revenues per Household (2020 $)

Property tax revenue

Property Tax Revenue

Description: Local property tax revenues are driven primarily by the value of residential and commercial property, with property tax bills determined by the local government’s assessed mill levy on the value of property. Property tax collections lag the real estate market, because local assessment practices take time to catch up with changes. As a result, current property tax bills and property tax collections typically reflect values of property from twelve to eighteen months prior.

A decline or diminished growth rate in taxable value may result from a number of causes such as an overall decline in property values, the transfer of taxable property to organizations that are exempt, or a decline in new development.

Warning Trend: Declining or negative growth in property tax revenues

Property tax revenue is greatly influenced by the value of both residential and commercial properties. The property tax bills are essentially determined by the government depending on the value of the property (Shazmin et al., 2017). In most cases, the real estate markets are lagged in property tax collection because the collection and assessment take a lot of time. Therefore, the bills that are subjected to property taxes are not up to date. In fiscal condition analysis, the warning trend for property tax revenue is the reduction or decline in property tax revenue. A decrease in property tax revenue may be accrued to several factors such as a reduction in the value of properties, a reduction of new developments, or transfer of taxable properties to institutions that are exempted from tax.

From the analysis of Maumelle, there was an increase in property tax revenues from 2019 to 2020. This is a positive depiction of the trend, and may it is significant in that the government has increased total revenue, which is essential for service provision (Shazmin et al., 2017). Similarly, it reduces the tax burden on other sectors, which relieves taxpayers. The implication of this increase may include an increase in property values or an increase in new developments. On the other hand, there was a decline in property tax revenue from 2018 to 2019, which depicts a critical warning. This decline may be caused by decreased new developments, a reduction in the value of properties, or increased transfer of taxable properties to institutions with exemptions in tax .

Table 2. Property Tax Revenues

201820192020

Property Tax Revenues* $2,050,000$2,050,000$2,200,000

Property Tax Revenue (in 2020 dollars) $2,112,894$2,075,291$2,200,000

Chart 2. Property Tax Revenue

$2,112,894$2,075,291$2,200,000201820192020Property Tax Revenue (in 2020 Dollars)

Sales tax revenues as a percentage of total revenues

Sales Tax Revenue as Percentage of Total Revenues

Description: Changes in economic conditions are also evident in terms of changes in sales tax collections. When consumer confidence is high, people spend more on goods and services, and city governments benefit through increases in sales tax collections. Prior to the recession, consumer spending was also fueled by a strong real estate market that provided additional wealth to homeowners. The struggling economy and the declining real estate market have reduced consumer confidence, resulting in less consumer spending and declining sales tax revenues.

Warning Trend: Declining or negative growth in sales & use tax revenues

Changes in sales tax revenues depict the changes that are eminent in the economic activities. An increase in the consumption of goods and services increases the sales tax revenues to the government. On the other hand, a decline in confidence in spending on goods and services by consumers reduces the amounts collected for sales tax revenues (Fiscal, 2020). The warning trend in this condition is a decline in sales tax revenue as a percentage of total revenues. From the analysis, Maumelle depicted an increase in sales tax revenues as a percentage of total revenues from 45.8% in 2018 to 57.6% in 2019, indicating a favorable position. The significance of this trend is that the government can avail better services. The implication of the trend suggests better spending of goods and services by consumers, which improves that economy.

However, there was a reduction in sales tax revenue as a percentage of total revenue from 57.6% in 2019 to 41.6% in 2020. This is a red flag and depicts challenges eminent in the economy. The implication of the decline includes a reduction in consumers' confidence in spending on goods and services. It also implies a reduction in operating expenditure due to a decrease in operating revenues.

Table 3. Sales Tax Revenues as a Percentage of Total Revenues

Description

201820192020

Total revenues 13,829,786$ 14,115,790$ 19,817,189$

Sales tax revenues 6,333,530$ 8,124,003$ 8,248,000$

Sales and use revenues as a percentage

of total revenues 45.8%57.6%41.6%

Chart 3. Sales Tax Revenues as a Percentage of Total Revenues

45.8%57.6%41.6%0.0%10.0%20.0%30.0%40.0%50.0%60.0%70.0%201820192020Sales Tax Revenues as a Percentage of Total Revenues

Expenditure indicators

Expenditures illustrate the output in the form of service provision. A higher expenditure indicates a higher service provision rate or high-quality services (Fiscal, 2020). In some situations, it can be an indicator of challenges in budget allocations. Analyzing the expenditure can be essential in determining problems such as excessive growth of overall expenditures compared to revenue growth, unfavorable increase in fixed costs, ineffective budget controls, and creation of future expenditure liabilities.

Operating expenditure per household

Operating Expenditures per Household

Description: Operating expenditures per household reflect changes in expenditures relative to changes in population. Increasing per household expenditures can indicate that the cost of providing services is increasing at a pace beyond the city’s ability to pay. If spending is increasing faster than can be accounted for by inflation or new programs, it may indicate that a city is spending more funds to support the same level of services or the methods of providing the services are inefficient.

Warning Trend: Increasing operating expenditures per household

Operating ex penditure per household indicates the relationship between expenditure and the population. An increase in operating expenditure per household may depict an increased rate of the need for service provision compared to the ability of the government to pay (Kushner & Ogwang, 2017). The warning trend in this analysis is increasing operating expenditure per household. According to the analysis, there is no alarm for alarm since it depicts an overall decline in the operational expenditure per household. Although there was a significant increase from 2019 to 2020, the general trend indicates a reduction in operating expenditure per household. The significance of this trend may suggest effective and efficient management in the government.

Table 4. Operating Expenditure per Household

Operating Expenditures Per Household 201820192020

Operating Expenditures $3,168,819$3,163,452$3,605,944

Operating Expenditures (2020 Dollars) $3,266,039$3,202,479$3,605,944

Number of Households 378240464394

Operating Expenditures Per Household (2020 Dollars) $864$792$821

Chart 4. Operating Expenditure per Household

$864$792$821$740$760$780$800$820$840$860$880201820192020Operating Expenditures Per Household(2020 Dollars)

Personnel costs per household

Personnel Costs per Household

Description: Employee wages and benefits can represent a significant cost to a city. Some benefits are mandated such as FICA, workers compensation and unemployment. Others, such as health insurance and retirement are discretionary.

Warning Trend: Increasing personnel costs per household

The costs accrued to employees' payments may is a significant indication of the expenses in the government. This includes the costs of benefits to employees that the government accrues in its costs (Kushner & Ogwang, 2017). The warning trend is an increase in personnel costs per household which is not depicted in the analysis of Maumelle. The trend indicates a decline in personnel costs per household from 2018 to 2020. This suggests an improvement in the effectiveness under which the government is managing personnel expenditures.

Table 5. Personnel Costs per Household

Personnel Costs Per Household 201820192020

Personnel Costs $9,736,012$10,306,516$11,094,892

Personnel Costs (2020 Dollars) $10,034,714$10,433,666$11,094,892

Number of Households 378240464394

Personnel Costs Per Household (2020 Dollars) $2,653$2,579$2,525

Chart 5. Personnel Costs per Household

$2,450$2,500$2,550$2,600$2,650$2,700201820192020Personnel Costs Per HouseholdYearsPersonnel Costs Per Household(2020 Dollars)

Biblical perspective

The Bible has prudent illustrations that explain the importance of effective management of finances. According to the Bible, it is wise to plan since it yields better results. The Bible says, “The plans of the diligent lead to profit as surely as haste leads to poverty” (Proverbs 21:5, ESV). Therefore, governments and institutions should plan for expenditures, balancing them efficiently with the collected revenues.

Concluding Remarks

In conclusion, the financial condition is described as the ability of organizations or institutions to create a balance between recurring expenditures and recurring revenues. A robust financial condition indicates effective operations, which results in profitability, and the revenues exceed expenditure. On the other hand, a weak financial condition reflects a situation where institutions cannot cater to their expenditure. Therefore, governments need to have adequate fiscal condition analysis and evaluations to manage expenditure and revenues effectively.

References

Chernick, H., & Reschovsky, A. (2017). The fiscal condition of US cities: Revenues, expenditures, and the “Great Recession.” Journal of Urban Affairs, 39(4), 488-505. https://www.tandfonline.com/doi/abs/10.1080/07352166.2016.1251189

Fiscal, Y. T. D. State Tax Revenues Continued to Decline in May 2020. https://www.urban.org/sites/default/files/2020/07/01/monthlystrh_may2020.pdf

Johnson, R. W. (2020). How Does Earnings Inequality Affect Social Security Financing. Insight. https://www.aarp.org/content/dam/aarp/ppi/2020/05/how-does-earnings-inequality-affect-social-security-financing.doi.10.26419-2Fppi.00104.001.pdf

Kopańska, A. (2017). Local governments' revenue and expenditure autonomy as a determinant of local public spending on culture. An analysis for Polish rural municipalities. International Advisory Board, 532. https://www.researchgate.net/profile/Nakije_Kida/project/Foreign-Direct-Investment-Environment-and-Economic-Growth/attachment/5924ad9e82999cd4856e794b/AS:497295801819136@1495575966203/download/12th_ICSS_2017_Proceedings_Book_ISBN9788890916106_Vol1.pdf?context=ProjectUpdatesLog#page=532

Kushner, J., & Ogwang, T. (2017). Why do per-household expenditures differ between municipalities? 1. Public Finance and Management, 17(4), 303-324. https://search.proquest.com/openview/e73432ce689615c63a387600d16b0fa2/1?pq-origsite=gscholar&cbl=44221

Sebestova, J., Majerova, I., & Szarowska, I. (2018). Indicators for assessing the financial condition and municipality management. Administration & Public Management Review, (31). https://www.ceeol.com/search/article-detail?id=718510

Shazmin, S. A. A., Sipan, I., Sapri, M., Ali, H. M., & Raji, F. (2017). Property tax assessment incentive for green building: Energy saving based-model. Energy, 122, 329-339. https://www.sciencedirect.com/science/article/pii/S0360544216318850

Singla, A., Stritch, J. M., & Feeney, M. K. (2018). Constrained or creative? Changes in financial condition and entrepreneurial orientation in public organizations. Public Administration, 96(4), 769-786. https://onlinelibrary.wiley.com/doi/abs/10.1111/padm.12540

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