When individuals eat healthily and exercise regularly, it is reflected in health indicators (cholesterol, blood pressure, blood sugar, etc.). People are more likely to live long, healthy lives when they monitor and maintain their health via these indicators.
Governments are no different: when expenses are less than revenues, cash reserves preserved, debt service reasonable, and capital assets maintained, entities are less likely to experience a financial emergency.
Defining fiscal health for local governments can be complicated. Defining potential fiscal distress is less complex. With different constituencies and services offered, local governments are as individualized and varied as people. But, just as medical tests provide insights into the health of human beings (who come in all shapes and sizes), an entity can learn to prevent potential fiscal distress by using the Fiscal Distress Dashboard.
Financial distress is the inability of an entity to maintain existing service levels, withstand local and regional economic disruptions, and meet the demands of growth or decline.
An entity's fiscal distress is measured via four fiscal areas. The Fiscal Distress Dashboard monitors these four fiscal areas via six fiscal indicators (ratios) calculated from data provided in the annual financial report.
The Dashboard enables entity management and governing bodies to identify signs of potential future or current fiscal distress. It tests indicator benchmarks over the most recent three fiscal years. If a fiscal indicator does not achieve an established benchmark, its color will change to yellow (cautionary outlook) or red (critical outlook) - both of which should prompt further investigation. Otherwise, the indicator will remain green (satisfactory outlook). Satisfactory outlook does not necessarily denote entity overall fiscal health, only the absence of a specifically monitored potential fiscal distress trigger.
Fiscal indicators and respective benchmarks were finalized by evaluating currently available data and evaluating indicators:
The Fiscal Distress Dashboard fiscal indicators are designed to signal potential fiscal distress. Not all indictor benchmark changes indicate cause for concern. A cautionary outlook for Indicator 1 may simply arise as a result of a large portion of general fund balance being classified as committed or assigned (as opposed to unassigned). This classification decision may have been made due to prudent planning by the governing body and management and may not be indicative of potential fiscal distress. The Dashboard is designed to prompt further investigation into fiscal distress triggers and facilitate dialogue between officials and administrators.
Fiscal indicator results do not necessarily demonstrate professional competency or good governance. Additionally, appropriate policies (accounting, budgetary, capital facility, cash depositing, debt, expenditure, revenue, reporting, etc.) and proper internal controls (see the Fraud Risk Assessment) can significantly affect an entity's current and future solvency.
Incorrect financial report data, incorrect digitization of select financial report data, delinquent annual financial reports, and nonexistent accounting funds (e.g. a special service district which only operates an enterprise accounting fund) may invalidate some indicator results.
At a minimum, five years of data are necessary for effective trend analysis. Economic shocks (demand, supply, policy, financial, and technological) can have profound macroeconomic effects, and, as a result, drastically affect local government financial condition. These effects are not necessarily captured in the three year period used. The three year time period is used due to the limited availability of digitized financial report data.
Other data affect an entity's current or future fiscal distress. These data may include: citizen demographics (education, household size, income/debt level, etc.) crime, economic (inflation, interest rates, unemployment, etc.), market (business starts, stock market volatility index, interest rate spread, etc.), housing (affordability, building permits issued, etc.), human health, internet infrastructure, tax rates, etc. The Fiscal Distress Dashboard does not monitor any of these data, although some of these data may ultimately affect the results of some indicators.
“Financial condition analysis is a critical task for public managers, but it is still unclear which [fiscal] indicators are the most salient measures of financial well-being.” ¹ The Fiscal Distress Dashboard fiscal indicators are neither comprehensive nor replacements for other indicators already monitored by entity management. For example, ICMA publishes over 40 financial indicators. The ratios selected were vetted by local government, state government, and university personnel, and are easily calculated from available digitized financial report data.