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General Indicators of a Jurisdiction's Financial Condition

The union can develop a general assessment of a jurisdiction's overall financial condition and budgeting practices by examining its financial statement and budget documents.

Adequacy of Financial Reserves

An important indicator of a jurisdiction's financial condition is the size of its fund balance in relation to the size of its budget. The fund balance constitutes a jurisdiction's financial reserves, which are the accumulated funds left over from previous years. The audited financial statement contains information on the size of the fund balance at the end of the last completed fiscal year. In the financial statement, a "balance sheet" can be found. It will list a fund's assets (the dollar value of its cash and investments and the money it is owed) and its liabilities (debts to be paid). The amount left over when the value of a fund's liabilities is subtracted from the value of its assets is the fund balance.

The fund balance is usually divided into reserved funds (money legally set aside for specific future uses) and unreserved funds. The unreserved portion of the fund balance can be used as the jurisdiction sees fit. While unreserved funds may be "designated" for specific uses, these designations are not legally binding under generally accepted accounting standards.

The Government Finance Officers Association (GFOA) recommends that a government jurisdiction maintain an unreserved fund balance in the range of 5 percent to 15 percent of operating revenues.1 An unreserved fund balance within this range is one sign of fiscal health, while a balance lower than 5 percent suggests a lack of financial flexibility.

In cases where the fund balance is large, management often argues they need a sizable fund balance to maintain an adequate cash flow. For example, many local jurisdictions rely heavily on revenues from property taxes for operating funds. However, property tax revenues are not received in a constant stream throughout the year; they are received once or twice a year coinciding with tax payment deadlines. Since a jurisdiction's expenditures must be paid more-or-less evenly throughout the year, there will be times where the money going out exceeds the money coming in due to the timing of revenues. Management will therefore argue that it needs a large fund balance to ensure that there is always enough cash on hand to pay the bills.

While a large fund balance may allow a jurisdiction to meet its cash flow needs without short-term borrowing, this should not occur at the expense of the union. A temporary shortage of cash due to the scheduling of tax payments is not a sign of poverty. If management argues that they cannot draw upon their reserves because of cash flow needs, you should ask for documentation.

Documentation includes monthly projections of cash needs and historic monthly reports showing actual cash receipts and cash disbursements. With these documents you may be able to identify ways to even out demands for cash. Also ask if management has considered short-term borrowing to cover any periods of cash shortage. Workers should not be forced to accept a poor settlement just for the sake of management's financial convenience.

Presence of a Deficit or Surplus

Another indicator of a jurisdiction's financial performance is whether there have been deficits (where expenditures exceed revenues) or surpluses (where revenues exceed expenditures) in recent years. While a jurisdiction with a large unreserved fund balance may intentionally budget for expenditures to exceed revenues in order to use a portion of the fund balance to bridge the gap, an unplanned deficit is a sign of fiscal stress.

You can determine the presence of a surplus or deficit by comparing revenues and expenditures for a given fiscal year. If a jurisdiction has a surplus, its fund balance grows. If there is a deficit, the fund balance shrinks. Information on previous years' actual revenues and expenditures can be found in the financial statement. Budget documents generally provide revenue estimates and budgeted expenditures (appropriations) for the current year and the upcoming year.

Accuracy of Budgeting Revenues and Expenditures

If a jurisdiction has had a tendency to underestimate its revenues (collect more than was estimated) and/or overestimate its expenditures (spend less than budgeted), there is a good chance of finding slack in the current or upcoming year's budget. On the other hand, a jurisdiction that regularly overestimates revenues or underestimates expenses is headed for trouble. You can examine this budgeting behavior by comparing actual expenditures and revenues for previous fiscal years with budgeted expenditures and revenues for the same years.

1 To calculate the fund balance percentage, divide the unreserved portion of the fund balance, by operating revenues for the previous year. The result is the fund balance stated as a percentage of budgeted revenues. For example, if a jurisdiction had an unreserved fund balance of $1 million, with revenues of $10 million, the fund balance amounts to one-tenth, or ten percent of revenues.

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