CITY OF HOUSTON CAFR PROJECT – REPORT
Utilizing the City of Houston Comprehensive Annual Financial Report (CAFR) for the fiscal year ended June 30, 2019, https://www.houstontx.gov/controller/cafr/cafr2019.pdf, assess the financial condition of the government. For purposes of this project, financial condition is broadly defined as a city’s ability to provide an adequate range of services on a continuing basis. Specifically, it refers to a city’s ability to (1) maintain existing service levels, (2) withstand major economic disruptions, and (3) meet the demands of a changing society in a changing economy. In your report, examine TWO of the following issues — revenues, expenditures/expenses, reserves, and debt burden. Analysis of revenues and revenue sources. · How stable and flexible are the city’s revenue sources in the event of adverse economic conditions? · Is the revenue base well diversified, or does the city rely heavily on one or two major sources? · Has the city been relying on intergovernmental revenues for an excessive portion of its operating expenditures? · What percentage of total expenses of governmental activities is covered by governmental revenues? · Do any extraordinary or special items reported in the statement of activities deserve attention? · Potential “red flags” or warning signs: · Decline in revenues. · Decline in property tax collection rate. 1. Less than 92% of current levy collected? 2. Property taxes more than 90% of legal tax limit? 3. Decreasing tax collections in two of the last three years? · Reliance on nonrecurring (i.e. special items) revenues to support current-period operations. · Decreasing revenue support from federal or state government. Analysis of expenditures and expenses. · Do any components of expenditures and, at the government-wide level, expenses exhibit sharp growth? · Is adequate budgetary control being exercised over expenditures? · How does the growth pattern of operating expenditures and expenses over the past 10 years compare with that of revenues? · Potential “red flags” or warning signs: · Expenditures increasing more rapidly than revenues. · Deferral of needed maintenance on capital plant. Analysis of reserves. · Are the levels of financial reserves (i.e. fund balances, contingency funds, and unrestricted net position) adequate to meet unforeseen operational requirements or catastrophic events? · Is insurance protection adequate to cover losses due to lawsuits or damage to property? · Is an adequate amount of cash and securities on hand, or could the city borrow quickly to cover short-term obligations? · Potential “red flags” or warning signs: · Declining balances of liquid resources and fund balances. 1. General fund deficit in two or more of the last 5 years? 2. General fund balances less than 5% of general fund revenues and other financing sources? Analysis of debt burden. · What has been the 10-year trend in general obligation long-term debt relative to trends in population and revenue capacity? · Are there significant levels of short-term operating debt? If so, has it shown indications of growth? · Are there any significant quasi-debts (e.g. lease obligations, unfunded pension liabilities, accrued employee benefits) or contingent liabilities? · Are any risky investments such as derivatives disclosed in the notes to the financial statements? Are the types of investments adequately explained, and their risks adequately disclosed? · Potential ‘red flags” or warning signs: · Growing debt burden 1. Short-term debt more than 5% of operating revenue? 2. Two-year trend of increasing short-term debt? 3. Short-term interest and current-year debt service on general obligation debt more than 20% of operating revenues? 4. Debt per capita ratio 50% higher than four years ago? · Growth of unfunded pension and other employee-related benefits such as compensated absences and postemployment health care benefits. As part of your financial analysis, calculate, insofar as possible, the relevant financial ratios in chapter 11 of your text. Evaluate the ratios in terms of the red flags and benchmarks provided above and in your text. Calculate long-term trend data for each ratio, if available. Locate any additional data that you think may be useful in assessing the financial condition of the city of Houston and include it in your analysis. REQUIRED: Write a two-page report examining and analyzing two of the four areas outlined above. As part of your report, prepare four PowerPoint slides that illustrate points made in your analysis. Submit the two-page report plus the four PowerPoint slides as one pdf file
