Net available assets as a proxy for financial condition: a model for measuring and reporting resources available to a local government.

• Author: Wolff, Lance W.

A framework that blends an economic resources measurement focus with a current financial resources measurement focus provides a systematic approach to reporting financial condition.

A standardized and useful tool is needed to enable public financial managers to cope with the scarcity of available resources and the degree of fiscal stress being encountered by local governments today. A statement of financial condition for local governments will meet this need. This article develops and presents a model for a new approach to measuring and reporting on the financial condition of a local government.

What is financial condition? Why is it important? How is it measured and reported? What is the current measurement basis and reporting model? What changes have been proposed by the Governmental Accounting Standards Board (GASB)? What will be the impacts of these changes? How will finance officials prepare for these changes? These are just some of the pertinent questions that must now be considered by local government leaders in order to adequately assess the state of their financial health.

The following article is an attempt to develop a statement of financial condition that combines the best of both the current reporting models and those proposed by GASB. The main purpose for utilizing a statement of financial condition is to provide public financial managers with a means of making tough financial decisions for their locality based on meaningful and reliable financial information that is standardized for analytical and comparative purposes. Simplifying a local government's ability to measure its financial condition at a point in time and as a trend over time, as well as in comparison to other localities, should enable these organizations to exercise proactive and not reactive financial management practices.

In the end, public financial managers need to know their current status before responding to internal and/or external environmental forces. A statement of financial condition for a local government must be specially tailored to meet the needs of its users and accomplish its primary objective of accountability - especially compliance, performance, and program accountability. Providing local governments with a tool that can be easily applied and understood should be paramount in the minds of those proposing changes to their financial reporting model. Simplicity and usefulness should be the guiding light even though local governments are complex and diverse organizations that demand care and expertise. The authors have sought to incorporate these basic concepts into the structure of this model.

Elements of the Model

It is the authors' view that existing approaches to measuring and reporting financial performance have limitations in explaining performance levels, how to improve performance, and what contributes to outcomes and that a greater knowledge of and expertise in applying the techniques is essential to determine the financial condition of a local government in the future. The model developed herein is a hybrid that blends the best of current theory and practice into an approach for measuring and reporting financial condition for a local government's governmental activities in a consolidated statement of financial condition. Its thrust is to build on the traditional balance sheet approach that focuses on financial position and to establish a new working definition and framework for measuring and reporting financial condition for a local government.

This model relies on a new working definition of the concept of "net available assets," which is the liquidated value of net assets that are currently available, spendable, and appropriable after all liabilities, commitments, contingencies, and restrictions have been satisfied. It structures the working definition into a consolidated financial statement that measures and reports on net available assets as a proxy for financial condition. This model offers a simplified yet comprehensive determination of net available assets, which emphasizes the details of the different classifications within the assets, liabilities, and equity sections of the balance sheet in order to accomplish this goal. Such an emphasis involves an assessment of the nature of the transactions and events that are recorded in the various accounts combined into each classification. Every balance sheet classification has its own identity and is comprised of homogenous accounts which, when combined, constitute a single element of financial position. Classified balance sheets divide assets and liabilities between current (within one year) and long-term (beyond one year) liquidity, while nonclassified balance sheets list all assets and liabilities in the order of liquidity without any such division.

The central focus of the model is a consolidation of the operating, capital, and debt components of the governmental activities of a local government, inclusive of its school board component unit. The funds included in this grouping are the general, storm water, debt service, and capital projects funds of the primary government (as well as the General Fixed Assets Account Group - GFAAG and General Long-Term Debt Account Group - GLTDAG) plus a combination of the school operating and food services funds of the school board component unit of the primary government. Additionally, in order to facilitate the combination of funds and account groups (as well as reclassifications, eliminations of inter-fund balances, and other adjustments), columns are presented for unadjusted, adjustments, and adjusted consolidated totals.

Phase 1: Four Basic Measures. The initial phase in developing the model was determining...