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Report gauges city's financial health in 2019

By Vicky O. Misa | Vicky.misa@news-star.com | (405) 214-3962 | Twitter: @Vicky_NewsStar
The Shawnee News-Star

This week, Frank Crawford, president of Crawford and Associates, offered a rundown of his company's analysis before Shawnee City Commissioners.

According to the firm's annual Performeter analysis, the city's 2019 report offers more ups than downs.

According to Crawford, for the 2019 fiscal year, the city's overall rating was a 7.1, based on a scale of 0 to 10.

“The strongest component of the ratings was the city’s near excellent financial performance over the past year,” Crawford said.

However, the city’s financial capability at June 30, 2019, also reflects an above-satisfactory rating. The city’s financial position is the lowest component of the city’s ranking, but has improved over its prior year score, Crawford's report stated.

The 2019 overall reading of 7.1 indicates the evaluator’s opinion that Shawnee’s overall financial health is above satisfactory, halting a 3-year pattern of decreases in the overall scoring ratio when compared with the prior years presented.

To determine financial stability, Crawford's Performeter gauges within three subcomponents:

• Financial position ratios — that measure financial health at year end

• Financial performance ratios — that measure changes in financial position from the prior year

• Financial capability ratios — that measure the ability to raise revenue or issue debt in the future, if needed

Shawnee's scores in these three areas were: Financial Position — 3.9; Financial Performance — 9.6; and Financial Capability — 7.5.

“We're talking about the period that began July 2018 and ended June 2019,” he said.

Comparing the past few years, around 2014 and 2015 Shawnee was scoring in the upper 7s and 8s.

“Then we began a three-year decline where all the financial ratios were kind of in the negative,” Crawford said. “We were spending our reserves; we were bringing in less money than we were spending; we were using up our savings accounts and carry-forwards.”

Then the city was using that money to pay for operations, it wasn't being invested in infrastructure, he said.

“The score had dropped,” he said. “From 2015 to 2018, from an 8 to a 4.8, which is a pretty significant drop.”

The city's current report of a 7.1 score, Crawford said is about average for what he's seeing in Oklahoma governments right now.

“Most governments are scoring in the low to mid 7s,” he said.

Performeter

Crawford and Associates created the Performeter about 20 years ago to offer its findings in a much simpler format, summarizing and explaining its spreadsheets and data in layman's terms.

“We developed a methodology meant to be for small town Oklahoma and ended up being taught now in colleges and in university textbooks as a method to analyze the health and success of government,” Crawford said.

The Performeter is used across the U.S. and by 11 other national governments, he said.

Some reported findings

According to the analysis, some of the reported findings were as follows:

• The level of total unrestricted net position is an indication of the amount of unexpended and available resources the City has in all funds combined at a point in time to fund emergencies, shortfalls or other unexpected needs. In our model, 50 percent is considered excellent, while 30 percent is considered a desired minimum.

For the year ended June 30, 2019, the City’s total unrestricted net position was in a deficit, or negative position, that approximated $22 million or 48 percent of annual total revenues. This is considered an unfavorable position to be in, and well below our model’s desired minimum of a positive 30 percent. This is due in large part to the City’s reporting, beginning in FY 2015, its share of unfunded pension liabilities of the State Fire Pension System.

• The level of unassigned fund balance is an indication of the amount of unexpended, unencumbered and available resources the City has at a point in time to carryover into the next fiscal year to fund budgetary emergencies, shortfalls or other unexpected needs. In our model, 10 percent is considered a minimum responsible level, while 30 percent is considered desirable.

For the year ended June 30, 2019, the City’s unassigned fund balance of the General Fund amounted to a deficit of $0.6 million or 3.1 percent of annual General Fund revenues. However, this does represent an improvement in the ratio when compared to the ratio of the prior years.

• The capital asset condition ratio compares depreciable capital assets cost to accumulated depreciation to determine the overall percentage of useful life remaining. A low percentage could indicate an upcoming need to replace a significant amount of capital assets. For comparison purposes, we have removed the consideration of the cost of land and current construction-in- progress.

At June 30, 2019, the City’s depreciable capital assets amounted to $196 million while accumulated depreciation totaled $111 million. This indicates that, on average, the City’s capital assets have less than one-half (43 percent) of their useful lives remaining. This is a less than satisfactory financial indicator in our model and continues a relatively consistent downward trend.

• The pension funding ratio compares the City’s OkMRF pension plan net position, comprised mainly of the fair value of the City’s investments held in a pension plan trust, to the actuarial determined total pension liability that has been accrued for pension benefits. A percentage less than 100 percent indicates the plan is underfunded at the valuation date.

At June 30, 2019, the City’s OkMRF pension plan net position was 95 percent of the total pension liability, indicating that the plan was not fully funded, from an actuarial perspective, at the last valuation date. This does represent an increase from the prior years’ ratio but it is still considered a slightly below satisfactory ratio. This ratio does not include the funded status of the State’s cost-sharing plans for police and fire employees.

• The assets-to-debt ratio measures the extent to which the City had funded its assets with debt. The higher the percentage, the more equity the City has in its assets.

At June 30, 2019, 41 percent of the City’s $130 million of total assets were funded with debt or other obligations, leaving 59 percent as equity. This indicates that for each dollar of City assets owned, it owes 41 cents of that dollar to others. This is considered to be an above satisfactory ratio and represents no change from the ratio of the prior year.

• The quick ratio is another, more conservative, measure of the City’s ability to pay its short-term operating obligations. Our quick ratio compares total unrestricted cash and cash equivalents to current liabilities. A quick ratio of 1.00 to 1 indicates adequate current liquidity and an ability to meet the short-term obligations with cash on hand.

At June 30, 2019, the City had a government- wide ratio of unrestricted cash and cash equivalents to current liabilities of 1.28 to 1. This indicates that the City had almost one and one-third the amount of cash and cash equivalents needed to pay short-term operating obligations at year end. This ratio is considered a favorable rating and also represents a significant improvement when compared to the ratio of prior period.

• Net position includes all assets and deferred outflows, and all liabilities and deferred inflows of the City, except for fiduciary funds held for the benefit of others. It is measured as the difference between total assets and deferred outflows, including capital assets, and total liabilities and deferred inflows, including long-term debt. Net position increases as a result of earning more revenue than expenses incurred in the fiscal year.

For the year ended June 30, 2019, total net position increased by approximately $5.7 million, or 7.6 percent from the prior year beginning net position.

• Interperiod equity is achieved when the cost of current services are paid by current year tax and ratepayers. When current year costs are subsidized by prior year resources carried over or from debt proceeds, it can be said that interperiod equity was not achieved, and either past or future tax and ratepayers helped fund the costs of current year services.

For the year ended June 30, 2019, the City’s total costs were fully funded by current year tax and ratepayers, with current year revenues, excluding fund balance carryovers, generating revenues at a level of 114 percent of current year costs.

• The self-sufficiency ratio indicates the level at which business-type activities (utilities) covered their current costs with current year revenues, without having to rely on subsidies or use of prior year reserves.

For the year ended June 30, 2019, the City’s business-type activities were 117 percent self-sufficient in total. This indicates that all of the current year costs of the City’s business-type activities were fully funded by current year revenues, and didn't require the use of carryover funds or a subsidy from other funds. In addition, this represents an increase in the ratio when compared to the ratio of the prior period.

• The debt service coverage ratio compares the City’s debt service requirements on revenue bonds to the net operating cash generated by the revenue streams pledged for payment. A debt service ratio of greater than 1.00 indicates a sufficient ability to make the debt service payments from net revenue from operations.

For the year ended June 30, 2019, the City experienced an excellent debt service coverage ratio of 3.23, an increase from the ratio of the prior period. This indicates the City generated almost three and one-quarter times the amount of cash necessary to pay the debt service requirements on its revenue bonds and notes.

• Due to the inability of Oklahoma municipalities to levy a property tax for operations, the City is highly dependent on sales and use tax revenue to fund its general governmental activities.

Sales tax growth is a measure of the state of our local economy by comparing revenue collected to the prior year in terms of the change per one-cent tax.

For the year ended June 30, 2019, the City experienced an increase in sales and use tax collections in the amount of $2,991,857, or 4.3 percent from the prior year. The Sales Tax Rate of 3.0 percent was in effect for the first four months of the year and then increased to 3.5 percent.