Executive Summary

The intent of this document is to provide a systematic process to monitor and evaluate the City of Peoria’s financial outlook and performance.  This is accomplished through the use of the Trend Analysis and Planning with Effective Measures (TAPE MEASURE) system which identifies, measures, organizes, and analyzes various factors that can affect financial condition. Peoria’s TAPE MEASURE, when implemented as a continuous monitoring process, serves as a management tool that combines information from the City’s annual financial report with applicable economic and demographic data in order to monitor changes in the City’s financial condition.  The system does not provide specific explanations as to why a problem is emerging, nor does it provide a single index to measure financial health.  However, it does provide flags for identifying potential problems, clues about their causes, and an opportunity to take anticipatory corrective action.

This report utilizes twenty-nine key indicators to track financial, economic and demographic trends for the City of Peoria.  Of the 29 indicators, 25 include comparisons of the City with six other similar jurisdictions to determine how the City’s financial operations measure up to those of comparable governmental units. The municipalities used as a basis of comparison in this report are the cities of Avondale, Chandler, Flagstaff, Gilbert, Glendale and Scottsdale, Arizona. 

Evaluating Financial Condition

Financial condition, in the broadest terms, can best be described as a local government’s ability to finance its services on a continuing basis.  In more precise terms, financial condition refers to a government’s ability to (1) maintain required service levels, (2) withstand local and regional economic disruptions, and (3) meet the demands of natural growth, decline and change.  Some of the questions that officials and financial decision-makers must address in evaluating financial condition are: Can the local government continue to pay for the services they currently provide?  Are there sufficient reserves available for financial emergencies? Is there sufficient financial flexibility to adjust for change?

In order to maintain financial solvency, local governments must be able to continue paying for services they now provide.  This includes basic services funded by local revenues as well as programs that are funded by external sources such as federal grants.  Current services include the maintenance of capital facilities to protect the initial investment and maintain the facilities in useable condition.  Continuation of services also requires funds for the payment of future liabilities such as pensions, employee leave, and debt service.

A sound financial condition also implies that a local government has the ability to withstand regional and national economic disruptions.  This may involve the relocation of a major employer to another community, which could adversely impact the community’s tax base and decrease the number of local jobs.  On a national level, a sudden rise in inflation may affect a city’s expenditures more heavily than revenues, leaving the local government with the same dollars, but less purchasing power.

Finally, a local government’s financial condition can affect its ability to meet the demands of change.  All communities are subject to change over time, and each change creates financial demands.  Increasing population growth can force a local government to assume additional debt in order to finance required infrastructure, or it can cause a sudden increase in the operating budget to maintain service levels.  Conversely, a decrease in population can leave a community with the same facilities and infrastructure to maintain, but with fewer citizens to pay those costs.  Even a stable population with a changing composition can create unforeseen financial demands.  A city that is becoming older, younger, poorer or more affluent can require the need to respond with different services and programs.  These new programs may require expensive start-up costs, and they may be more expensive to maintain than those services previously provided to the community.

The Trend Analysis Process

This report provides a framework for monitoring these types of events and provides a method to assist in evaluating the City of Peoria’s financial condition.  The approach used to develop this financial trend analysis is based upon the practices and principles outlined in Evaluating Financial Condition: A Handbook for Local Government published by the International City Management Association (ICMA).  The analysis system for this report utilizes an expanded approach to ICMA’s model by providing comparisons of the City of Peoria’s data with several other local jurisdictions.  This assists us in analyzing how the City’s financial operations compare with those other governmental units.  The trending analysis system is designed to provide information in the following ways:

·        Gain a better understanding of the government’s financial condition.

·        Identify emerging problems before they reach serious proportions.

·        Identify existing problems of which local officials may be unaware.

·        Present a straightforward picture of the government’s financial strengths and weaknesses to elected officials, citizens, credit rating agencies, and others.

·        Introduce long-range considerations into the annual budgeting and revenue forecasting process.

·        Provide a linkage to a local government’s financial policies.

This information will serve as a valuable resource for the City’s long range financial plan.  The ten year capital improvement plan and five year forecast are the master plans for the City’s finances, quite similar to the master planning documents prepared for water/wastewater operations, transportation systems, and development planning.

Peoria’s TAPE MEASURE provides a method to quantify a significant amount of information, while relying on data that exists in the City’s records or is otherwise readily available.  The data is generally taken from Comprehensive Annual Financial Reports (CAFR) to ensure consistency and validity of the data.  The TAPE MEASURE system utilizes both financial and non-financial information in the same analysis.  Finally, it also tracks changes over time.

Peoria’s TAPE MEASURE is based on twelve factors representing the primary forces that influence financial condition.  The twelve factors, illustrated in the following diagram, are classified into three groups: environmental, organizational, and financial.

As the diagram indicates, environmental factors determine organizational factors which in turn determine financial factors.  Essentially, the environmental factors are filtered through a set of organizational factors resulting in a series of financial factors that best describe the internal financial state of the local government.  Keep in mind, however, that other relationships among the factors are possible. 

Environmental factors are considered the external influences on a local government.  They can affect the local government in two ways.  First, they can create demands on the entity.  For example, a population increase may force the local government to add new services, or the acceptance of a new grant may require new audit and accounting procedures.  Second, environmental factors can provide resources.  The population increase that creates the need for additional services may also increase tax revenues.  However, when reviewing the effects of environmental factors on financial condition, the following question should be included in the analysis: Do the environmental factors provide enough resources to pay for the demands they make?

Organizational factors are the local government’s responses to changes in environmental factors.  Theoretically, any government can maintain a satisfactory financial condition if it makes an appropriate organizational response to a changing environment.  For example, the entity may reduce services, increase efficiency, or raise taxes in response to changes in the environment.  This is assuming that the decision-makers will have advance notice of the change, understand it, know what to do, and are willing to do it.  When reviewing the effects of organizational factors on financial condition, the following question should be included in the analysis:  Do the City’s management practices and legislative policies enable the government to respond appropriately to changes in the environment?

Financial factors reflect the condition of the local government’s finances and are largely a result of environmental and organizational influence.  If the environment’s demands are greater than the resources it provides, and if the entity does not provide a response to maintain a balance between demands and resources, the financial factors will eventually show deficits of cash, and budgetary or long-term insolvency.  It is in the financial factors that problems left untreated will make themselves known. When reviewing the effects of financial factors on financial condition, the following questions should be included in the analysis:  Is the City currently covering the full cost of its operation or subsidizing it by other means?  Is it postponing those costs to a future period when revenues may not be available to cover the costs?

Analysis

Of the twelve factors identified in the TAPE MEASURE system, only seven can be quantified; they are the six financial factors and community needs and resources.  These six financial factors are measured through a series of indicators that quantify changes in the factors.  The quantifiable factors for the City of Peoria are discussed in Part I of this report.

The remaining five factors do not have specific quantifiable indicators.  However, they should be considered in the overall analysis as they influence the City’s financial condition. These five factors address national and regional economic conditions, intergovernmental constraints, natural disasters and emergencies, the political culture, and financial management practices and policies.  The non-quantifiable factors for the City of Peoria are discussed in Part II of this report.

The primary tool for evaluating the twenty-nine individual indicators is the TAPE Measure system – examining and tracking each indicator over a period of time.  The steps involved in completing the trend analysis are as follows:

1.                  Classify trends.  At the top, right-hand side of each worksheet in Part I is a block depicting the trend of the indicator.  If an indicator is moving in the direction described as the warning trend, it should be considered to be – at this point – potentially unfavorable.

2.         Determine when the trend began, how fast the indicator is changing, if it is getting better or worse, and how serious is the problem?  Some indicators can quickly flag potential problems while other indicators must be monitored over time.  If an unfavorable trend is developing, it should be carefully examined as a potential problem.  No single trend implies good or bad financial condition.  It only points to situations that should be examined more closely.  Each potentially unfavorable trend should be broken down into its component parts, analyzed in light of its causes and significance, evaluated in relation to other trends as necessary and have an action plan developed and carried out.

Trend analysis methodology offers several advantages.  First, it allows the evaluator to determine how quickly an indicator is changing and in which direction.  Second, it permits one trend to be evaluated with other trends.  Third, it allows local trends to be compared with regional and national trends.  Additionally, it provides a database that can be used to make five or more year projections necessary for effective budgeting, capital programming, master planning efforts and general policy making.  Finally, the information gathered and provided in the trend analysis helps to demonstrate to bond rating agencies and investors that the City of Peoria is aware of, and in control of, its finances.

Adjusting for Inflation

Many of the indicators in this analysis require that current dollars be expressed in terms of constant dollars to remove the inflationary factor.  This common adjustment makes it easier to compare data between time periods without the distorting effects of inflation.  For purposes of this report, the Municipal Cost Index (MCI) was chosen to adjust the City’s fiscal measures to the base year 2003.  The Municipal Cost Index was developed by the American City & County organization to show the effects of inflation on the cost of providing municipal services.  The MCI draws on the monthly statistical data collected by the U.S. Departments of Commerce and Labor as well as independently compiled data to project a composite cost picture for the municipal budget officer or operating department manager.  Costs of labor, materials and contract services are all factored into the composite MCI.  Major indicators of these items used for the MCI include the Consumer Price Index, the Wholesale Price Index for Industrial Commodities (now known as the Producer Price Index) and the construction cost indexes published by the U.S. Department of Commerce, respectively.  Each year the base year will be re-set to the first year shown in the TAPE MEASURE report, so that the constant dollars presented will be relatively current.  The following chart provides the Municipal Cost Index information used in this report: