Thursday, February 14, 2013

A Weak Cup of CAFR

For city finance wonks, Christmas comes twice a year: once in August when the city budget is set and again in February when the city financial audit is published. The budget specifies the city's cash flow (its planned revenues and expenses). The financial audit details the city's assets (the value of city property, bank accounts, etc.) and its liabilities (outstanding debt, pension obligations, etc.).

After the jump, a quick look at this year's Comprehensive Annual Financial Report (CAFR).



From the 2012 CAFR:
The Statement of Net Assets presents information on all of the City's assets and liabilities, including capital assets and long-term obligations. The difference between the two is reported as net assets. Over time, the increases or decreases in net assets may serve as a useful indicator of whether the financial position of the City is improving or deteriorating.
The CAFR advises that indicators other than net assets should be taken into consideration, too, and goes into mind-numbing detail for 138 pages. But let's look at that bottom line figure, net assets, and how it has increased and decreased over time.

Net Assets (in thousands)
YearAssetsLiabilitiesNet Assets
2004$419,151$217,860$201,281
2005$434,085$232,701$201,383
2006$502,134$286,805$215,329
2007$510,162$289,211$220,951
2008$509,827$298,977$210,849
2009$505,943$299,970$204,972
2010$574,261$371,640$202,621
2011$566,295$376,557$189,737
2012$547,848$365,430$182,418

After peaking in 2007 at $220,951,000, net assets have decreased five straight years and now stand at $182,418,000, a decline of 17% from its 2007 high. The CAFR suggests that a decline in net assets may serve as a useful indicator that the financial position of Richardson is deteriorating.

Yet if you read the city's announcement of this, you'd think that the important thing is that the auditors did not identify any irregularities in the city's accounting practices. It's as if Jerry Jones recapped the Dallas Cowboys 2012 season by praising the team statistician for the accuracy of the team stats without once mentioning that the team failed to make the playoffs.

I mean, sure it's good that the city didn't muck up reporting how its financial position might be deteriorating. But it would be more comforting if the city either highlighted the details that explain why the city's financial position is not, in fact, deteriorating, or highlighted the steps the city is taking to restore the city's financial position to one that's improving.

The bottom line? The city has served up a weak cup of CAFR.

4 comments:

John Murphy said...

Keeping with your Dallas Cowboy reference: If you're a fan they're not worth a damn because they didn't make the playoffs "this year", but if your interest is financial, the team has increased in value over the 2007-2012 time period because liabilities as a percent of assets has decreased from 43% to 33% (48% to 33% if you measure from 2004). This would indicate the true overall value of the Dallas Cowboys is not measured in year to year wins and losses but in the continued growth of the assets over liabilities over time. In fact, if they were a publicly traded company and this CAFR was their financial prospectus, they would be a "good" investment even with Jerry at the helm. If the net asset trend line had been positive every year for the period shown, they would be a "fantastic" investment given the overall economic trends during the same period. In short, net assets is only one of many measures of performance used as a management tool. Taking it alone or giving it too much weight provides a misleading snapshot of performance.

John Murphy said...

Keeping with your Dallas Cowboy reference: If you're a fan they're not worth a damn because they didn't make the playoffs "this year", but if your interest is financial, the team has increased in value over the 2007-2012 time period because liabilities as a percent of assets has decreased from 43% to 33% (48% to 33% if you measure from 2004). This would indicate the true overall value of the Dallas Cowboys is not measured in year to year wins and losses but in the continued growth of the assets over liabilities over time. In fact, if they were a publicly traded company and this CAFR was their financial prospectus, they would be a "good" investment even with Jerry at the helm. If the net asset trend line had been positive every year for the period shown, they would be a "fantastic" investment given the overall economic trends during the same period. In short, net assets is only one of many measures of performance used as a management tool. Taking it alone or giving it too much weight provides a misleading snapshot of performance.

dc-tm said...

Net Assets, Assets and liabilities seems to be a good way to measure in a meaningful way, where a city is going and what it is doing to get there. It is the bottom line.

Assets have increase by 30.07% since 2004 while liabilities have increased 67.74% leaving a decrease of the Net Assets/Assets ratio plunging 69.9%, going from 48.02 in 2004 to 33.30% in 2012.

If you chose to just look at comparison from 2007-2012 it looks even worse. Assets have increase 7.39%, liabilities have increased 26.35% leaving the Net Asset/Asset ratio has plunging by 76.88%, from 43.31% in 2007 to 33.3% in 2012.

Debt seems to be a big problem. It is fast outpacing asset growth. Take your pick on what the reason is for the growth of the debt and the lagging growth in assets. Something is wrong and it can’t keep going this direction without unpleasant consequences.
Dave Chenoweth

Mark Steger said...

I said publication of the CAFR is like Christmas to city finance wonks, but I didn't claim to be a wonk myself. Help me with your math, John. I can get your figures to match net assets as a percent of assets, but not liabilities as a percent of assets. It seems to me that one would want net assets as a percent of assets to be going up, not down. What am I missing?