Thursday, September 15, 2011

About that Page 99 in the CAFR

As expected, the Richardson City Council approved by a 7-0 vote a 2011-2012 budget that technically is a smidgen in the red for the year, but is cyclically balanced in that it uses excess reserve funds from last year to cover the deficit.

Still, there are some who point to the 2010 CAFR, especially page 99, as the smoking gun evidence of chronic deficit spending in Richardson.

After the jump, a look at the infamous page 99 (and page 100).

Pages 99-100 of the 2010 Consolidated Annual Financial Report (CAFR) contain Table 4, "Changes in Fund Balances, Government Funds, Last ten fiscal years." All numbers below are taken directly from that table and are in millions of dollars.

Changes in Fund Balances, Government Funds
Last ten fiscal years (in millions)

In seven of the ten years, the net change is negative. In three of the ten years, the net change is positive. The overall ten-year net change is positive. Now being in the red seven of the ten years doesn't sound good, but when the surpluses in the three black years are bigger than the deficits in the seven red years, I have trouble concluding that Richardson has chronic financial deficit spending problems.

Admittedly, those three black years are helped by bond sales. Is the problem that Richardson is staying afloat by growing debt? There is no doubt that Richardson's debt has grown, but so have the city's assets. Prior years' CAFRs that are available online go back to 2006. Whereas both assets and liabilities have grown since then, Richardson's net asset value is essentially unchanged.

Net assets as of September 30, 2005 were $201,383,000.
Net assets as of September 30, 2010 were $202,622,000.

The 2010 CAFR shows one measure of how much it has cost Richardson over the years to carry its debt. It's on that same page 100:

Debt service as a percentage
of noncapital expenditures

Again, this is remarkably stable over time.

Let's review. Over ten years, revenues plus other funding exceeds expenditures. Over five years (all that's available online), net assets are essentially unchanged. Over ten years, debt service as a percentage of noncapital expenditures is essentially unchanged.

I live in Richardson and want it be financially sound. So, I'm alert to warnings about fiscal problems. But I have a hard time concluding from pages 99-100 of the CAFR that Richardson is in a death spiral of increasing debt.

All that said, it's important to keep in mind that pages 99-100 are only two pages of a long report. And they summarize only the city's government funds. These account for the majority of the city's activities, but they aren't the whole story. There are still many places in the CAFR in which trouble may lurk. If trouble ever does emerge, expect the cynics who distrust the city government to be the first to spot it. That's a valuable service, even if they lead us down a lot of rabbit holes beforehand.


Sassy Texan said...

So Mark, what does debt over non capital expenditures mean?

glbeach said...

I for one have been pretty satisfied with how the city of Richardson has been run, managed and led during the 16 years I have lived here. Certainly no city is perfect - and no doubt there are situations that could have been handled differently. But on the whole, I'm glad we have the city government we have. If the state of Texas or the United States were as sound as Richardson, we'd all be better off. I think the Moody's bond rating agency echoes Richardson's city management when they rank Richardson Aaa - a designation only 10 cities in the state of Texas hold.

mccalpin said...

"In seven of the ten years, the net change is negative. In three of the ten years, the net change is positive. "

The bonds are not sold at the same rate as the bond money is spent on capital projects. For example, 53,775 in GO bonds were sold in 2006 (Table 4, page 100, "issuance of general obligation bonds"), but no GO bonds were sold in 2007 and 2009, and only a small amount (5,933) sold in 2008.

But, it stands to reason that it's impossible that all the bond money raised is spent in the same year as it is raised - capital projects often take years to complete. So let's look at the spending of the bond money (Table 4, page 99, "Capital outlay"):
2006 - 14,808
2007 - 20,699
2008 - 27,552
2009 - 37,125
(note that these numbers include all capital outlays, funded by GO bonds, Certificates of Obligation, revenue bonds, and who knows what else).

So, to reduce this to a very simplistic case, if over a four year period, I received $100 the first year and $0 in the next three years but spent $25 in each year, then, of course, I would have inflows higher than outflows in the first year and inflows lower than outflows in the next three years.

Your observation that at the end of a "cycle" that the inflows have exceeded the outflows for the City is the correct and most telling point.


Sassy Texan said...

The bond money is allocated money in the CAFR and is not part of the unallocated reserves. The charter requires an unallocated reserve fund and is most clear on the methods to amend the budget. And it is not by ratifying it. The 30-60-90 days reserve monies are technically allocated reserves approved by a resolution and that number floats for the revenues/expenditures of the year.

The budget reflects revs from the bond on projects expected to be completed. The bonds were sold at approval and Keffler already said they were sweeping the 5% management to the general fund. So a part of the bond money went to operations, ie the general fund. Why would he say that and it not be true? That is $3.3m. That financing is questionable, but it is done. And of course all bond money is not spent in the year is is received. The 1997 bond had projects in completion in 2005-6.

The budget notes the projects in progress carried forward as an individual item at the top of the page of the specific fund.

That still has nothing to do with the fact O&M expenditures exceed revenues (ad valorem, sales tax revs, franchise fees, all the other fees and any other misc items). As I said before the source of monies above the regular operations IS important. To strip one fund to cover a shortfall in another is not a good practice. A good analyst can see the differences.

Most mix the criteria for a triple A rating. It is different for the bond industry. It is another set of rules in the accounting fields. It is different in the banking industry. Which one is the right one? Depends on the intention for using the rating.

As long as the movement of property progresses and values go up, and expenditures are pacing that increase, there is not a problem. But what happens when they don't? What happens when the market retraces ground?

Historically alot of maintenance has been neglected. Otherwise the list of projects would not be growing faster than they can address them. Those were Keffler words, not mine. The story of $350m-500m and growing has been thrown around alot over the last few years.

As I said before, look at the details of each fund and the INTENTION (ie the Texas constitution/statutes/tax code/charter)you will find the issues I am bringing to light. There is a reason sales tax revs are declining to flat against an excelerating inflation rate. And many other issues brought up by myself and others.

I grew up here. So I have seen the changes. And I too am happy with the services provided. As with anything, they are great until you don't have them. And the market goes up until it doesn't. Any good investor will follow the trend and adjust for changes. What adjustments are being made in this city? Very few are apparent until they become blatant.

So one more time: what does "Debt service as a percentage of non-capital expenditures" mean to you Mr McCalpin? And how is this percentage relevant to the city's balance sheet?

Sassy Texan said...

And just for the record on debt: Page 106 of the 2010 CAFR

2001 GO/CO debt was $158.179m - 1283 per capita
2010 GO/CO debt was $244.561m - 2417 per capita

It's all in how you look at it!!

Sassy Texan said...

And then on page 105 of the CAFR

2001 total primary debt $188.688m -2035 per capita
2010 total primary debt $316.493m -3127 per capita

Getting bigger when you add in the unfunded liabilities and and the $350-500m infrastructure needs! Then add the debt from RISD, county, and federal of $125k per citizen. Those are some really stout numbers!!!

I want better for my kids and grandkids with all of this!

Mark Steger said...

Cheri, thanks for the extensive feedback. It's probably just a shortcoming of my reading comprehension, but I didn't see exactly which statements of mine you found to be incorrect. Before we move on to pages 105 and 106 of the CAFR, are we done with page 99? Not to be snide about it, but it really does feel like we're about to chase down a whole 'nother rabbit hole.

Sassy Texan said...

I asked you in the very first question.