Monday, February 27, 2012

The Devil Wears Green Eyeshades

Last week, without any training, I played art critic. This week, I get to play accountant, again without any training. Consider this a layman's adventure into the netherworld of municipal accounting, otherwise known as the CAFR. Fun fact: CAFR happens to be the abbreviation of a Latin phrase that means, "Abandon all hope ye who enter here." (Warning: I don't have any training in Latin, either.) Open the door and you'll be lured into a spider's web of terms and numbers that will bring you down and overwhelm you and smother you. Last warning: run away!

After the jump, the descent begins.

Last week, the City of Richardson released its 2011 Comprehensive Annual Financial Report, or CAFR. The 2011 CAFR contains 127 pages of tables, footnotes, explanations, even a certificate of achievement for the city (for "the highest standards in government accounting and financial reporting", although an award is probably deserved just for finishing the danged thing each year).

Last year, I was comfortable with the 2010 CAFR numbers. This year, my confidence is not quite as firm.

In hopes of not getting myself sucked too deeply into this snake pit (vain hope!), I want to focus on just two sentences out of the 127 pages. The two sentences are separated by four pages in the report, but I bring them together to give the impression they are related. Who knows, they just might be.

Net assets decreased $12,404,680.
Total expenses for fiscal year 2011 increased by approximately $11,374,000 (8.96%) when compared to fiscal year 2010. This increase is predominately due to increases in salaries and employee benefits.

Below is a table of net assets for the city going back as far as the CAFRs available on the city's website allow me to go.

Net Assets (in thousands)
YearAssetsLiabilitiesNet Assets

As you can see, the city's net assets (everything from the value of the city-owned buildings minus the debt used to finance them, to the amount of money the city has in the bank), have been remarkably stable for seven of the last eight years. $202 million in September, 2004, and $202 million in September, 2010, peaking at $220 million in September, 2007, just before the financial crash of 2008. The latest data, from September, 2011, seems to be an outlier. It's the lowest total in eight years, and records the biggest drop in net assets in the same time period. The total drops $12,404,680. What gives?

It does not appear that the city is racking up debt to cover the declining net assets. The city's total debt *decreased* by approximately $4,641,000 in 2011. Besides, in most cases, increase in debt is balanced by an equal amount of new infrastructure, leaving net assets essentially unchanged. That's generally true in the table above, at least until this past year. Debt service inched up in the last year, but it's still well within the range of the past ten years, as you can see in the table below.

Debt service as a percentage
of noncapital expenditures

So, is the city drawing down its cash balances? It would appear so. The Government Fund balances dropped by $14,489,000, an amount approximately equal to the drop in net assets.

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

In its statement of assets and liabilities, the city reports that its cash and investments dropped from $130 million in 2010 to $117 million in 2011. No matter where I turn, I keep coming back to the same numbers. Drop in assets of $12 million. Drop in cash balances of $13 million. Increase in expenses of $11 million, "predominately due to increases in salaries and employee benefits." The numbers all seem to fit. Is there a connection?

This is as far as I can venture into this netherworld without veering off into speculation.

I don't recall anyone on city staff or city council warning that the CAFR would show a drop of $12 million in net assets this year. Did I just miss it? Or didn't they see it coming? Or didn't they think it important?

Is the drop in net assets related to the employee raises? I don't recall anyone saying, let's draw down those cash balances to give employees a raise. Is that even what happened? If so, is that good or bad? Would maintaining $130 million in cash and investments have been a better use of the taxpayers' money? Maybe $117 million is good enough. Who can say?

It's hard enough to understand what the numbers mean (a question of fact). It's even harder if you layer in assumptions about what the numbers should be (a question of opinion). Something wicked that way comes. My soul is exhausted. Here I rest.


glbeach said...

Like you, not an accountant and certainly not a municipal or public sector accountant, but if I look at $12,404,680 decrease against a total asset basis of 566,295,000 it gives me a change of 2.19%. I guess depending on your perspective, it may or may not be significant. Was there commentary on when the basis increased by that amount or is this an example of a fear of loss bias and only noteworthy in that it is a decrease? I don't know, I'm only asking.

Mark Steger said...

Thanks for the questions, glbeach, but I don't have the answers. I don't know if the year-to-year fluctuations in net assets are significant or only random noise. I do know that the topic wasn't really discussed by the council. That worries me.

dc-tm said...

Mark says - "Is the drop in net assets related to the employee raises? I don't recall anyone saying, let's draw down those cash balances to give employees a raise."

Mark, that is exactly what happened when they found out property values did not drop as much as expected, that is when Keffler told the council that he was going to give out raises. Also, if you will remember, he convertered car alloances to salary after the big stink about how Richardson had more in car allowances that just about any other city. He also said Richardson did the car allowances the way it did because most of the city employees were already at the top of their pay grade and that was about the only way to give them more money.

But the CAFR does tie almost $11 mil to pay raises.

CAFR, Page 17 (page 25 of the pdf) "Total expenses for fiscal year 2011 increased by approximately $11,374,000 (8.96%) when compared to
fiscal year 2010. This increase is predominately due to increases in salaries and employee benefits.