Introduction

Financial condition helps to ascertain how healthy a city’s finances are for a certain period of time. For a city to be considered financially healthy, it ought to provide the residents with the desired service levels through the use of the resources provided by these residents. The needs of the residents tend to change from time to time. This is something that governments should always anticipate and remain prepared to take the necessary action. The local government will have the ability to respond to these changes if the city is experiencing a healthy financial condition. This is because there is the ability to lay ground-work for long-term projects that have the ability to impact different services over the years (Kemp, 2012). When the city’s financial conditions are in order, there is also the ability to deal with unforeseen events likely to bring varied impacts.

Examining the financial conditions of a local government can be  examined from a personal financial perspective to help get a better understanding of why it is important. As an individual, everyone wants to meet their current needs such as buying groceries, paying the mortgage, making car payments among other things. People want to attain these current needs while still putting short-term and long-term needs into consideration. People’s needs change over time due to varying circumstances. A good example is when people get children, and their priorities are now different from how they were initially. There is also a rainy fund day in case there is the occurrence of an unexpected event.

The three basic questions while assessing the financial condition of the City of San Jose will be, can the city pay its bills in the present period? Can the revenues involved cover its expenses? Does the city have the ability to pay its bills in the future?

Background

The local government will not understand the current position with regards to financial aspects if there is no financial condition analysis being conducted. It is through this analysis that it becomes clear of the areas that are not operating as it would be expected hence the need for initiating relevant changes (Ritonga et al., 2012). Residents will also get an idea of how the government officials are doing with their funds or resources hence the ability to hold them accountable in case they are not operating as expected.

There is no set procedure for the assessment of a government’s financial condition. As a result, it is prudent to assess varied measures to help get a conclusive picture of how the financial condition of the given city looks like. Measures used to analyze a city’s financial condition use information from audited financial statements. The financial statements provide information such as expenditures, revenues, debts owed, and assets among others.

In case a city has a poor financial condition, it will not have the ability to provide relevant services to the residents. This is both in the short-run and long-run. Such a city will always be susceptible to economic downturns hence requiring cutbacks in maintenance and services (Kemp, 2012). It will also become difficult to recover from the economic setbacks and financial setbacks.

Local Government being Studied

The City of San Jose has been chosen for this study. Among the reasons why San Jose has been chosen for this study is the population of the city. San Jose is the third largest city in California by the number of population. This means that the local government is responsible for the well-being of a huge population hence it is appropriate to try and see how they have responded. Dealing with a high population from a government’s perspective is always not an easy thing. This is because the resources obtained might not be able to fulfill the needs of every resident due to the population overlap if the financial condition is not healthy. The financial condition of the government in the city tends to impact the services received by the residents. The residents of the city depend on the local government to provide things like safe road, police responses, sewage treatment and libraries among others.

Previous financial conditions that have been facing San Jose also made it a favorable choice to help see how things are changing financially. Before 2014, the city had been facing general fund deficits for close to a decade. Things have now been changing. There is an indication of an increase in revenues though moderately. This is being enabled by the steady growth in the economy (Sanjoseca.gov). However, reaching this states has not come without varied challenges due to the changes that have been necessitated in the process. A good example is how there has been a need to reduce the programs in the city such as the reduction of staff. Currently, San Jose has currently employed around 5.8 individuals per 1,000 residents, a figure which is lower compared to the 30-year average of 7.1 (Sanjoseca.gov).

Assessing the city’s financial condition will help to ascertain where it stands. This will show whether the efforts being put in place by the local government have any positive impact or there is the need of making adjustments to ensure things are moving in the desired direction financially.

The City of  San Jose General Fiscal Condition

For the purpose of assessing the financial condition of San Jose, the paper will use the Comprehensive Annual Financial Report for the period ended June 30, 2017 to obtain the relevant financial data. The end of the 2016-2017 fiscal year showed continued growth in varied revenue categories like Transient Occupancy Tax, Property Tax, development-related fees and Utility Tax. The adopted budget within this period maintained existing service levels and also provided service delivery enhancement in priority areas. The 2016-2017 adopted budget was established with the assumption that the prevailing economic growth would persist.

MSA employment level in June 2017 was 1.097 million, and this was 1.6% higher compared to that of June 2016 that was 1.080 million. This was the seventh successive year of growth for the prevailing fiscal years. The unemployment rate in San Jose metropolitan area in June 2017 was 3.6%, which was a drop compared to June 2016 that stood at 4%.

Overall construction activity led by the residential and commercial sectors was strong in the 2016-2017 period as it stood at $1.9 billion. This was high than the peak of $1.7 billion experienced in the 2013-2014 financial year. The housing market also remained strong during this period given that the median price concerning single-family homes had increased in value. In June 2017, the median home price was $996,000, which was 8.3% increase compared to June of the previous year.

Ratios Used to Assess San Jose’s Financial Condition

The ratios used to assess the city’s fiscal condition have been chosen based on the measures being used to assess the financial condition. These measures include ability to pay expenses, building up reserves, change in net assets, reliance on grants and aid, ability to pay obligations using annual revenues, and change in value of capital assets. Ability to pay expenses and building up reserves will help to assess the city’s ability to pay its bills. Change in net assets and reliance on grants and aid will assess whether the city’s revenues have the ability to cover its expenses. Ability to pay obligations using annual revenues and change in the value of capital assets, on the other hand, analyzes whether the city can pay its bills in the future.

Ability to Pay Expenses

312, 800,000/896,900,000=0.35

 Building up Reserves

79,900,000/901,900,000=0.089

Reliance on Grants and Aid

86,779,000/1,536,467,000=0.056

Change in Net Assets

(3,437,781,000–3,686,053,000)/ 3,437,781,000=-0.072

Change in Value of Capital Assets

(5,439,984,000–5,571,397,000)/ 5,571,397,000=-0.023

Ability to Pay Obligations Using Annual Revenues

4,746,319,000/1,536,467,000= 3.1

Discussion

Does the city has the ability to pay its bills now?

The ratio that assesses city’s ability to pay expenses is low at 0.35. A higher ratio would have indicated a better financial condition for the city. However, despite this ratio being low, the city had an improvement with regards to the cash available in the general fund compared to prior years. The increase is an indication that the city is in a better position to pay its liabilities at the current period compared to how it was initially. However, there is still plenty of room for improvement since a higher ratio would bring more confidence to all the stakeholders involved with regards to the city’s financials.

When it comes to the building of reserves, the ratio was 0.089. This is a low ratio, but there is an improvement compared to the period ending June 2016 whose ratio was 0.076. This shows that the city is making positive strides despite them being minimal. The city has varied reserves that are usually set aside. However, the unassigned fund balance has few restrictions on how it is used compared to the others.  Despite the improvements in this area, there is a need for the city to have the ability to put aside more money that can cater for some services when the revenues are moving in an undesired direction.

Can the expenses of the city be covered by its revenues?

When it comes to reliance on grants and aid, the ratio stands at 0.056. This was a positive indication of how the financials are with regards to this aspect. This shows that only a small fraction of the city’s revenue is from grants and aid. Grants and intergovernmental aid in San Jose come from other government agencies like the federal and state governments. Despite a city welcoming support in terms of grants and aid from other agencies, the less dependent it becomes from these sources, the more independent the financial condition of the city will be.

On matters to do with change in net assets, the ratio was -0.072. The negative in this ratio has been attributed to the fact that governmental  activities net position by the year ending June 2017 was less than that of the previous year. As a result, the closing balance was less than the opening balance. All in all, the expenses incurred by governmental activities did exceed the revenues. Ideally, the city’s revenues ought to cover the expenses incurred for varied programs. Lack of this occurrence only means that the city will have to dip into its savings to make ends meet. As a result, it becomes difficult to save funds for safety net reserves and projects.

Does the city have the ability of paying its bills in the future?

Change in value of capital assets had a value of -0.023. This is an indication that the capital assets in the city have decreased in value. Capital assets encompass things like vehicles, land, public infrastructure, and buildings. The decrease in value of this items is usually due to depreciation. The ratio involved is low hence an indication of a worse financial condition. The negative ratio is an indication that the value reported at the end of the year was less than the value that was there at the beginning of the year.

Ability to pay obligations using annual revenues, on the other hand, has a ratio of 3.09. This is an indication that the city would require 3 years of revenue to be able to pay its obligations. This includes for both long-term and short-term obligations. A city’s financial condition is better when fewer number of years are required to pay the existing obligations.

Conclusion

Assessing financial condition is vital in understanding where the government stands with regards to the financial prospects. It is through understanding how the condition is that corrective measures can be taken since there is an idea of where things are not going as it would be expected. The paper has tried to analyze the financial condition of the City of San Jose using varied measures to help see where things stand. The paper has used the Comprehensive Annual Financial Report for the year ending June 20, 2017 to obtain relevant financial information. There are areas where the financial condition seems favorable whereas in others it is not favorable. This is something that can be used to instigate positive change. Financial condition is complicated to evaluate since it requires an examination of varied financial areas. However, it is everyone’s responsibility to take the initiative of knowing the financial condition of their jurisdiction. This helps in holding relevant government officials accountable for the prevailing conditions.

References

Cooper, J. (2017). Comprehensive Annual Financial Report: Fiscal Year Ended June 30, 2017.City of San Jose.

Kemp, R. (2012). The municipal budget crunch: A Handbook for Professionals. Jefferson, N.C.: McFarland & Co.

Ritonga, I., Clark, C., & Wickremasinghe, G. (2012). Assessing financial condition of local government in Indonesia: an exploratio. Public And Municipal Finance (Hybrid), 1(2).

Sanjoseca.gov (n.d). San Jose, CA – Official Website – Financial Transparency. Sanjoseca.gov. Retrieved 15 March 2018, from http://www.sanjoseca.gov/index.aspx?NID=4733

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