Needed in Virginia: A Fiscal Early Warning System

fiscal_distressby James A. Bacon

In the wake of the City of Petersburg’s fiscal meltdown, the General Assembly has appointed Del. R. Steven Landes, R-Augusta, to head a subcommittee to study how other states deal with fiscally stressed localities. In surveying best practices in other states, it’s a good bet that Landes will familiarize himself with a new report, “State Strategies to Detect Local Fiscal Distress,” published by the Pew Charitable Trusts.

It turns out that 22 states, many of whom have learned from hard experience, have established mechanisms for monitoring the fiscal health of local governments. The idea is to spot the warning signs of fiscal distress in the hopes that local elected officials will take action before their municipality becomes the next Detroit, Mich., Stockton, Calif., or Central Falls, R.I.

Virginia requires cities, counties and towns to file audited documents called Comprehensive Annual Financial Reports (CAFRs), but the oversight ends there. No one at the state level analyzes the data or conveys findings to the public.

Of the 22 states that monitor local fiscal health, Pew classifies eight as “early warning states” with laws defining when local governments are in “fiscal distress” and systems to identify when a locality reaches that status. As Pew notes, an early warning system can save states big headaches and liabilities down the road if it can avert local government failure.

Another big bonus: Credit-rating agencies look positively upon such systems. “All else being equal, we tend to assign higher ratings to troubled governments in states with strong oversight, well-established policies of intervention, and a track record of success,” the study quotes Moody’s Investors Service as saying. Among the key indicators that analysts in other states scrutinize:

  • Audits and other financial information submitted on time
  • Deficits and minimum fund balances
  • Size of debt-service obligations, and debt service as a ratio of population and operating revenue
  • Sufficiciency of cash for services
  • Total revenue and expenditures per capita
  • Unrestricted fund balances
  • Cash-to-liabilities ratio
  • Pension plan funding ratios

Few local elected officials have the financial training to read municipal balance sheets and spot the signs of impending trouble. A state report card on key indicators and ratios would be invaluable to them and to members of the public. Flashing warning signs would give them time to address problems before they reached the point where, like Petersburg, city officials have to make catastrophic cuts to core government services.

(Hat tip: Tim Wise)

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9 responses to “Needed in Virginia: A Fiscal Early Warning System”

  1. Larrytheg Avatar

    would love to hear Dons view of having the Clown show in Richmond keeping tabs on the localities.. ;-0

  2. Dear Baconius: you say, “Virginia requires cities, counties and towns to file audited documents called Comprehensive Annual Financial Reports (CAFRs), but the oversight ends there. No one at the state level analyzes the data or conveys findings to the public.” Apparently, no one at the State level can do, or does, anything even if the CAFR is never submitted. When did Richmond last comply with this “requirement”?

  3. djrippert Avatar

    What will the General Assembly do if they detect a brewing problem? What did they do for Petersburg? Landes is a bank executive. He ought to be able to understand financial statements. But then what? The General Assembly members see a potential problem and spend their days insisting there is nothing the state is going to do to help the locality?

    1. baconius Avatar

      I don’t think that the General Assembly should necessarily do anything if they detect a brewing problem. The idea is to set up a system so that the public — and the city/county/town officials — know there is a problem before it explodes in their face like it did for Petersburg.

  4. Larrytheg Avatar

    so the current CAFR “transparency’ is not getting the job done? I like the approach but a better implementation is to REQUIRE that the audits be done by an external auditor that the locality cannot influence AND that the audit results be sent to every taxpayer in their tax bills…or by email or other means.

    such that it’s not the state holding the locality accountable – but the local voters and done so as a result of mandatory transparency.

    Finally -a regime similar to how the Feds enforce adherence to requirements – either the locality performs the required processes – or the state will – and when the state does – it informs each and every voter in that locality what it is doing – and why – and insure that local voters KNOW that it is THEIR responsibility to do something about the situation – and that the State is NOT going to bail them out… it’s mandatory that voters take responsibility.

  5. djrippert Avatar

    Fairfax County states in its financial report that an independent audit is performed (by KPMG) and that an independent audit is required by “the code of Virginia”.

  6. Larrytheg Avatar

    “independent” is an interesting and misleading concept. Stafford County schools had said they hired an “independent” auditor for several years running and for several years running serious financial irregularities were apparently occurring – not caught by the hired “independent” auditor … until exposed by a School Board separate 3rd party forensic auditor.

    “independent” should be one in which the auditor is NOT one selected by the entity to be audited.. but instead by an external/oversight agency.

    there’s all kinds of ways to fool the citizens with the word “audit”… these days.

  7. djrippert Avatar

    In private enterprise there must be an audit committee as part of the board of directors. For publicly traded companies the audit committee must be composed of independent board members with at least one member qualified as a financial expert. Much of the modern definition of an audit committee was the result of Sarbanes – Oaxley federal regulations. One responsibility of the Audit Committee is to choose an independent auditor. The fact that the City of Richmond has apparently failed to file financial statements for some time seems shocking to me. I wonder why some of the thinking around publicly traded companies isn’t applied to public entities.

    In the case of Fairfax County KPMG is certainly well respected for both their financial competence and auditing integrity.

  8. Larrytheg Avatar

    I guess what I’m saying is that a truly independent audit is one is which the people who are being audited – do not pick the auditor….. and if you really want a verified audit – you get a forensic audit that goes further than the generated numbers but who and how those numbers were generated.

    If a true – 3rd party audit is done – and the results of that audit provided directly to taxpayers – you’ll have true transparency and a much higher likelihood of accountability from voters. Many audits done today are done by auditors doing it per the direction of those whose finances are being audited – then the work product is often buried on the website… such that very few taxpayers are even aware that it has been done.

    that’s not a good way to do it if you really want transparency – and the ability of taxpayers to hold their elected accountable.

    That’s how situations like Petersburg happen.

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