Financial Health Indicators
Financial Health Indicators: A 'Fiscal Physical' for Local Governments
We all know that if we eat right and exercise, it will be reflected in our key health indicators: our bad cholesterol, good cholesterol, blood sugar level, etc. If we keep those numbers in order, the chances are pretty good that we’ll live long, healthy lives and will avoid visits to the emergency room.
The same goes for government: If the expenses are kept in line with the revenues, there’s a cushion of reserves in the bank and the debt isn’t too high, chances are that entity won’t end up in fiscal emergency.
Prior to 2016, there was no easy-to-understand, readily accessible vital sheet showing the relative health of Ohio cities and counties. And, having been witness to too many local governments that ended up with their fiscal numbers out of whack, Ohio Auditor of State Dave Yost wanted to develop a tool to help local officials better predict when their communities’ health was going in the wrong direction.
At the direction of Auditor Yost, the office developed a series of indicators that would help identify those that show signs of heightened fiscal stress. Years of effort has led to the creation of an assessment that serves as a “fiscal physical” for cities and counties, alerting them to areas of concern.
Staff studied historical data for entities that had been declared in fiscal distress and identified key indicators of fiscal stress. Using that data, the Auditor’s office developed a set of Financial Health Indicators to recognize early signs of fiscal stress for cities and counties.
The indicators – 17 for entities that report financial statements using the Generally Accepted Accounting Principles (GAAP) and 15 for those that use a cash or modified cash basis of accounting – are a collection of financial information, percentages and ratios gathered from annual financial statements filed by local governments with the Auditor’s office in addition to their audit reports. The indicators are useful in predicting both financial stability and stress.
The indicators are explained in detail in the accompanying documents, including how they are measured, their individual importance and how each is a sign of fiscal stability or stress.
It is important to note that no single indicator is a sign of fiscal stress as they all should be viewed collectively to gain a more accurate picture of the fiscal health of a city or county. The vast majority of cities and counties have at least one indicator in a “critical” or “cautionary” outlook. Citizens, government leaders and policy makers can gain great insights into the fiscal trends of an entity from reviewing the indicators.
Collectively, the indicators provide meaningful information about the state of our state’s largest governmental units through heat maps, which pull together results for all 88 counties and 247 cities.