The city government’s recently released annual financial evaluation, including financial statements and an independent auditor’s report, describes a clean bill of fiscal health, especially regarding the city’s conservative debt posture.

The financial report — the Comprehensive Annual Financial Report — serves as a kind of companion to the budget. Each year, whereas the budget looks forward to the next fiscal year, the financial report evaluates the prior fiscal year.

Reviewing FY 2018, which ended June 30, independent auditors offered an “unmodified” opinion, the best possible, of the city’s financial statements. That’s after obtaining “reasonable assurance” that the statements “are free of material misstatement,” according to the audit report. Material misstatements include errors, omissions and fraud, which in the auditor’s “professional judgment” might, among other things, “influence the economic decisions of users,” according to the American Institute of CPAs, a professional association.

In addition to the audit, the report includes analysis of various metrics that describe fiscal health, a few of which are described below.

BOTTOM LINE

The city’s net position and General Fund balance have exhibited upward trends over the past decade, notwithstanding changes in calculation methods over the years that can complicate historical comparison.

The city’s “net position” is its bottom line. Specifically, it’s “the difference between assets and deferred outflows, on the one hand, and liabilities and deferred inflows, on the other,” according to the Governmental Accounting Standards Board, a standards-setting organization. Non-monetary capital assets (land, buildings, etc.) and long-term bond and/or pension liabilities are included. “Over time, increases or decreases in the City’s net position are indicators of whether its financial health is improving or deteriorating,” according to the report.

Fund balance is similar to net position, though narrower and shorter-term in scope, indicating only the net of financial assets and liabilities of specific funds, such as the general or capital projects funds. This measure is of “central importance to the credit reviews performed by municipal bond analysts;” it serves “to identify the available liquid resources that can be used to repay long-term debt,” according to the Governmental Accounting Standards Board. The government can also draw on fund balance to address emergencies.

Director of Finance Kendel Taylor cited New York’s Westchester County as a cautionary tale: “We have actively increased fund balance reserves over the past 5-plus years to go from 10 percent to more than 15 percent. Also, … we were within one percent of [our budgeted revenue] target,” she said. By contrast, “Westchester was downgraded [from its AAA rating] for not maintaining a healthy reserve and for revenue forecasts that were somewhat risky.”

DEBT

Three debt ratios that the city tracks have all increased over the past decade: debt as a percentage of the assessed value of real property; debt per capita as a percentage of per capita income; debt service as a percentage of general government expenditure. But all measures remain within their state-mandated and self-imposed limits.

In the first case, while the state constitution would allow the city to carry debt equal to 10 percent of total fair market value, the city carried only 1.49 percent in FY 2018. On the one hand, Taylor cited a recent review from Moody’s, a credit rating agency, which lauded Alexandria’s “conservative debt issuance guidelines” and “manageable” long-term debt, “despite an extensive capital plan.” On the other hand, keeping the debt ratio low left $3.4 billion in untapped legal debt capacity.

Asked why the city doesn’t issue more bonds in light of its looming list of capital projects, Taylor said: “It is important that debt service payments in relationship to the rest of the budget do not become disproportionate. … If debt service were to become a greater share of the pie, either programs or services would need to be reduced or eliminated or the tax rate would need to go up.” Furthermore, “Issuing significantly more debt than is planned would definitely cause concerns with our rating agencies. … A sudden, significant increase in debt would be contradictory to our long time practice for which we receive positive feedback from the rating analysts,” and which allow the city to borrow more cheaply.

PENSION FUNDING

“Long-term pension liability funding is critical. The [credit] rating agencies are looking for it” as “a very strong criterion,” Taylor told City Council earlier this year.

“Funding status is a measure that captures a government’s ongoing effort at one point in time to prefund its future pension liability, generally expressed as the ratio of assets to liabilities (also referred to as the funded ratio),” according to a 2007 report from the U.S. Government Accountability Office. An 80 percent funding level is “generally viewed as being acceptable to support future pension costs. However, funding levels across the different plans [surveyed at the time] ranged from about 32 to 113 percent. Those state and local governments with plans that are funded below acceptable levels may face tough choices in the future between the need to raise taxes, cut spending, or reduce benefits in order to meet their obligations.”

Kendel concurs that “a pension that is 80 percent funded is definitely in great shape. However, we don’t shoot for 80 percent. We do shoot for 100 percent, but rarely get there. Changes in investment performance, changes in assumed rates of return, and other actuarial analysis and assumptions can quickly change a pension’s funded levels.”

For more, visit www.alexandriava.gov/FinancialReports.