Assessing Financial Condition – Centerville Town

Financial condition can be referred to as the local government’s ability to balance its repetitive expenditure obligations with its repetitivesources of revenue, while ensuring that it provides services to its residents on ongoing basis. A community living in a town witha healthy financial condition tends to have as well as preservesatisfactory service levels even in fiscal slump periods;easily detects and adjusts itself to long-term changes in economic or population change; and creates resources that will help it meet its population’s future needs. Inversely, living in a town with an unhealthy financial condition or in a fiscal stress tends to struggle to find a balance out its budget;it often experiences disruptive service levels; has challenges adjusting to alterations in socioeconomic forces; and has inadequate resources to meet its population’s future needs(Nollenberger, 2003). Maintaining or reestablishing a healthy financial condition calls for local officials to invent and adopt strategies that will enable the community to easily adjust itself to long-term changes in economic or population changes as well as respond to the business cycle’s economic bearing appropriately, and lastly, effectively plan for the community’s future.

Analyzing the city’s  revenue structure will help us identify a number of problems including: aid in identifying the following types of problems: Deterioration in revenue base; Internal procedures or legislative/board policies that may adversely affect revenue yields; Over-dependence on obsolete or external revenue sources; User fees that do not cover the cost of services; Changes in tax burden; Lack of cost controls and poor revenue estimating practices; Inefficiency in the collection and administration of revenues; Suggest that the leadership explore the following possible reasons for the lack of balance between revenues and expenditures; Excessive growth of overall expenditures as compared to revenue growth or growth in wealth (personal and business income); Undesirable increases in fixed costs; Ineffective budgetary controls; and A decline in personnel productivity; Excessive growth in programs, which creates future expenditures.

In the table provided, Centerville’s financial situation over a five-year period is summarized using four key financial factors: the city’s revenue per household, sales tax contribution in thecity’s total revenue, city’s expenditure per household, and the proportionof households exempted from paying sales tax.Centerville’s revenue and its expenditure do not balance. Centerville’s revenue for the five year period are $321, $318, $329, $329, and $328 respectively while its  expenditures are $321, $321, 333, $334, and $334 respectively. From the above figures, it is clear that the town’s expenditure is higher that its revenue throughout the five year period.

As the city’s total population grows, so does its needs for services. Consequently, a city’s revenues per capita should either remain equal to or grow above its level of operating expenditures per capita. In our case however, the city’s operating revenues per capita are lower than its operating expenditures per capita.  Unless the city creates new revenue sources, or come up with strategies that will help reduce its expenditure, it may not be able to maintain the current level of services.

Furthermore, the level of expenditure per household is noted to increase from year to year with an exception of year five where it remains constant. Although the amount of revenue per household is seen to fluctuate upwards, it remains lower than the expenditure throughout the period except in year one where the revenue is equal to the expenditure reported. The differences between the city’s revenue and expenditure from each household for the five year period are: $0, $-3, $-4, $-5, $-4 respectively. The city is gaining less per year from each household but spending more for services per household within the same period.

Operating expenditures per capita show changes in the city’s expenditures that aresubject to population changes. Growing per capita expenditures could be an indication that the total costof providing communal services has been gradually increasing at a speedthat is beyond thecommunity’s capacity to pay (Zafra-Gomez, Lopez-Hernandez&Hernández-Bastida, 2009). If such instances where spending is growing faster than it can be accounted for by either inflation or the new programs being introduced. This indicates that the city devotes more funds to maintaining the same service level. The city may be usinginefficient methods of service provision.

The city’s sales taxes for the five year period are: .938, .936, .935, .935, and .933 respectively.  When the city’s sales taxes are converted to percentages, they become: 93.8%, 93.6%, 93.5%, 93.5%, and93.3% respectively. From the above percentages, it is clear that the city’s percentage sales tax is declining from year to year throughout the period with an exception of year four where it remains constant.Centerville’s sales taxes are the city’s main source of revenue, which means that the city’s revenue is deteriorating on yearly basis.

Alterations in economic conditions are manifested in terms of fluctuations in the amount of sales tax collected. When an economy’s consumer confidence is great, customers tend to spend more and in return, the city governments collect higher sales tax. In some cases, consumer spending may also be influenced by strong real estate market as it either increases or reduces homeowner’s wealth. The city’s struggling economy coupled with possiblydeteriorating real estate market may be the cause of reduced consumer confidence, which has resulted in reduced consumer spending that has resulted in declining sales tax revenues.

Revenues regulate a city’s aptitude to provide communal services. The important issues to deliberatewhen it comes to revenues are revenue growth, revenue diversity, revenue reliability, revenue flexibility and revenue administration. Under perfectfinancial conditions, the city’s revenues would grow at a higher rate than its expenditure burdens of providing services. The revenues should also be flexible enough to allow any adjustments required to adapt to thechanging conditions. Furthermore, the city’srevenue sources should be diversified in their resources so as to avoid overdependence in external funding sources including federal grants and optional state aid. User levies should also be evaluated on regular basis and adjusted accordingly to ensure that they to cover the true cost of providing services.

Community resources indicators comprise of both economic and demographic characteristics comprising of population, individual income, property prices, and rates of employment. These pointers describe the community’s affluence and the city’s ability to create revenues(Theodossiou, 1991). It also includes the community’s demand, which the publicmakes on its civic government for instance, public safety, social amenities, and capital improvements. Any variations in economic and demographic physiognomies are most convenient for financial analysis over the long term. The needs of community and its resources are very closely correlated.

Community needs and resources encompass economic and demographic characteristics, including population, employment, personal income property value, and business activity. An assessment of the local economic and the local demographic characteristics can help us recognizea number of conditions including:A decline in the tax or revenue base; A need to shift public or customer service priorities; and A need to shift policies because of a loss of competitive position.

A probable key reason for this decline may be the increasing number of the number of households exempt from paying sales tax due to low income.Sales tax could also have been influenced by the city’s general labor market situations. Although every city gets a portion of its sales tax from people outside the city in terms of tourists, local economic conditions play a big part of the sales tax.The number of households exempt from paying sales tax row over the five year period increased as follows: .139, .139, .142, .155 and .156 respectively. When the city’s numbers of households exempt from paying sales tax row over the five year period are converted to percentages, they become: 13.9%, 13.9%, 14.2%, 15.5% and 15.6% respectively. The percentage of sales-tax-exempt households has increased notably over the five-year period. This means that it is highly probable that the Centerville tax base is shrinking because more of its citizens are exempt from paying sales tax.

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