The City of Providence, RI: A Case Examining the Financial Condition of a U.S. Municipality

ABSTRACT: This case is intended for use in a wide variety of learning contexts, including undergraduate and graduate government and not-for-profit accounting courses, advanced accounting courses, public policy courses, along with courses that address municipal pensions at the college or university level, or other training programs. The case achieves four primary objectives: developing proficiency in ratio analyses for a municipality, conducting research related to the financial status of a municipality, improving critical thinking and problem-solving skills, and developing an awareness of potential public interest issues facing municipal leaders. We find that students benefit from analyzing the financial condition of the City of Providence and develop critical thinking skills through their analyses.

INTRODUCTION

The economic recession and financial crisis of 2008 had a dramatic impact on the financial position of government entities, particularly at the state and local levels. There are numerous articles in the popular press and media stories of clashes between state governments and their citizens, and cities and towns on the verge of bankruptcy and in some extreme cases going bankrupt. We have developed this case to enable you to learn firsthand about the challenges government entities face by having you perform an in-depth study and analysis of the financial condition of a medium-sized city, Providence, RI, that is currently facing significant financial challenges. Through this analysis you will deepen your understanding of governmental accounting issues and better understand the public interest complexities that occur in decision making for governmental entities.

Part I -

A: Background Questions/General Knowledge of Accounting for Municipalities 

(1) Typically which branch of the city level of government structure is responsible for managing the city's expenditures within the budget and maintaining the accounting, budget, and financial reporting systems? What financial reports does a municipality need to prepare? What standards guide the preparation of municipal financial reports? Municipalities use modified accrual basis of accounting. How does this differ from accrual accounting?

(2) In the City of Providence, who is responsible for developing the budget? How is the budget voted on and implemented?

(3) Using articles from Lexis-Nexis or other business media, along with the Letters of Transmittal for 2011-2013 (pp. i-x for 2011 and 2012, pp. i-vii for 2013), write a brief summary of recent events that are related to the City of Providence and its financial condition. 

B: Preliminary Analysis of the City of Providence CAFR 

(4) Find the Total Assets, Total Liabilities, Net Assets, Unrestricted Net Assets, Total Revenues, Total Expenses, and Change in Net Assets of the City of Providence for 2011, 2012, and 2013. Explain the trends. 

(5) Calculate the current ratio and the debt ratio for 2011, 2012, and 2013. How is the City of Providence 2013 performance on these measures relative to 2011 and 2012?

Part II: Additional Analysis of the CAFR

(6) Discuss the financial performance of the city over the last three years. Pay attention to specific items from the Financial Statements that reflect the city's performance.

(7) An article by Trussel and Patrick (2009) titled "A Predictive Model of Fiscal Distress in Local Governments" summarizes the ways to measure fiscal distress and related financial risk factors of municipalities.

a. Trussel and Patrick (2009) (p. 590) define the condition of fiscal distress "as a local government that experiences a significant and persistent imbalance between revenues and expenditures." Trussel and Patrick "operationalize the definition of fiscal distress as a local government that experiences three consecutive years of operating deficits (scaled by total revenues) with a cumulative three-year operating deficit of more than five percent." By reading the three-year financial statements of the City of Providence, do you think the city is experiencing fiscal distress? Explain how you derive your conclusion regarding the city's financial condition. 

b. Trussel and Patrick (2009) identify risk factors or indicators of fiscal distress and use the risk factors to develop a model to predict the likelihood of fiscal distress. They use the following risk factors or indicators of fiscal distress: revenue concentration, administrative expenditures, debt usage, and entity resources. The definitions and measurements of these factors are listed in the following table (Trussel and Patrick 2009):

Calculate three risk ratios suggested by Trussel and Patrick (2009) for the City of Providence for 2011, 2012, and 2013, and report your findings.  Use charts or graphs to support your points.

(8) City of Providence officials considered a number of ideas to mitigate the financial pressures facing the city, including reducing the education budget and instituting an income tax for the City of Providence.  Comment on these ideas.

( 9) The 2011-2013 Letters of Transmittal (pp. i-x for 2011 and 2012, p. i-vii for 2013) described a number of actions taken to avoid the fiscal crisis facing the City. Given your understanding of these Letters and the Financial Statements, how would you assess the effectiveness of the actions taken in 2011 (e.g., did they improve Providence's financial position and permit a more sustainable fiscal approach for the City?). What are the short and long-term implications of the cost saving initiatives? Will the initiatives provide long-term solutions to the City's problems?

(10) Given your answer in Question 9, what fiscal and operational challenges does Providence face in the next few years? What else should the City of Providence do to achieve financial and operational success?

Part III: Analysis of Pension and Other Post-Employment Benefit Costs 

(11) Find the annual pension cost, pension contributions made, net pension obligation, and  actuarial accrued liabilities of the City of Providence as reported in the 2011, 2012, and 2013 CAFRs. How well does the City of Providence fund its Employees' Retirement System (ERS) for 2011, 2012, and 2013? (Hint - the annual pension cost, pension contributions made, net pension obligation for all three years are listed in the 2013 financial statement footnotes).

(12) The city's annual other postemployment benefit (OPEB) cost is calculated based on the annual required contribution of the employer, an amount actuarially determined in accordance with the provisions of GASB Statement 45. Find the annual OPEB cost, contributions made, and net OPEB obligations of the City of Providence for 2011, 2012, and 2013. How well does the City of Providence fund its OPEB?

(13) GASB No. 68 "Accounting and Financial Reporting for Pensions" is effective for fiscal years beginning after June 15, 2014. In terms of financial statement reporting, GASB No. 68 (Para. 20) requires that a liability should be recognized for the net pension liability. As noted in Paragraph 20: "The net pension liability should be measured as the portion of the actuarial present value of the projected benefit payments that is attributed to past periods of employee service in conformity with the requirements of paragraphs 22-32 (total pension liability), net of the pension plan's net position" (GASB 68, 9). Assume this requirement existed for 2011 and 2012. While Total Assets do not change for these years, calculate the Total Liabilities, Net Assets, and Debt Ratio for the City of Providence for these two years. Explain your results.

Assignment Files -

https://www.dropbox.com/s/6z9vhonc2j6biqr/Assignment%20Files.rar?dl=0