Page 83 - Southlake FY23 Budget

CITY PROFILE

Financial condition can best be described as a municipality’s ability to maintain existing service levels, withstand
economic disruptions that occur at the local, regional, and national levels, and adapt to ever-changing economic
conditions.

The ability to maintain existing service levels refers to more than just the ability to pay for the services the locality
currently provides. It also refers to the ability to maintain programs that are currently funded from external sources
(state or federal grants) where the support is likely to diminish over time, and such programs cannot be practically
eliminated once funding does disappear. This element also refers to the ability to maintain capital facilities, such as
roads, buildings, and other infrastructure, in a manner that protects the initial investment and keeps such facilities
in usable condition. Lastly, it also includes the ability to provide funds for any future liabilities that may currently be
unfunded, such as pensions, employee leave, and debt.

The ability to withstand economic disruptions that occur at the local, regional, and national levels is an important
element because these disruptions have significant impacts on businesses and individuals who enjoy their livelihoods
within the locality. Economic disruptions therefore impact a locality’s ability to generate new local tax dollars.

The ability to adapt to ever-changing economic conditions refers to the financial pressures localities face as they
grow, shrink, or experience no change at all. Growth can force localities to assume new debt in order to finance
new infrastructure or cause a sudden increase in the operating budget in order to maintain and provide necessary
services. Shrinkage leaves a locality with the same amount of infrastructure to maintain but with a smaller tax base
with which to pay for it.

What is the Financial Trend Monitoring System?

The Financial Trend Monitoring System (FTMS), adapted from the system developed by the International City/
County Management Association (ICMA), “identifies the factors that affect financial condition and arranges them
in a rational order so that they can be more easily analyzed and measured.” The FTMS is a management tool that
compiles pertinent information from the city’s budgetary and financial reports, combines it with relevant economic
and demographic information, and creates a series of local government financial indicators that can be used to
monitor changes in financial conditions when plotted over a period of time.

These financial indicators include: cash liquidity, level of business activities, changes in the fund balance, and
external revenue dependencies. This system can also assist the locality by setting in place long-range policy priorities
as well as providing a logical way of introducing long-range considerations into the annual budget process. The
following discussion has been developed using the ICMA manual entitled Evaluating Financial Condition, A Handbook
for Local Government.

The FTMS is built on overall “factors” that represent the various influences of a locality’s financial condition. These
financial condition factors are then associated with “indicators” that measure different aspects of these factors.
Once developed, these can be used to monitor changes in factors and financial conditions. Each factor is classified
under three categories: environmental, organizational, or financial.

Environmental Factors affect localities in two ways. Firstly, they create demand. Secondly, they provide resources.
The question most associated with the analysis of this category in regards to its impact on financial condition is, “Do
these factors provide enough resources to pay for the demands they create?”

Organizational Factors are the government’s response to changes in environmental factors. Theory assumes that
any government can maintain their strong financial condition if it makes an appropriate organizational response to
adverse conditions by reducing services, increasing efficiency, raising taxes, or taking some other appropriate action.
It also assumes that public officials have perfect information of the problem, understand the gravity of the situation,
and know how to act in response.

82 FY 2023 City of Southlake | BUDGET BOOK
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