Question:
*In the 2010 CAFR, Detroit indicated that its general obligation debt rating had been downgraded by Moody’s Investors Services from a Ba2 to a Ba3. Based on its fourth quarter Performance Dashboard
1 Detroit was subsequently downgraded to junk bond status as of the fourth quarter of 2012 by all three rating services (Caa2, Moody’s; CCC-, Standard & Poor’s; CCC-, Fitch). The audit of the 2011–2012 financial reports resulted in the following statement from its auditor, KPMG:
“The City has an accumulated unassigned deficit in the General Fund of $326.6 million as of June 30, 2012, which has resulted from operating deficits over the last several years. The deficits raise significant liquidity risks regarding the City’s ability to meet its financial obligations as they come due without raising revenues, cutting costs of services provided, and effectuating financial restructuring.â€
2. As Detroit indicates in its 2012 CAFR report, the city faces socioeconomic factors that make it difficult for the city to regain its financial footing:
The City of Detroit is the largest City in Michigan and the 18th largest City in the United States. However, as documented in the 2010 Census, the City’s population continues to decline, which contributes to the declining property and income tax base. In addition, the City faces continued high unemployment (18.9% in October 2012), which hinders personal income tax collections. Resident home foreclosures and delinquent property tax levels are another financial concern. The weak economy has had an adverse impact on the State’s budget resulting in cuts of revenue sharing to local governments. The City’s revenue sharing for the year ended June 30, 2012 was $173.3 million or $66.0 million less than the year ended June 30, 2011.
Although the City’s current economic condition is poor, the future outlook for recovery and improvement is positive. Businesses are transferring employees from suburban cities to the City of Detroit. New residents are moving into the City’s mid-town area.
Following are selected financial indicators from Detroit’s CAFRs, which provide financial data that can be used to help identify financial trends the city has experienced with regard to its economic condition.
In July of 2013 Detroit filed for bankruptcy. 3 Since its bankruptcy filing, numerous events have occurred that impact the city’s economic condition.
3 Michael Corkery and Matthew Dolan, “Detroit Bankruptcy Likely to Spark a Pension Brawl; Filing Will be a Test Case of How Far a City Can Go in Shedding Retiree Costs,†The Wall Street Journal (online), July 20, 2013.
Required:
a. Using the information provided in the case, the information provided in the Illustrations 10–3 and 10–4, and the information provided in the Credit Analyst Models section of the text provide an analysis of factors that would lead to the downgrading of the debt rating.
b. The City of Detroit’s Finance Department provides quarterly performance indicators on financial sustainability and some economic indicators along with service performance. Additionally, the Emergency Manager for the bankruptcy provides quarterly filings on the Detroit Web site. These quarterly reports provide a status update on Detroit’s financial situation. Using the information provided by the Finance Department and the Emergency Manager, assess the city’s economic condition. As part of the assessment indicate whether you believe the city’s condition has improved, worsened, or remained the same since 201
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Selected 10-Year Trend Data from Detroit's CAFRS* Measure 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 Cash and cash equivalents Current liabilities $82 $1,038 ($269) $123 $818 $81 $871 ($91) $116 $823 ($267) $268 $858 ($142) $59 $726 ($91) $75 $698 ($107) $50 $671 ($34) $49 $47 $558 ($69) $481 General fund balance Governmental fund ($91) $69 total revenues $1,524 $1,712 $1,630 $1,748 $1,773 $1,910 $1,839 $1,840 $1,867 $1,829 Governmental fund total expenditures Debt per capita Legal debt limit used Debt service/operating expenditures $1,586 $1,711 $1,665 $1,062 $1,843 $880 $1,908 $990 $1,870 $936 49.67% $2,061 $3,220 $1,028 $2,170 $1,981 $702 $1,456 $1,350 92.65% 84.82% $1,011 $882 75.46% 59.10% 54.50% 56.48% 52.36% 55.94% 44.02% 15.10% 13.70% 13.39% 14.41% 13.97% 13.00% 14.06% 5.76% 6.98% 6.91%
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> You are the finance director of White Rock City. Your current auditor informs you that he is retiring and selling his auditing practice. When you seek his advice regarding the hiring of the accounting firm that is currently helping to integrate a new acc
> Use Illustration 14–3 as a guide in completing this exercise. ______1. Fredericksburg Chamber of Commerce ______2. American Diabetes Association ______3. American Legion ______4. American Museum of Natural History ______5. American Institute of Certified
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> Following is a list of a number of accounts used by federal agencies. Required: For each of the accounts listed indicate in Column A whether the account is a proprietary account (P) or a budgetary account (B). In Column B indicate whether the account
> Access the most recent Financial Report of the U.S. Government at the U.S. Treasury Department Web site, www.fms.treas.gov/fr, and answer the following questions. Required: a. What are amounts of the total budget deficit and net operating cost for eac
> The source of authoritative guidance for federal financial accounting and reporting is the Federal Accounting Standards Advisory Board. To better understand the FASAB, access its Web site at www. fasab.gov to answer the following. Required: a. What is t
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> Custer County receives pass-through funds from the state’s Department of Justice to assist in administering the federally funded Public Safety Partnership and Community Policing Grants program (also referred to as Community Oriented Policing Services [CO
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> Identify some of the characteristics of a government’s citizens that can affect the government’s financial condition. Explain how the characteristics affect financial condition.
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> What is the purpose of the Form 990? Because there are different types of Form 990, explain how an NFP would know which type it must file.
> Explain a major difference between a 501(c)(3) tax-exempt organization and a 501(c)(7) tax-exempt organization.
> Identify which level(s) of government regulate(s) NFP organizations and identify the source of authority.
> What are articles of incorporation and how do they differ from by-laws of a NFP organization?
> Obtain the most recent copy of the annual report for your college or university (school). Using the annual report, answer the following. Required: a. Does your school follow GASB or FASB standards? Use the financial statements to explain how you can tel
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> The NACUBO expense accounts typically used by colleges and universities do not identify the program and support functions. Discuss whether colleges and universities are required to identify program and support expenses and how this is accomplished if the
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