Auditor of Public Accounts Reports on Revised “Early Warning System” for Local Fiscal Distress

August 23, 2019

The Auditor of Public Accounts (APA) released a report on August 2 detailing the most recent application of a revised “early warning system” for detecting financial troubles in local governments. The APA was directed to develop the original version of this system in budget language in the 2017 Appropriations Act, which set out a procedure by which the APA would make a preliminary determination that a locality appeared to be experiencing fiscal distress and begin the process by which some state assistance might be made available to the locality. The revised version incorporates several suggestions made by local representatives during discussions in late 2017 about how the model could be improved to present a more holistic version of a locality’s financial condition.

Under the version of the model employed in 2017, the APA’s Office developed an overall Financial Assessment Model (FAM) score for each locality by calculating ten ratios, which were each ranked relative to other localities and then averaged to produce a composite FAM score. The APA’s Office established a threshold at which the Office would follow up with the locality with a more detailed questionnaire. In meetings and correspondence with the APA’s Office, local representatives encouraged the use of broader metrics to evaluate a locality’s financial condition, as there may be minor discrepancies in reporting methods from locality to locality that might provide a distorted picture of a locality’s true capacity to meet its financial obligations.

Under the new model, each ratio is calculated for each locality independently of other localities’ scores; the ratio is compared to a benchmark established by the APA’s office, and points are assigned based upon whether the ratio suggests a weak or strong performance for that indicator. (Five ratios were retained from the 2017 model, and seven new ratios were added.) The ratio is weighted based on importance. Higher numbers of points indicate less-favorable outcomes, and the APA’s Office established a cut-off score above which APA staff would undertake additional qualitative analysis to determine whether the locality’s condition warranted further follow-up. This additional layer of analysis includes demographic factors, such as population growth or decline and unemployment rates (review of such qualitative factors was a suggestion of local government representatives in discussions in 2017). After completing both steps of this review, the APA’s Office made a preliminary determination of the need to have additional discussions with localities that appeared to be experiencing fiscal distress. Fourteen localities were identified as needing further review; the report details the additional interactions between the APA’s Office and these jurisdictions.

The report may be found on the APA’s website, along with an executive summary.

VACo Contact: Katie Boyle

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