After years in a continuous loop of population decline and higher taxes on a decreasing tax base, the largest municipal bankruptcy in U.S. history was filed by the City of Detroit in July 2013. After any disruptive event, our collective hindsight is 20/20, but could anyone who followed Detroit’s financial statements have seen this coming? We often discuss calculating key financial indicators to assess the financial health of a fund; would have doing so early on helped predict the bankruptcy? Recently, a study by Stone et. al., [1] sought to answer this question by analyzing Detroit’s financial condition through the lens of two dozen financial indicators. Their results illuminate some important points about using key financial indicators.
The authors computed 24 financial indicators from the City’s Comprehensive Annual Financial Reports (CAFRs) from 2002 to 2012. They calculated indicators from the financial data reported in two places: government-wide statements, and the balance sheets and operating statements for Detroit’s Governmental Funds. While they did not look at Proprietary Funds specifically, which would include the Enterprise Funds in which water and wastewater utilities usually reside, there are some lessons we can apply to Enterprise Funds using this study.
