Internal Audit Department Financial Condition Report Fiscal Year 2001, Benchmark Edition May 2002 County Auditor Ross L. Tate, CMA, CIA, CGFM Project Team D. Eve Murillo, CPA, MBA, CFE Audit Manager Richard L. Chard, CPA Senior Auditor John Schulz, MPA Senior Auditor Kimmie Wong Associate Auditor Internal Audit Department 301 W Jefferson 10th Floor Phx AZ 85003 (602) 506-1585 Fax (602) 506-8957 May 22, 2002 Don Stapley, Chairman, District II Fulton Brock, Supervisor, District I Andrew Kunasek, Supervisor, District III Janice K. Brewer, Supervisor, District IV Mary Rose Wilcox, Supervisor, District V Internal Audit has completed this Benchmark Edition of the FY 2001 Financial Condition Report as a part of our Board approved audit plan. An abbreviated Special Executive Edition featuring only Maricopa County trends was issued in February 2002. The Benchmark Edition needed a later release date because benchmark county financial year-end data was not available in February. A comparison to benchmarks broadens our perspective. Overall, we found that our fiscal health compares favorably to the benchmark counties. A special section of this report analyzes the important issue of health system net income and liquidity as portrayed in County financial statements. We are pleased to note that Internal Audit’s annual Financial Condition Report is now the recipient of two national awards (NACO and an audit association award.) Sincerely, Ross L. Tate County Auditor Financial Condition Report Awards Page National Association of Local Government Auditors Award Winner 2002 National Association of Counties Achievement Award Winner 2001 Table of Contents General Fund 1 Long Term Debt 2 Liquidity 3 Health System (MIHS) Net Income 4 Benchmark Demographics 5 Maricopa County Employee Data 6 Government Performance Project 7 Arizona Counties Tax Rate Comparison 9 Bond Ratings 10 Report Methodology 11 General Fund 25% General Fund Balance as a Percent Benchmark Counties: General of Revenues Fund Balance as a Percent of 25% 20% 20% 15% 15% 10% 10% 5% 5% 0% 0% FY92 FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY92 FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 Maricopa Maricopa Maricopa’s unreserved General Fund balance has grown because financing sources exceeded financing uses and County leaders budgeted reserves for future capital outlay. 25% Avg of 10 Other Counties Maricopa’s unreserved General Fund balance performance continues to surpass the benchmarks’ performance. Maricopa vs. Orange County Maricopa vs. Pima County 25% 20% 20% 15% 15% 10% 10% 5% 5% 0% FY92 FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 Maricopa 0% FY92 FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 Pima Pima County’s (AZ) ratio of fund balance to revenues has lagged behind Maricopa’s for the last six years. page 1 Revenues Maricopa Orange Orange County’s (CA) ratio of fund balance to revenues has been weaker than Maricopa’s strong ratio for the last seven years. Internal Audit — FY01 Financial Condition Report May 2002 Long Term Debt Per Person $180 Maricopa County vs. Benchmarks Maricopa County $600 $160 $500 $140 $120 $400 $100 $300 $80 $60 $200 $40 $100 $20 $0 FY92 FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 $0 FY92 FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 Maricopa Maricopa Only In FY01, new bonds were issued for building construction and estimated claims/judgments increased. The increase for construction was offset by a hard cash reserve. $600 Avg. 10 Benchmarks Benchmark counties on average show significantly higher and growing levels of per person debt. Maricopa’s low long term debt levels are a financial strength. Maricopa vs. Orange County Maricopa vs. Pima County $2,000 $500 $1,500 $400 $300 $1,000 $200 $500 $100 $0 FY92 FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 Maricopa FY 92 FY 93 FY 94 FY 95 FY 96 FY 97 FY 98 FY 99 FY 00 FY 01 $0 Maricopa Pima Although Pima County’s per person debt is lower than the benchmark average, it does not reach Maricopa’s favorable low level. Orange Orange County maintained low long term debt like Maricopa until FY95 when large investment losses forced Orange to issue debt. Internal Audit — FY01 Financial Condition Report May 2002 page 2 Liquidity General Fund Liquidity Ratio General Fund Liquidity Ratio (Including Due From/To Other Funds) (Excluding Due From/To Other Funds) 5 2.5 4 2 3 1.5 2 1 1 0.5 0 0 FY97 FY98 FY99 Maricopa FY00 FY01 FY97 FY98 Benchmarks FY99 Maricopa FY00 FY01 Benchmarks LIQUIDITY = MONEY ON HAND TO PAY BILLS (The ratio of dollars available compared to bills due.) Maricopa General Fund liquidity over the last 5 years (graph on left) has contained large Medical Center IOU’s. The graph on the right shows how Maricopa liquidity would look without IOUs. Medical Center IOU’s grow larger as cash balances decline (graph below). Per the AZ Auditor General: “… County’s General Fund Cash has been used on an ongoing basis to cover the Medical Center’s cash deficits.” The Medical Center’s inability to pay these IOU’s may adversely affect General Fund liquidity. Not shown in Maricopa’s FY01 ratio is $80 million in a Capital Improvement Fund available to the Maricopa General Fund. Cash Balances per County Treasurer (Millions) $100 $80 $60 $40 Total Health System $20 Jun-01 Mar-01 Dec-00 Sep-00 Jun-00 Mar-00 Dec-99 Sep-99 Jun-99 Mar-99 Dec-98 Sep-98 Jun-98 Mar-98 Dec-97 Sep-97 Jun-97 ($40) Mar-97 ($20) Dec-96 $ ($60) ($80) Medical Center ($100) Health System cash balances peaked in mid FY00 and declined sharply in FY01. Health System management states that overall system cash was able to offset Medical Center deficits without General Fund help. page 3 Internal Audit — FY01 Financial Condition Report May 2002 Liquidity / Health System Net Income Medical Center Cash (Millions) Treasurer v. Financial Statement Maricopa’s FY01 financial report cash flow statements show a positive Health System cash trend. However, Treasurer (bank) statements show Medical Center cash as $89 million less than the County cash flow statements. $10 1998 1999 2000 2001 $20 $30 $40 $50 $60 $70 Per County Treasurer + Fiscal Agent If accounting guidelines had allowed Medical Center cash overdrafts to be shown as “negative cash” (as Treasurer records show), instead of as IOU’s to the General Fund, financial reports would have shown a negative Health System cash trend. Alternatively, cash could have been transferred from the General Fund to the Medical Center to cover the deficits, and the Cash Flow Statements would have matched the Treasurer (bank) statements plus Fiscal Agent statements. FY01 financial statements show Health System net income as $15 million more than the amount shown in Health System management reports (light gray bar). In FY01, Maricopa Long Term Care Program (MLTCP) transferred $15 million from retained earnings (already reported as MLTCP income) to the Medical Center via the General Fund. Financial statements show the $15 million operating transfer as an increase to Medical Center net income. $24 The transaction created net income in one part of the Health System (Medical Center) by transferring retained earnings from another part of the Health System (MLTCP). $12 FY01 financial statements show total Health System net income as $19.5 million, Health System management presentations show $4.5 million. $4 • • The Health System did not realize actual additional income from this “related party” transfer. $15 million Transfer $20 $16 $8 $0 FY96 • Health System Net Income (Millions) Internal Audit — FY01 Financial Condition Report May 2002 FY01 $ FY00 $10 FY99 (Upswing = Capital funds with Fiscal Agent) FY98 $20 Per Financial Statements FY97 $30 Comprehensive Annual Financial Reports show entity-wide, inter-fund relationships. As a result, isolated sections may not convey economic substance well. page 4 Benchmark Demographics Maricopa County leads, or is near the top of, population growth when compared to benchmark counties. (Source: 2000 Census Data) Benchmark Counties Population Benchmark Counties Population Numerial Growth 1990 - 2000 Percentage Growth 1990 - 2000 90% 1,000,000 80% 900,000 70% 800,000 60% 700,000 600,000 50% 500,000 40% 400,000 30% 300,000 20% 465 10,000,000 2000 8,000,000 1990 ah ke tn om a La m ul M 798 Maricopa 1,312 9,222 1,778 7,000,000 2,134 6,000,000 4,083 4,000,000 Pima Clark pa ico r Ma 5,000,000 San Diego Los Angeles King 3,000,000 2,000,000 Harris 4,200 1,000,000 9,184 Santa Clara Orange ge An Salt Lake 7,910 H le s a M rris ar ic o O pa ra Sa ng e n D ie go Sa K nt ing a C la ra C Sa lark lt La ke M Pim ul tn a om ah - s lt (Square Miles) 764 9,000,000 Lo Sa ra nt Sa Benchmark Counties Area Benchmark Counties Total Population page 5 Pi la a C Ki ng go e ie D Sa n ra O ar ng ris rk H le la C ge op ic An ic ar ar s M Lo op a Pi m a Sa lt La ke H ar ris O ra ng e la C M a 0 Ki ng M ul tn om ah Sa n D i eg Sa o nt a C Lo la ra s An ge le s 0% rk 100,000 s 200,000 10% Internal Audit — FY01 Financial Condition Report Multnomah May 2002 Maricopa County Employee Data The Number of County Employees per Thousand Capita Decreased 16% between 1994 and 2001 7 Employees 6 5 4 3 2 1 0 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 19 00 20 01 20 The Number of Citizens Each Employee Serves 225 Citizens 200 175 150 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 Source: 2000 Census Data Internal Audit — FY01 Financial Condition Report May 2002 page 6 Government Performance Project Syracuse University Maxwell School of Citizenship & Public Affairs The Government Performance Project (GPP) is a comprehensive survey of core government management activities’ effectiveness. Maricopa County's Overall Score is A-. The highest score issued in the GPP results was A- and only one other county (Fairfax, VA) received that score. Grade A Maricopa County Financial Management AA- Human Resource Management B+ B C Information Technology A Capital Management B+ Managing for Results A- Fairfax, VA Financial Management AA- Human Resource Management A- D Maricopa’s Benchmarks Overall Average C+ Clark, NV C+ Harris, TX C+ King, WA C Los Angeles, CA C Information Technology A Capital Management A- Orange, CA B Managing for Results A- San Diego, CA B+ Santa Clara, CA C+ Multnomah, OR N/A Pima, AZ N/A Salt Lake, UT N/A 38 Other GPP Counties Grade range: D– to B+ Overall Average C+ Alameda, Allegheny, Anne Arundel, Baltimore, Broward, Clark, Contra Costa, Cook, Cuyahoga, Dallas, Erie, Franklin, Fulton, Hamilton, Harris, Hennepin, Hillsborough, King, Los Angeles, Mecklenburg, Miami-Dade, Milwaukee, Monroe, Montgomery, Nassau, Oakland, Orange, Palm Beach, Prince George’s, Riverside, Sacramento, San Bernardino, San Diego, Santa Clara, Shelby, Suffolk, Wayne , Westchester N/A: Multnomah, Pima and Salt Lake counties were not graded by GPP page 7 Internal Audit — FY01 Financial Condition Report May 2002 Maricopa Vs. Fairfax Top-Ranked Performance Counties Maricopa 2000 Population 10 Year Population Increase Full–time Equivalent Employees Fairfax 3,072,149 969,749 44.8% 18.5% 15,117 31,142 NO Yes School Funding Responsibilities Although Fairfax is smaller in size and population than Maricopa, it has larger revenues and employee numbers due to a broader scope of functions. Fairfax County includes public schools as a component unit, which accounts for its larger per person debt. As the only other county in the Government Performance Project assessment to receive an A-, Fairfax deserves our attention as a model of excellent government performance. General Fund Balance General Fund Revenues (Millions) $2,500 as a Percent of Revenues 25% $2,000 20% $1,500 15% $1,000 10% 5% $500 0% $0 FY97 FY98 FY99 Maricopa FY00 FY97 FY01 FY98 FY99 Maricopa Fairfax Long-Term Debt Per Person FY00 FY01 Fairfax General Fund Liquidity (Adjusted for Inflation) 6.0 $2,000 (Ratio of Cash to Liabilities) 4.0 $1,500 2.0 $1,000 0.0 $500 FY98 $0 FY97 FY98 FY99 Maricopa FY00 Fairfax FY01 FY99 FY00 Maricopa Internal Audit — FY01 Financial Condition Report FY01 Fairfax May 2002 page 8 AZ Counties Tax Rate Comparison Maricopa County tax rates are consistently lower than the average of all other Arizona counties (average of all other counties excludes Maricopa). Maricopa vs. Other AZ Counties Primary Tax Rate, TY01 (Tax Year) Primary Tax Rates 3.00 2.50 2.00 1.50 1.00 0.50 0.00 Maricopa $1.68 Benchmark Average $2.69 Maricopa 01 TY 00 TY 99 TY 98 TY 97 TY 96 TY 95 TY 94 TY 93 TY TY 92 Primary property tax revenues help fund County maintenance and operation budgets. Avg. Other AZ Counties Maricopa vs. Other AZ Counties 5.00 Countywide Primary + Secondary Tax Rates Countywide Primary & Secondary Tax Rate, TY01 Maricopa $3.29 3.00 Benchmark Average $4.54 2.00 Countywide rates include special districts such as Flood Control, Library and Community College districts. 4.00 1.00 0.00 TY92 TY93 TY94 TY95 TY96 TY97 TY98 TY99 TY00 TY01 Maricopa page 9 Avg. Other AZ Counties Secondary property tax revenues fund such things as bond issues, budget overrides and special districts. Internal Audit — FY01 Financial Condition Report May 2002 Bond Ratings Financial Recovery is Reflected in the County’s Bond Ratings: Moody's Bond Ratings Moody’s — Aa-3 Aa Aa-3 Fitch — AA The County’s financial position declined in the early 1990’s. The County responded by restructuring its finances. Since June 1994, the Moody’s County bond ratings have steadily improved. The following table illustrates the Moody’s bond ratings from FY93 through FY01: A-3 A-2 A-1 FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 What do the Moody’s Ratings Mean? According to Moody’s, a rating helps investors determine the relative likelihood that they might lose money on a given fixed-income investment. Obligations that extend longer than one-year are rated Aaa through C. Moody’s Aaa represents the highest quality, meaning that the obligation ranks highest in terms of investor safety. A C rating is the lowest level of credit quality. Investments rated Baa and above are considered “investment grade.” Those rated Ba and below are considered “speculative grade”. The numerical indicators further modify credit risk within each rating. A modifier of 1 indicates that the issue ranks in the higher end of its generic rating, while a modifier of 3 indicates that the issue ranks in the lower end of its generic rating1. The table presented above shows that Maricopa County’s Long-term bonds, rated Aa-3 by Moody’s, are considered high-grade bonds1. Maricopa County’s trend since June 1994 has been one of improving ratings. In announcing its rating upgrade, Moody’s referred to improvement in the county’s financial condition, conservative fiscal strategies, elimination of non-service support for the county hospital, and the county’s low debt position.1 What does the Fitch IBCA Rating Mean? According to Fitch IBCA, credit ratings are an opinion on the ability of an entity to meet its financial commitments. These credit ratings are used by investors as indications of the likelihood of getting their money back in accordance with the terms on which they invested. “Investmentgrade” ratings (international long-term ‘AAA’ ‘BBB’ categories) indicate a relatively low probability of default, while those in the “speculative” or “noninvestment grade” categories (international long-term ‘BB’ ‘D’) either signal a higher probability of default or that a default has already occurred. Ratings imply no specific prediction of default probability. However, for example, it is relevant to note that over the long term, defaults on ‘AAA’ rated U. S. corporate bonds have averaged less than 0.10% per annum, while the equivalent rate for ‘BBB’ rated bonds was 0.35%, and for ‘B’ rated bonds, 3.0%.2 1 Moody’s Investor Service “Rating Actions, May 27, 2000“, How to Use Ratings” and “Rating Definitions” [Online].Available: http://www.Moodys.com.html. 2 Fitch IBCA “Rating Definitions” [Online]. Available: http://www.Fitchibca.com.html Internal Audit — FY01 Financial Condition Report May 2002 page 10 Report Methodology Definition Financial Condition is defined as a local government’s ability to finance services on a continuing Explain report methodology Use page A1 from can FY 2000 report basis. A county in good financial condition sustain existing services to the public, withstand economic slumps, and meet the demands of changing service needs. Objectives, Scope, and Methodology The objective of this report is to evaluate the financial condition of Maricopa County using key indicators. Indicators were selected from authoritative sources on evaluating governmental entity financial condition and judged to be the most indicative of a county’s overall financial health. Ten benchmark counties’ and Maricopa County’s audited financial statements were used as primary sources of data for this report. The benchmark counties are: ¾ ¾ ¾ ¾ ¾ ¾ ¾ ¾ ¾ ¾ Clark Harris King Los Angeles Multnomah Orange Pima Salt Lake San Diego Santa Clara (Las Vegas, NV) (Houston, TX) (Seattle, WA) (Los Angeles, CA) (Portland, OR) (Santa Ana, CA) (Tucson, AZ) (Salt Lake City, UT) (San Diego, CA) (San Jose, CA) Other sources include the Governmental Accounting Standards Board (GASB), the International City/County Managers Association (ICMA), ASU Center for Business Research, Arizona Department of Economic Security Research Administration, Arizona Department of Revenue Econometrics Unit, Maricopa County’s Strategic Plans (budgetary documents), and Auditor General Reports. The focus of the analysis was on the General Fund, but does include other funds when the General Fund is affected by the other fund(s), or when an overall County trend is examined. When pertinent, each section and graph presented define the fund(s) included in the analysis. Trend analysis is used in this report. Trend analysis involves examining financial indicators’ historical data over several years. A trend is defined as the direction the data is moving over a three-to-five year period. Fiscal years are identified as “FY01” (fiscal year ending June 30, 2001). Numbers are referred to as “actual,” otherwise as “adjusted for inflation”, “constant”, or “real” (e.g., “2001 dollars”). An “actual” number is the amount originally published in the CAFR. An “adjusted for inflation” or “constant” number has been adjusted to the purchasing power of a 2001 dollar. The adjustment for inflation was made according to the “U.S. Consumer Price Index—All Items.” page 11 Internal Audit — FY01 Financial Condition Report May 2002 Maricopa Internal Audit 301 W. Jefferson Suite 1090 Phoenix, AZ 85003 Telephone: (602)506-1585 Facsimile: (602)506-8957 E-Mail: jsimpson@maricopa.gov