The Rockville 2014 CAFR: An

Analysis of the Financial State

of the City
Isabel Vordzorgbe

ACCY 6701 Government and Nonprofit Accounting & Auditing

Professors Devine, Lewis, and Thomas
The George Washington University
School of Business Master of Accountancy

As we have learned in class, under the GASB No. 34 standard, state

and local governments are required to deliver audited comprehensive
annual reports in accordance with GAAP that provide external users with
important information about the financial state of the government. In this
paper, an analysis will be presented for Rockvilles 2014 Comprehensive
Annual Financial Report. In Chapter 11 of our textbook, a guide is provided
in Table 11-4 for how to conduct an analysis of a governments CAFR. This
paper will utilize the guide in Table 11-4, the Government Profile and the
Information on Economic Conditions (Letter of Transmittal), as well as the
MD&A section of the report to focus on the key issues faced by Rockville
during the 2014 year. The paper is structured as follows: 1) overview of the
City of Rockville based on the sections listed above, 2) calculation and
analysis of key financial indicators, and 3) forecasting the impact of
financial indicators on citys future and ability to continue providing
services to constituents.
The City of Rockville operates as a council-manager governmenti,
with the power to levy a property tax on both real and personal properties
located within its boundaries.ii Rockville provides water, sewer, refuse,
parking, streets and stormwater, recreation and parks, police, planning and
zoning, and engineering servicesiii to its constituents. The City of Rockville
utilizes a policy where the unassigned portion of the General Fund is
maintained at a level not less than 15% of annual budgeted General Fund
Revenue.iv In instances where the unassigned portion is more than what is

stated in the policy, the city utilizes this balance to provide pay-as-you-go
financing for capital projects and for other one time capital assets.v
According to the Information on Economic Conditions Section, the
City of Rockville continues to see more constituents entering the labor force
as well as residential and commercial growth. Rockville has also
experienced an increase in its tax revenues and overall 2014 revenues. The
Citys debt has been rated by Standard & Poors and Moodys as AAA and
Aaa, respectively. Given that the City has been rated so highly by the rating
agencies and given its strict management policies, it took on several capital
project initiatives in order to improve the infrastructure and economic
development of the city.
The MD&A section highlights some key financial indicators of the City
of Rockville. However, due to the ability of management to massage
numbers to present their information in a positive light, further analysis will
be provided later on for the indicators highlighted. The City of Rockville
boasts a positive net position of $328,871,859, with a business related
deficit of $10,553,298 due to continued maintenance of the water and
sewage systems. Rockvilles unassigned portion of its General Fund
represents 22.3% of the General Fund revenues, which meets its
management policy of maintaining above 15%. Out of the five separate
General Fund categories, the City of Rockville spends a considerable
amount of money on capital projects, which also accounts for almost all of
the citys net position. The City of Rockville has realized a 6.3% decrease in

its debt principal outstanding as of the 2014 year end. Overall, Rockville
boasts a positive net position in its governmental and business-related
activities except for two funds, CDBG and Parking Funds.
Given this overview, one can say that everything seems very positive
for the City of Rockville, and it also seems to have the proper management
and accounting practices in place to properly manage its revenues and
expenses and adequately provide services to its constituents. But further
analysis into the liquidity, solvency, and overall ability of the City of
Rockville to continue on this path is necessary. The ability of the city to
continue its activities in the long-term is very important to its constituents,
and therefore an operating deficit would be a sure sign that the city is
heading for trouble in the future. In the Statement of Revenues, Expenses,
and Changes in Fund Balances of Governmental Funds, the city experienced
an operating deficit of $1,096,163. In the prior year, the city had a
$3,580,589 operating deficit. This indicates that in the governmental funds,
the city has managed to implement a strategy that has allowed it to
decrease its operating deficit. For its business-related activities, the City of
Rockville is doing better with excess revenue to cover expenditures.
However, the operating deficit does not truly indicate that the city is in dire
straits in terms of financial condition.
The governmental fund balance sheet for the City of Rockville
presents it short-term assets and resources and its obligations on those
resources. As a result, the City of Rockvilles governmental balance sheet is

a great indicator of whether the city will be able to provide services to meet
those obligations. A positive fund balance clearly shows that the
government has the necessary resources on hand to meet any unexpected
shortfalls in revenue or obligations. In order to measure the adequacy of the
City of Rockvilles fund balance, its unassigned fund balance is divided by
its operating revenue to get 20.5% ($15.7 mill/$76.7 mill). This ratio clearly
shows that the City of Rockville would be able to manage in the event of a
revenue shortfall or new obligation. However, as with the measure for the
operating deficit, this measure of the fund balance is also subject to
limitations.
As was noted in the MD&A section, a considerable portion of the fund
balance (about $19.1 mill) has be restricted for the capital projects fund.
This is a good sign, as it clearly indicates that the city is investing money for
the future capital projects or the acquisition of capital assets. To measure
the liquidity of the City of Rockville, we take into account its cash and shortterm investments as well as its current liabilities. Utilizing the information
presented in its Statement of Net Position, the City of Rockvilles liquidity
ratio is 3.87% (equation on pg.501 of textbook). This is a low, but positive
liquidity ratio that indicates that the city has adequate cash on-hand to meet
the short-term claims on its assets and/or resources.
Since we have considered, the citys ability to meet its short-term
obligations, it would be also useful to assess its ability to meet its long-term
obligations. Extracting information from the Statement of Revenues and

Expenditures for the Governmental funds regarding the citys debt service
costs as well as the total expenditures of the general and debt service funds,
the calculation results in a ratio of 74.4%. This ratio is rather high and
indicates that the City of Rockville may not be able to pay the costs of its
debt service when they come due. Looking at the detailed notes on LongTerm Debt (pg. 48), it is obvious that the city has a considerable number of
general obligation bonds and loans for its business-related activities. This
could present a very hard problem for the city to solve in the event that it is
not able to meet its loan payments. In such an instance, this could lead the
city into financial distress which would begin to swallow up the citys liquid
resources and/or assets.
As was noted in the MD&A section, the water and sewage funds under
its business-related activities have presented a deficit to the city. If service
charges cannot be adequately received for these activities, the city runs the
risk of not have enough revenue to pay of its expenditures as well as debts,
since its loans received are made on its good faith and credit. Although the
liquidity ratio presents a bad picture, the comparison made between 2013
and 2014 for the citys long-term obligations, shows that it is making an
effort to decrease its total long-term liabilities through tax revenues and
service charges. Also given the rating of AAA for its debt, one would
surmise that maybe its debt structure would not present an issue.
Overall, the analysis of the City of Rockvilles CAFR presents a
positive picture. The management accurately described the key issues and

financial indicators that affect the city. The city has shown considerable
growth in revenue received from real and personal property, has engaged in
more public works, and has seen a decrease in unemployment comparable
to the national level. The financial statements also support the summary
made in the MD&A section and clearly show that the City of Rockville
management has been employing good management practices and
accounting policies to properly account for resources and obligations in
order service its constituents. Three main factors that the City of Rockville
should take note of is its deficit with the two funds CDBG and Parking Fund,
its increased maintenance expenditures for the water and sewage systems,
and its long-term obligations. Those three items are important, as the city
continues to provide services for its constituents.
In order to address the deficit in the two funds, the City of Rockville
needs to implement a strategy that will help to generate more revenue
through service charges. This might mean an increase in the rate of
services charges in order to recoup for those losses. As for its increase in
maintenance for the water and sewage systems, those costs can be
decreased by the same avenue as would be used for the two funds. In terms
of its long-term debt, the City of Rockville needs to be careful and make
sure that it is making proper payments to meets it long-term liabilities. Any
potential shortfalls in payment would necessitate undue increase in service
charges or taxes in order to meet liability payments. As a result, the City of
Rockville is doing great, but becoming complacent could lead to serious

issues. In the case of this analysis, revenue is a key ingredient to the city
maintaining its healthy financial conditioning and therefore being able to
provide services to its constituents.

i City of Rockville. 2014 Comprehensive Annual Financial Report: Profile of the

Government. Rockville: 2014. Accessed July 6, 2015.
http://www.rockvillemd.gov/index.aspx?NID=229
ii City of Rockville. 2014 Comprehensive Annual Financial Report: Profile of the
Government. Rockville: 2014. Accessed July 6, 2015.
http://www.rockvillemd.gov/index.aspx?NID=229
iii City of Rockville. 2014 Comprehensive Annual Financial Report: Profile of the
Government. Rockville: 2014. Accessed July 6, 2015.
http://www.rockvillemd.gov/index.aspx?NID=229
iv City of Rockville. 2014 Comprehensive Annual Financial Report: Factors Affecting
Financial Condition. Rockville: 2014. Accessed July 6, 2015.
http://www.rockvillemd.gov/index.aspx?NID=229
v City of Rockville. 2014 Comprehensive Annual Financial Report: Factors Affecting Financial
Condition. Rockville: 2014. Accessed July 6, 2015. http://www.rockvillemd.gov/index.aspx?NID=229

References
City of Rockville. 2014 Comprehensive Annual Financial Report. Rockville: 2014. Accessed July 6,
2015. http://www.rockvillemd.gov/index.aspx?NID=229
Granof, Michael H., and Saleha B. Khumawala. Government and Not-For-Profit Accounting:
Concepts and Practices, 6th ed., Chapter 11. Hoboken: Wiley, 2013.