LiabilitiesLiabilities represent potentially very large obligations or unsustainable practices that could seriously harm financial condition. The diagnosis finds the magnitude of any problem areas and allows the government to begin looking for solutions.
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Foremost, identify repayment schedules and make sure there are no upcoming large debt service payments that could strain cash position. Also look for restructuring or refinancing opportunities for existing obligations.
Compare debt levels to the amount of debt permitted under your customized local debt policy. Discern how much capacity for borrowing is available. This will tell you the extent to which debt might be used to manage through financial distress (to pay for capital projects, for example). If a customized local threshold for acceptable indebtedness has not been established, then such a policy may need to be developed.
Get a firm handle on expected future contributions. The most immediate concern is that pension contributions may increase in order to make up for market losses.
Look for consistent underfunding of pension or OPEB liabilities – this may suggest excessive personnel costs. It is wise to take stock of the size and urgency of these liabilities early on in the recovery process so that they can be factored into the recovery strategy.
Risk, Management, Self-Insurance, and Lawsuits
If not managed properly, the health of self-insurance funds and risk management policies are a source of major potential liabilities. Claim trends for all insurances can identify operating practices and management policies that need review as well as areas for improving safety and service delivery.
In addition, trends in the type and amount of lawsuits filed against the agency can identify high risk areas especially in terms of law enforcement, management behavior, and public safety liabilities.
Discern the purpose of interfund loans and the probability that the loans can be paid back. Make sure there is a repayment schedule in place and the purpose of loans is clear. Large and growing interfund loans may indicate a de facto subsidization of an unsustainable operation.
Also, interfund loans may signal a disconnect between when revenues come in and expenditures are made – perhaps one fund needs to borrow from another to bridge a gap. This may signal a structural weakness and potential point of failure.
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