Net Position/Net Worth

A balance sheet, as most people are aware, we take our assets, what we own, subtract our liabilities, what we owe, leaving us a balance. In a business or household, we refer to this as net worth or equity. In a city, since residents don’t technically own the city, this balance is called net position

As of 6-30-17 the city’s net position was $882 million. It took a big hit when changes in accounting rules required accrued pension liabilities on the balancer sheet instead of just referencing them in the footnotes. This number will see another big adjustment on the 6-30-18 statements when retirement medical benefit liabilities are reflected in the balance sheet instead of just a footnote. If we had done that at 6-30-17 the net position would be drop $634 million to $248 million. Since the city has been running deficits, that figure can expect to be lower CAFRA reports are released in January. While $200 million sounds like a lot of money, it doesn’t provide much margin for error when weighed against $3.7 billion in liabilities.

In a Council meeting last spring, upon questioning by a councilman, the city’s CFO explained that since the net position was basically an accounting concept, he didn’t see it as a key metric. When asked for better metrics, he suggested items such as housing starts, job growth and increases in the tax base. In other words-the ability of the city to get money from its citizens. While this may be good to know and benefit the city’s finances, this deflects from the question of how well the city manages the resources its citizens have already given it.

The city had reserves of $100.9 in 2017-18, or 20.6% of the next year’s operating budget. These reserves were projected to decline to $38.7 million in 2022-23, leaving only an 8.0% reserve, a dangerously low level that serves as a red flag to investors.

This decline happened during a relatively strong economy. In anticipation of an economic downturn, the City shifted $3 million in each of three years and adjusted the $9million into another. However, in the Great Recession, sales tax revenues dropped over $29 million in 2008-09 and didn’t return to its peak level for six years.

So, without esoteric discussions of the pitfalls and benefits of the net position metric, recognize that its downward trend is matched by a downward trend in a much more measurable metric such as reserves. Starting from a point where Mesa already compares unfavorably to other valley cities, this is not a good sign.

 

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