Discuss how well the government entity is performing financially. Include in your discussion liquidity, performance, and overall evaluation. Please use all the tools available to you to perform this financial analysis.
California is one of the largest states in the United States of America by physical size. The population of the state of California is about forty million. Economy wise, the state of California has the largest economy among the fifty states making up the USA and its economic diversity is one of the most recognized across the globe. The significant components of the Californian economy are technology, agriculture, tourism, entertainment, government, and trade (SCO, 2017). The diversity of the Californian economy ensures that the state has financial sustainability. By the end of the fiscal year 2017, the gross domestic product (GDP) of California stood at $ 2.7 trillion, ahead of many countries in the world, with over $ 46.0 billion in farm production (SCO, 2017). In the financial year 2016, California exported $ 163.6 billion in products with two of its largest markets in Mexico and Canada (SCO, 2017). California majorly exports computers, machinery, chemicals, and agricultural output. To counteract the negative implications that policy changes may have had for the Californian economy, the state lays emphasize on the clearance of the debts that have accumulated over time and the building of reserves (SCO, 2017). The governor of the state focuses on increased investment in education, handling the effects of poverty and improving the infrastructure of California to create more opportunities for the expansion of the budget.
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The January 2018 revised financial estimates projected that the 2017-18 fiscal year would end up with general fund revenue and transfers totaling $ 127.3 billion, expenditures amounting to $ 126.5 billion and the total reserves will total to $ 12.6 billion (SCO, 2017). The government of California ensured that $ 8.4 billion were added to the Budget Stabilization Account (BSA), and a total of $ 4.2 billion was saved in the General Fund's Special Fund for Economic Uncertainties (SFEU), which indicated a $ 3.2 billion more than the projected value of SFEU accounted for in June 2017 (SCO, 2017). The Californian budget in the financial year 2017-18 also included a one-time payment to the California Public Employees Retirement System (CalPERS) to work towards reducing California's liability regarding the net pension (SCO, 2017). A sum of $ 1.8 billion was used to clear the various debts that the state has. Undoubtedly, the state of California has a liquid economy in which its current assets can cover the current liabilities with ease (SCO, 2017). Additionally, the government has made it easier to manage the available resources to reduce the debts and liabilities that the state owes to the other states within the USA and countries and organizations across the world.
Moreover, some of the Californian government's initiatives such as the improvement of infrastructure increased access to education, and the counteraction of the effects of poverty, are aimed at providing more opportunities for the growth of the economy. Generally, the state of California presents a well thought and considered budget, which is relevant to the state's improved financial performance. The governor of the state of California released the proposed financial year 2018-19 budget in January 2018, which was meant to establish whether the state is moving forward or backward while focusing on its economy. Compared to the 2017-18 budget, the 2018-19 was to hold more reserves at $ 15.8 billion (SCO, 2017). The 2018-19 proposed budget also anticipated that there would be increased revenue stemming from the increased personal income taxes and sales. The general find revenue in the proposed budget was to be made up of 69.4% of the personal income taxes, 19.4% of the taxes generated from the sales and use, and 8.3% of the corporation taxes (SCO, 2017). However, the proposed 2018-19 budget for the state of California was made before the enactment of the most recent federal tax bill, which meant that the budget of the state was to be affected adversely.
Describe and discuss the significant programs and functions of the government entity. Include in your discussion which funds the programs and functions are included in. Why are the programs and functions considered significant for the government entity?
One of the significant Californian government's programs, according to the long-term financial plan is the improvement of the infrastructural systems in the various parts of the state (Pryke & Allen, 2018). The governor released the proposed budget in January 2018 to target the 2018-19 financial year. According to the proposed budget, the government of California as an entity planned to spend $ 61.3 billion over the next half a decade to better the state's infrastructure (SCO, 2017). The infrastructural projects coming up in the state include the enhancement of transport such as the construction of the high-speed rail system. The Road Repair and Accountability Act were enacted in 2017 (SCO, 2017). The act was expected to raise $ 52.5 billion of accumulated additional funding over the next decade for the repairs and maintenance of the already constructed roads classified under the highway system. The money raised over the ten years is also expected to be used in the improvement of the critical transportation corridors and routes connecting the major cities such as Los Angeles, San Francisco, and San Diego along the shores of Pacific Ocean (Pryke & Allen, 2018). Therefore, in the development of infrastructure as a role of the government in the state of California has been adequately taken care of by the state.
The other program that displays the function of the Californian government as the addressing of the long-term debts and liabilities that the state owes the external debtors (Wang & Kriz, 2015). In the past, the state of California was known to have large amounts of money as debt, which slowed down the economic performance of the state. Some of the debts and liabilities were also internal such as the employee pensions, which were still outstanding (Wang & Kriz, 2015). In the 2017-18 fiscal year, the state of California made a payment of $ 6 billion as a contribution to CalPERS (SCO, 2017). The government had already paid the first two installments. While the state keeps on funding the employee pensions and the post-employment benefits on the pay-as-you-go basis. The government has already begun funding some of the services such as its healthcare benefit costs by depositing the agreed employee and state employer monetary contributions in a trust fund (SCO, 2017). The governor of the state of California estimated that the plan to pre-fund the services would get rid of the unfunded obligations concerning the pension payment in the next thirty years. The pre-funding of the benefits by the Californian government such as those of health improves the service provision of the government to the citizens residing in the state.
The government of California has organized programs to protect the people residing in the state such as solving the wildfires and hydrologic variability (Gonzalez-Mathiesen & March, 2018). The Californian wildfires have been accelerated by extreme weather, which has been as a result of climate change (Gonzalez-Mathiesen & March, 2018). California, according to reports given by various bodies within the state, has been involved in a five-year-long fire season, which has continued to threaten the lives of the residents in the various parts of the state and at the same time consuming a lot of the government's money. The fires have grown more substantial as the state approaches the subsequent years (Gonzalez-Mathiesen & March, 2018). It was reported that in October and December 2017, the California wildfires struck the state and destroyed a large number of structures and burned over 500000 acres (Gonzalez-Mathiesen & March, 2018). Looking at the damage and loss from a financial perspective, billions of dollars were lost, and they may not be recovered sufficiently for the next few years. The government has a duty to protect the economy of California from such losses experienced in the various parts of the state, which means that the governor of the state has to concentrate on finding out the best solutions that can be given to addressing the issue of the wildfires across the state and their massive losses (Gonzalez-Mathiesen & March, 2018).
Which accounting policies are the most significant and important relative to the Financial Reports, in your opinion? Properly support your response.
In June 2016, the Financial Accounting Standards Board (FASB) introduced an update to the financial accounting policies that were expected to be followed in the reporting by the various governments, institutions, and organizations in the various parts of the United States of America (FASB, 2019). Among the items of the accounting, the update was the measurement of the credit losses on the financial instruments. The amendment introduced the expected credit losses methodology, which was to measure the credit losses on the financial assets at an amortized basis. The new update replaced the previously incurred loss methodology (FASB, 2019). The accounting update also made significant changed to the codification process in financial reporting. The FASB ensured that they focused on the measurement of credit losses as one of the policies that are relevant to the process of accounting for the government of California (FASB, 2019). Concisely, the update made by the FASB in June 2016 compelled the Californian government to have a new way of recording the financial credit losses.
Also relative to the financial reports is the principle of economic entity assumption. The financial reporting of an organization or an entity such as the government of California is structurally different (Barker & Schulte, 2017). For instance, if the organization's ownership is based on sole proprietorship, the accountants have to ensure that they keep all the business transactions separate from the personal transactions to reduce chances of error and confusion while reporting for the financial performance of the company (Barker & Schulte, 2017). Thus, according to the legal perspective, a sole proprietorship and the owner are considered a single entity while when it comes to the accounting purposes, they are considered two separate entities and the accounting reports from the companies have to indicate the same (Barker & Schulte, 2017). When it comes to the government of California, the accounting is done separately from the personal auditing and accounting of the amount of money that each involved official is worth.
The other accounting principle that is relevant to the financial reports is the monetary unit assumption. The financial reports posted by the government of California typically indicate economic activity as measured in term of the United States dollar. The government records only transactions that are conducted in terms of the American dollars. Hence, it is assumed that the purchasing power of the dollar does not change over time. That is contrary to what happens as the dollar keeps fluctuating and rising in its purchasing power as the factors influencing the economy are realized over a number of financial years (Eichenbaum, Johannsen, & Rebelo, 2017). The accountancy of the financial reports posted by the government of California thus ignores the effect of the inflation of currency that continually takes place across the various financial periods. For instance, the financial performance of the government of California as an entity can have the comparison between the performance in 1970 and 2018 without having to account for the rate of inflation that has happened between the two periods.
The other accounting principle that is relevant to the financial reporting in the case of the government of California is the full disclosure principle. If particular information is critical to a given financial investor or lender using the financial statements, then the data can be disclosed within the financial statement or in the notes of the financial statement (Guay & Verrecchia, 2018). The full disclosure principle leads to the creation of numerous footnotes that are often attached to the financial statements. An organization or entity that is named in a lawsuit, for instance, has to indicate the amount of money that it is being asked for in the notes. That provides the investors and lenders with an opportunity to ensure that they are not bombarded by the news of the entity being involved in a lawsuit after they fund their activities or buy part or whole of the company (Guay & Verrecchia, 2018). Furthermore, the FASB expects the organizations and entities to record such information.
Discuss the financial issues you have noticed in the Annual Report that will be the most relevant and significant within the next 10 years. Properly support your rationale. Can the issues be rectified appropriately and satisfactorily for the government entity and its' constituents?
One of the most significant financial issues that are evident in the 2017-18 and the proposed 2018-19 budget for the state of California is the lack of a comprehensive economic perspective on the amount of money set aside by the government to counteract the wildfires. Undoubtedly, the government of California has been involved in the various programs and projects that have for a long time been a burden to the economic progress of the state. Some of such projects are the reduction of the debt that the state owes various entities and the payment of the pension schemes. The state addresses and recognizes the wildfires as a common threat with reports indicating that they happen almost every year. Although the wildfires are associated with the destruction of property and land, which may cost the Californian government several billion and a long, time to recover from, the state does not set aside funds to counteract the losses that are realized from the incidences. The issue may lead to the aggravation of the losses as more outbreaks of the wildfires are reported in the various parts of the state. The issue will be significant in the next decade of California's financial performance since it directly influences the economic progress of the state.
The other financial issue that faces the government of California and may be significant in the next ten financial years is the presence of massive debts that the government owes external organizations and entities. The Californian government was reported to owe a total of $ 1.3 trillion in the financial report released in June 2015. With the various efforts to improve education, develop and advance infrastructure, and alleviate poverty, the government of the state is expected to have indulged into more losses as it tries to cover the funding of the programs given that the number of resources providing money for the government is still constant. Thus, the government needs to increase the funding allocated to settling debts and loans in the 2018-19 financial projections. With the government increasing the budgetary allocation to the payment of the debts, it is clear that the entity will not have adequate resources to take care of the rise in the money used to settle the debts. Therefore, the government will have to look for alternate funding which may include the increase of taxation for the residents of the state and the obtention of other loans in a bid to reduce some of the money the government owes the external entities.
The Californian government has a comprehensive plan to improve the various aspects of infrastructure across the state. The government has set aside considerable amounts of money to facilitate the same and intensify the access to infrastructure for the various residents in the state. However, the government may not be setting aside enough money for the improvement of infrastructure across California given the infrastructural deficits that the state faces. In a bid to address the issue, the governor of California planned the proposal for the 2018-19 budget, which was released in January 2018. The proposed budget recorded an increase for money set aside for infrastructure compared to the 2017-18 financial budget released in June 2017. The amount of money set aside for the infrastructural improvement in the proposed budget was still not enough, which necessitated the formation of the Road Repair and Accountability Act of 2017, which was expected to raise an additional $ 52.5 billion over the next ten years for the repair and maintenance of the state highway system. The primary concern was whether the amount set aside for the infrastructural development was enough or the program remains a pipe dream.
Is the government entity fiscally viable? What does the future look like for the entity? What issues (financial and otherwise) will the entity have to deal with going forward and what changes may the entity have to undertake for the future?
The Californian government is not currently fiscally viable. The future of California's economy is threatened by the increase in the financial liabilities owing to the many projects that the government has proposed to improve the quality of life within the state (Beccaro, 2018). Some of such liabilities are the costs involved in the design and construction of roads, the construction of the light rail system and the repair and maintenance of the highway system in the country. The government is also faced with the issue of the rising debt burden as the state is in a bid to improve the infrastructure, increase the quality of education, and counteract the effects of poverty on its residents. The future of California is also characterized by the existence of wildfires with no detailed plans to solve the menace that claims property and land every year (Beccaro, 2018). The wildfires have been claiming the lives of people with the government having to compensate their families for the loss. The fires have also been consuming some of the lands that are set aside for agricultural purposes, as one of the most significant pillars supporting the Californian economy. With such issues, the future of the Californian economy may not have light at the end of the tunnel as the state indulges into more financial issues.
Some of the issues that the government may have to face as time goes by are as follows. Firstly, the rise in the costs of the projects in California may force the government to increase taxation (Beccaro, 2018). The increase in taxation will see more Californian residents wallowing in poverty as their pay will not increase with taxation. The other issue is the lack of comprehensive plans to counteract the risks. The exploration of the impending dangers caused by the wildfires in the state of California is not enough, as the state needs to have the sound plans to reduce the economic damage that is caused each time the fires strike the state. The other issue that the entity has to take care of in the long term is the rise in the liabilities and debts owed to the external and internal financial institutions (Beccaro, 2018). The government has been reported to have debts totaling over $ 1.3 trillion and needs to settle them to realize the growth and development of the economy (Beccaro, 2018). The growth of the debts is set to affect most of the projects that the government of California has scheduled. For instance, the construction of a light rail system may be halted by the need to invest more money towards paying debts that have been obtained in the past and those that continue to be obtained as time goes.
To secure the future, the government of California may need to have the following changes. The first one is the perspective towards managing the risks posed by the wildfires. The government will need to have a permanent solution that secures its future even with the natural occurrence of the wildfires in the various parts of the state. For instance, the state may invest in efficient firefighting, which will take care of the wildfires ay their initial stages to minimize the damages and losses. Secondly, the government needs to review its infrastructural goals to avoid exerting much pressure on the financial prowess that the state has. The government may reduce some of the amounts set aside for infrastructure for a short time so that some of the money used in the provision of better infrastructure may be used to reduce the debts that the government owes. Similarly, some of the money meant to settle debts may be set aside for use in the provision of a better life for the Californian residents such as in the provision of quality education and improving infrastructure.
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