Municipal financial statements are notoriously dense. Fund accounting, GASB standards, and dozens of line items with similar-sounding names can make it easy to get lost before you reach the numbers that actually matter.
This guide cuts through that complexity. Whether you're a bond investor evaluating a municipality, a journalist covering local government, a researcher studying fiscal policy, or a resident trying to understand your city's finances, here's how to quickly assess what a city's financial statements are telling you.
Step 1: Find the Right Document - The ACFR
The primary source for a municipality's financial data is the Annual Comprehensive Financial Report (ACFR), formerly called the Comprehensive Annual Financial Report (CAFR). This is a city's full audited financial report, published annually.
Where to find ACFRs:
- The city's official website (Finance or Budget department)
- The Municipal Securities Rulemaking Board's EMMA platform (emma.msrb.org) for cities with outstanding bonds
- Government audit portals for municipalities that receive federal funding
- MuniSpot, which aggregates and standardizes financial data from these sources across 14,000+ municipalities
An ACFR typically contains:
- Management's Discussion and Analysis (MD&A): an overview written by finance staff
- Government-Wide Financial Statements: a full balance sheet and income statement
- Fund Financial Statements: detailed breakdowns by fund type
- Notes to Financial Statements: critical context, including pension details
- Statistical Section: multi-year trend data
Step 2: Start With the Government-Wide Statements
The Statement of Net Position (balance sheet) and Statement of Activities (income statement) give the most complete picture of a city's finances.
Statement of Net Position - Key Lines
| Line Item | What It Tells You |
|---|---|
| Total assets | Everything the city owns or is owed |
| Total liabilities | All obligations, including debt and pension |
| Net position | Assets minus liabilities (the city's equity) |
| Net pension liability | Unfunded pension obligations (GASB 68) |
| Restricted net position | Assets that can only be used for specific purposes |
| Unrestricted net position | Freely available; watch for negative values |
A negative unrestricted net position is a warning sign. It means the city's unrestricted assets are overwhelmed by its unrestricted liabilities, which is common in cities with large pension obligations.
Statement of Activities - Key Lines
| Line Item | What It Tells You |
|---|---|
| Program revenues | Fees, grants, and charges tied to specific services |
| General revenues | Property tax, sales tax, investment income |
| Total revenues | All inflows |
| Total expenses | All outflows |
| Change in net position | The bottom line: did the city gain or lose net worth? |
A city consistently showing negative change in net position (meaning expenses exceed revenues year after year) is eroding its financial base.
Step 3: Analyze the Fund Financial Statements
Cities use fund accounting, which separates finances by purpose. The most important for analysis:
General Fund
The general fund covers core municipal services: police, fire, parks, and administration. It is the most closely watched fund and typically the focus of annual budget debates.
Key metric: Fund balance as % of expenditures
- Below 17%: Below GFOA's recommended minimum (two months of operating spending)
- 17% to 40%: Adequate
- Above 40%: Strong
- National median (2024): 40.6%
A city with a thin or declining general fund balance has limited ability to absorb unexpected expenses or revenue shortfalls.
Capital Projects Funds
Used for major infrastructure investments. Large balances here are normal and expected, as cities accumulate funds before spending on projects.
Debt Service Funds
Tracks payments on outstanding bonds. Review this for upcoming principal and interest obligations.
Step 4: The Five Key Ratios
Once you've oriented yourself in the statements, these five ratios give you a rapid assessment of financial health:
1. Operating Margin
Formula: (Total revenues - Total expenditures) / Total revenues
What it means: Are revenues covering expenses? Positive = surplus; negative = deficit.
- National median (2024): +3.7%
- Healthy range: +3% to +15%
- Warning zone: Below -5% consistently
2. Fund Balance Ratio
Formula: Total fund balance / Total expenditures
What it means: How large is the city's financial cushion relative to its annual spending?
- National median (2024): 41.8% (~5 months)
- GFOA minimum recommendation: 17% (2 months)
- Warning zone: Below 15%
3. Debt-to-Revenue Ratio
Formula: Total bonded debt / Total governmental fund revenue
What it means: How much debt has the city taken on relative to its income?
- National median (2024): 39.0%
- 90th percentile (high stress): 158%
- Warning zone: Above 150%
4. Pension and OPEB Burden Ratio
Formula: (Net pension liability + OPEB obligations) / Total governmental fund revenue
What it means: How large are unfunded pension obligations and OPEB obligations relative to revenue?
- National median (2024): 45.4%
- 90th percentile: 152.7%
- Warning zone: Above 200%
5. Net Position Trend
Track whether total net position is growing or shrinking over multiple years. A declining trend can be a warning signal even if short-term cash flow looks fine.
Step 5: Read the Pension Footnotes
The pension footnotes are where financially significant information is often buried. Under GASB Statement No. 68, cities must disclose:
- Total pension liability and plan assets
- Net pension liability
- Pension plan's funded ratio (plan assets / total pension obligation)
- Actuarial assumptions (discount rate, salary growth, mortality tables)
What to watch:
- Funded ratio below 60% signals meaningful underfunding
- Discount rates above 7.50% may be overly optimistic, making liabilities appear smaller than they are
- Sensitivity analysis: if the footnotes show how the liability changes with a 1% change in discount rate, that range tells you how certain (or uncertain) the number really is
Step 6: Look at Trends Over Time
A single year's snapshot can mislead. The statistical section of the ACFR typically includes 10 years of data on:
- Revenue and expenditure trends
- Debt ratios
- Property values and tax rates
- Demographic indicators
A city with a solid 2024 balance sheet but declining revenues, rising expenditures, and a shrinking tax base deserves more scrutiny than the single-year numbers suggest.
Using MuniSpot to Accelerate Your Analysis
Pulling together all of this data manually (downloading ACFRs, building spreadsheets, normalizing line items across years) is time-consuming. MuniSpot standardizes financial data for over 14,000 municipalities, so you can see analysis, trend charts, and peer comparisons in one place.
Explore any city's financial dashboard:
Quick Reference: Municipal Finance Terminology
| Term | Definition |
|---|---|
| ACFR | Annual Comprehensive Financial Report: the full audited financial report |
| GASB | Governmental Accounting Standards Board: sets accounting rules for governments |
| Fund balance | Accumulated surplus in a fund |
| Net pension liability | Unfunded pension obligations on the balance sheet (GASB 68) |
| OPEB | Other Post-Employment Benefits: retiree health/life insurance obligations |
| General fund | The main operating fund for core municipal services |
| TGF | Total Governmental Funds: the sum of all governmental fund activity |
| Operating margin | (Revenues - expenditures) / revenues, expressed as a percentage |
| Debt service | Annual principal and interest payments on outstanding bonds |
MuniSpot aggregates data from audited ACFRs. MuniSpot is not a financial advisor; this content is for educational purposes only.