ANALYSIS AND PROJECTION OF LOCAL

FINANCIAL CAPABILITY

Prepared for the

Special Course on Urban and

Regional Planning
(UP SURP)

Romulo R. Zipagan
April 5, 2008

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 Financial Analysis

Basic Concepts

Financial analysis is the cornerstone of improved financial management in

local governments.

The use of quantitative data in problem solving and in decision making

provides a clear view of current conditions and/or problems and suggests
alternatives in addressing them.

Uses of Financial Analysis

Five important applications of financial analysis in local financial

management include:

 Identifying underused revenue sources

 Projecting income and expenditure trends
 Assessing debt carrying capacity
 Evaluating the impact of rate changes in local fees and licenses, and
 Improving cost efficiency of local services

Data Needs

The data needs for financial analysis is available and easily accessible
from the following sources.

 The Statement of Income and Expenditures (SIE), now the Statement

of Receipts and Expenditures (SRE) for at least five (5) years
 COA Financial Reports
 Population figures (from the latest official census and from official
population projections)
 Official inflation estimates
 Selected information on housing, income, and local expenditure figures
on general public services economic services, and social services
 Comparative revenue and expenditure figures from other LGUs

Data Collection and Presentation

It is important to collect consistent income and expenditure data when

data collected covers several different years.

An example of the data available at the Bureau of Local Government

Finance Data Bank is the LGU Statement of Income and Expenditures follows:

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 INCOME PROFILE OF LGUs*
Calendar Years 2001-2005
General Fund
(in Million Pesos)

INCOME 2001 2002 2003 2004 2005

LOCAL SOURCES 34,824 40,103 44,265 47,088 54,817

Revenue from Taxation 24,454 29,043 31,227 32,798 37,863

Real Property Tax 8,511 10,069 11,268 10,900 13,476

Business Taxes 13,784 16,705 17,575 19,512 21,525

Other Local Taxes 2,159 2,269 2,384 2,386 2,862

Non-Tax Revenues 10,370 11,060 13,038 14,290 16,954

Regulatory Fees 2,680 2,893 3,425 3,397 3,781

Receipts from
Eco Enterprises 3,488 4,540 5,909 6,320 7,733

Service / User Charges 1,526 1,300 1,637 1,990 2,868

Other Receipts 2,676 2,327 2,067 2,583 2,572

EXTERNAL SOURCES 94,791 110,071 122,394 121,051 130,726

Shares from National Taxes 88,285 107,596 116,472 115,402 124,539

Extraordinary Receipts/Aids 1,081 592 1,796 1,014 1,362

Loans and Borrowings 4,929 1,416 3,288 3,359 3,319

Inter-Local Transfers 496 467 838 1,276 1,506

TOTAL INCOME 129,615 150,174 166,659 168,139 185,543

IRA Dependency 28.29% 27.15% 27.54% 28.98% 30.56%

Special Education Fund 8,451 9,536 10,668 10,762 12,385

*Source: BLGF Statement of Income and Expenditures (SIE) System.

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A sample of data from COA follows:

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 Financial data maybe presented in current or constant values. Constant
values include an adjustment for inflation to represent the actual purchasing
power of money “deflated” to some past base year.

Single Case versus Comparative Analysis

The single case analysis emphasizes the year-to-year changes in income

and expenditures of a single LGU.

Example of data presentation for a single case analysis

INCOME AND EXPENDITURES OF SORSOGON CITY

GENERAL FUND
(000)
2002 2003 2004 2005 2006
Particulars
INCOME 244,610 263,735 252,803 270,533 343,648
Local Sources 23,731 24,799 22,355 25,849 24,395
Tax Revenue 12,514 14,570 14,856 18,019 16,114
Non-Tax Revenue 11,217 10,229 7,499 7,830 8,281
Shares from National 212,016 238,673 230,318 244,417 277,421
Taxes
Extraordinary Receipts, 8,863 263 130 267 41,832
Grants, Aids, Loans

EXPENDITURES 226,291 287,000 276,944 259,156 386,994

General Public Services 134,029 95,734 83,956 88,541 174,502
Social Services 18,273 117,291 27,625 26,075 40,245
Economic Services 3,076 69,321 60,273 46,445 60,780
Debt Service 2,309 2,234 976 1,000 1,800
Other Purposes 68,604 2.420 104,114 97,095 109,667

Special Education Fund 3,328 6,008

3,921 2,732 8,523
Source of Data: BLGF SIE Data Bank

Analysis of the income and expenditure performance of a single LGU can

be greatly aided by comparison ith other similar LGUs. This is known as
comparative analysis.

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Standardizing Data

Comparative analysis requires standardizing group data. The same

measure or unit of comparison among municipalities is used. This is done by
using per capita measures or what accountants call common size statements.
Per capita figure is derived by dividing raw data by population; common size
figure by converting raw data into percentages.

Example of Standardized Data

(Common-Size)

EXPENDITURE PATTERNS OF LGUs

IN BASILAN PROVINCE*

Calendar Year 2005

General Social Economic

LGUs Services Services Services
Isabela City 58.39% 7.78% 3.06%
Basilan Province 53.00% 4.53% 11.42%
Lamitan 49.59% 13.02% 16.08%
Lantawan 56.12% 12.02% 10.22%
Maluso 59.58% 9.39% 12.76%
Sumisip 51.72% 9.09% 14.18%
Tipo-Tipo 59.08% 8.15% 7.25%
Tuburan 47.54% 8.48% 5.78%

All LGUs 43.00% 18.00% 17.00%

All Provinces 32.00% 24.00% 18.00%
All Cities 40.00% 18.00% 19.00%

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 Example of Standardized Data

PER CAPITA EXPENDITURES FOR SOCIAL SERVICES

BASILAN PROVINCE
Calendar Year 2005

(In Pesos)

Education, Health, Social

Culture, & Nutrition & Security/Social Housing &
LGU
Sports/Manpow Population Services and Community7
er Development Control Welfare Development

Isabela City 17.45 86.96 11.25

Basilan 0.40 30.26 5.38
Province

Lamitan
6.55 107.70 20.18

Lantawan
1.64 111.43 40.70

Maluso
1.29 70.27 18.05

Sumisip
71.16 31.44

Tipo-Tipo
37.76 28.43

Tuburan
78.85 21.45

Amounts are rounded to the nearest Centavos.

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 COMPARATIVE INCOME PROFILE OF LGUs
Cy 2005
(In Million Pesos)

%
INCOME Provinces % Cities % Municipalities All LGUs

Local Sources 7,414 16 45,634 55 14,155 20 67,202 34

Revenue from Taxation 4,479 10 36,938 44 8,668 12 50,085 25

Non-Tax Revenue 2,935 6 8,696 11 5,486 8 17,117 9

External Sources 38,101 84 37,716 45 54,908 80 130,726 66

Total Income 45,515 100 83,350 100 69,063 100 197,928 100

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 Income and Expenditure Forecasting

Trend Analysis

Trend analysis examines the composition and growth trends of group data
over time. It is useful in comparing data from one LGU to data from a group of
LGUs.

The simplest technique is termed the “moving average” method. This uses
the average of several years’ data to plot the values on a graph. For example, in
a two-year moving average calculation we take the average for CY 2001 and
2002 and plot that number; then we next plot the moving average for CY 2003
and 2004 and plot that number; and so on.

`Using the data in the income profile of LGUs the calculation of the
“moving average” of LGU income from local sources appears as follows:

“Moving Average” of LGU Income from Local Sources

CY 2001 to CY 2005
(In Million, Pesos)

2001/2002 - 46,457
2002/2003 - 52,286
2003/2004 - 56,395
2004/2005 - 62,256

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 Revenue and Expenditure Projection and Forecasting Techniques

The Average Annual Growth Rate (AAGR) Method

Income/Expenditure for Latest Year less

Income/Expenditure for Earliest Year
AAGR = __________________________________ x 100

Total Income/Expenditure less

Income/Expenditure for Latest Year

Computing for the AAGR of the income from local sources in the income
profile of LGUs, the figures would be:

67,202 – 43,275 23,927

______________ = _______ = 11.63%

272,898 – 67,202 205,696

Therefore, the projected income for CY 2006 equals 67,202 x 1.12 = `75,266.

A more sophisticated method is the Linear Regression Technique

The Technical Note in Annex 1 shows how to determine a regression line

by hand.

A Regression Calculation Table for CY 2005 income from local sources is

prepared as follows:

REGRESSION CALCULATION TABLE

1 2 3 4 5 6 7
Year (X) Revenue X– Y– (Col 3) (Col 4) (Col 3)
Amt. (Y) avg.X avg.Y squared squared times
(Col 4)
1 43 -2 -11.6 4 134.56 23.2
2 50 -1 -4.6 1 21.16 4.6
3 55 0 0.4 0 0.16 0
4 58 1 3.4 1 11.56 3.4
5 67 2 12.4 4 153.76 24.8
Sum 15 273 10 321.2 56
Avg. 3.0 54.6

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The regression equation is then calculated as:

Predicted Y = a + b times X

where “b” is the coefficient = sum of Column 7 divided by the sum of

column 5, and

where “a” is the constant = average of all Y’s (Column 2) minus “b” times
the average of all X”s (Column 1)

If we now use the numbers in the Table above to calculate the regression
equation, we have:

“a” = 54.6 - (5.6) (3) = 37.8

“b” = 56/10 = 5.6

and the values for the trendline would be:

Year 1 Y = 37.8 + (5.6) (1) = 43.4

Year 2 Y = 37.8 + (5.6) (2) = 49.0

Year 3 Y = 37.8 + (5.6) (3) = 54.6

Year 4 Y = 37.8 + (5.6) (4) = 60.2

Year 5 Y = 37.8 + (5.6) (5) = 65.8

Year 6 Y = 37.8 + (5.6) (6) = 71.4

If we plotted these values on a graph, they would produce a straight trendline,

showing the underlying trend in revenues for our sample data. The reader can
use the same Table, substituting other figures in Column 2 (Y values) to calculate
other trendlines.

Linear Regression by Excel

1. Enter years as 1, 2, 3, 4 and 5 as one column (x coordinate)

2. Enter income figures as another column (y coordinate)
3. Click Tools in the Menu Bar
4. Select Data Analysis
5. Select Regression in the dialogue box, and then click OK
6. Follow directions in the dialogue box
 Input Y ranges by selecting Y coordinates in the worksheet
 Input X ranges by selecting X coordinates in the worksheet

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 7. The regression equation is then calculated as

Predicted Y = a + b times x

Where “a” is the constant (intercept) and “b” is the coefficient (x variable)

Applying the technique the trendline for the CY 2001 to CY 2005 LGU
income from local sources follows.

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SUMMARY OUTPUT

Regression Statistics
Multiple R 0.988099
R Square 0.976339
Adjusted R
Square 0.968452
Standard Error 1.591645
Observations 5

ANOVA
df SS MS F Significance F
Regression 1 313.6 313.6 123.7895 0.001556
Residual 3 7.6 2.533333
Total 4 321.2

Standard Lower Upper

Coefficients Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0%
Intercept 37.8 1.669331 22.6438 0.000189 32.48744 43.11256 32.48744 43.11256
X Variable 1 5.6 0.503322 11.12607 0.001556 3.998204 7.201796 3.998204 7.201796

The trendline is plotted as follows:

Year 1 Y = 37.8 + (5.6)(1) = 43.4

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Year 2 Y = 37.8 + (5.6)(2) = 49.0
Year 3 Y = 37.8 + (5.6)(3) = 54.6
Year 4 Y = 37.8 + (5.6)(4) = 60.2
Year 5 Y = 37.8 + (5.6)(5) = 65.8
Predicted Y = 37.8 + (5.6)(6) = 71.4

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 The linear regression technique woks best when the data is linear or
approximately linear.

A Caveat

Projection methods or techniques are tools for forecasting income and

expenditures that rely on historical data. To be useful the data should be
examined in the light of the conditions and circumstances that existed during the,
period that provided the data. To be sure, past events and decisions significantly
affected past income and expenditure performance. The predicted figures
provided by forecasting methods and techniques are starting points only for
planning and decision making.

References

Perfecto L. Padilla, Perla E. Legaspi, and Rosa R. Cordero, Manual on Improving Local
Financial Administration. Local Government Center,, University of the Philippines, in collaboration
with the Local Resource Management ,Project, NEDA.

James S. McCullough and James F. Hicks, Jr., Municipal Financial Analysis Handbook,
Research Triangle Institute, December 1984.

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 Annex 1

The Freehand Curve-Fitting Approach

The Freehand Curve-Fitting Approach is a freehand adaptation of the

Simplified Linear Regression Approach. This is otherwise called the Eyeball
Method as this primarily requires the use of one’s eyes instead of statistical or
mathematical computations in determining the actual and projected trend lines.

Like the Simplified Linear Regression Approach, the Freehand Curve-

Fitting Approach should be used only when the past trend of the actual income
and expenditures was either perfect linear or approximately linear.

The steps and, procedures involved are:

Step 1. Plot the actual income or expenditure data points on a graph.

Make sure that the graph has a uniform scale for the both the X
axis and the Y axis.

Step 2. Draw the actual trend line of income or expenditure on the graph
prepared in Step 1. The actual trend line is the straight line that
closely approximates the actual curve formed by the actual data
points. To be able to see all the actual data points while drawing
the actual trend lines, the ruler to be used in drawing the line
should be transparent.

Step 3. Draw the projected trend line of income or expenditure by

extending the actual trend line drawn in Step 2 to the left side of
the graph.

Step 4. Determine the projected income or expenditure based on the

projected trend line drawn in Step 4.

________________

Adapted from Perfecto L. Padilla, Perla E. Legaspi, and Rosa R. Cordero, Manual on
Improving Local Financial Administration. Local Government Center, University of the
Philippines, in collaboration with the Local Resource Management, Project, NEDA.

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