The Basic Financial Statements

Statement of Activities

A government's Statement of Activities presents much of the same information we see on the income statement for a for-profit or non-profit. It lists a government's revenues and expenses or expenditures and the difference between them. It reports the change in net assets or net position and explains why that change happened. Like an income statement, it tells us where the government's money came from, where it went, and whether its core activities pay for themselves.

That said, the Statement of Activities is also quite different from a traditional income statement. Expenses in the upper left are presented first. These are listed by function or program, with the governmental activities presented separately from the business-type activities. Recall that governmental activities are those supported by taxes and other non-exchange revenues. In contrast, business-type activities are supported with exchange-like revenues, primarily user charges and fees. Governmental activities and business-type activities together comprise the primary government. Next to expenses, you may occasionally see (although not with Bothell) indirect expenses the government has allocated to each activity.

Program revenues include (a) charges for services, (b) operating grants and contributions, and (c) capital grants and contributions. Charges for services include revenues based on exchange or exchange-like transactions that can be directly linked to programs. For example, the city of Bothell reported $6.1 million in charges under General Government.

Revenues were from the sale of licenses and permits. The $6.8 million in charges reported under the Security of Persons and Property include anything from fees for fire protection and emergency medical services to civil penalties, including parking fees and traffic violations. Charges for services will vary by type of government and scope of activities. The city reported $4.1 million in operating grants and contributions and $12.7 million in capital grants and contributions. A significant proportion of the capital grants and contributions were in Transportation. Business-type activities similarly reported operating ($7,763) and capital ($1.8 million) grants and contributions.

Shifting to the right, we see columns with the heading "Net (Expense) Revenue and Changes in Net Position." The net cost format nets program revenues from expenses. The city reports a net expense of $12,069,005 for the General government. This figure represents the sum charges for services, operating grants and contributions, and capital grants and contributions minus expenses (($6,079,031 + $795,460 + $0) – $18,943,497).

This deficit (or net expense) tells us that general government activities do not pay for themselves. Similarly, public safety programs (police, fire, emergency medical services) do not pay for themselves (-$17,827,855). Governmental activities are not self-sustaining. Except for the "economic environment," every program reported a net expense (or deficit) – for a total of $65.9 million.

Should the city council be concerned that its core services are hemorrhaging money? Not really. We do not want local government services like public safety, planning, and zoning to pay for themselves because there is no clear link between the users and the beneficiaries of these services. The city exacts fines on people who break the law when they park illegally or speed on city streets, but those fees are designed to deter those behaviors. Perpetrators who pay these fines do not receive a service, and as we saw in Ferguson, MO, and elsewhere, bad things happen when local governments turn fines into a viable revenue source.

But that leaves open an important question. Citizens want to see these essential services provided. How, then, do we help fund public transit or public safety?

To answer that question, skip down to the lower right corner of the statement. Here we see a list of General Revenues like property taxes, sales taxes, excise taxes, business taxes, and other revenues. General revenues are not directly connected to a specific activity. The city of Bothell reported $63.8 million in general revenues for FY 2021. Compare that figure to the $65.9 million in net expense for governmental activities – we are left with a decrease in the government's net position for governmental activities of $2.1 million. The city's total revenues (taxes, charges and fees, and grants) were not sufficient to cover its expenses.

Should the city council be concerned with this figure? Well, it depends. We need to understand whether the negative change in net position resulted from a decline in revenues, an increase in expenses, or both. We also need to understand whether the changes resulted from changes in the economic environment, tax policy, or accounting standards. The answer, sometimes, is not as straightforward. As you will see in Chapter 3, more questions than answers will arise from any review of financial statements. That said, the relationship between expenses, program revenues, and general revenues is one of the most important things to observe in a government's Statement of Activities.

The expense versus program revenues link is much more straightforward for business-type activities. Recall that business-type activities are designed to pay for themselves through charges and services. For the city of Bothell, Water, Sewer, and Storm Water reported net revenue of $4.8 million at the end of FY 2021. Their operations were not subsidized with tax revenues.

Not all business-type activities are self-supporting, and not all business-type activities consistently report a surplus. For example, public universities and hospitals listed under business type are frequently subsidized with tax revenues. States will report transfers to business-type activities to finance the operations of its universities and hospitals. The unemployment benefits program is another example of a program that reports sizeable surpluses when unemployment rates are low but reports sizeable deficits when unemployment rates are high, as benefit distributions in a recession will exceed program revenues. So again, it depends!

That said business-type activities present challenging strategic and policy questions. How profitable is too profitable? Moreover, should business-type activities subsidize governmental activities? If a business-type activity like a golf course is not profitable, does it offer enough indirect benefits in areas like economic development and tourism to justify that lack of profitability? With a careful look at the Statement of Activities, you can begin to put numbers to these and other questions.