By Brian Reilly, CFA, CIPMA
If you don’t know where you are going, you might wind up somewhere else!” When it comes to government finance, the late great Yogi Berra offers sage advice.
Financial management planning is a smart, comprehensive way for your city to set a sustainable course for fiscal stability over a five- to 10-year horizon. The scope of this planning can vary in breadth and complexity, but at a minimum should incorporate all tax-supported funds.
The most complete plans create a holistic, long-term profile of your community, including all major funds and accounts. They also take each material variable and potential “what if ” into consideration.
Benefits of planning
Sure, annual budgeting is a necessity, but if your vision only extends to the next fiscal year, your city may end up making short-sighted decisions that render costly results down the road. There are many benefits of thoughtful financial planning, including that it:
- Provides an opportunity for staff and elected officials to work together to achieve your city’s goals and deliver optimal benefits to residents, businesses, and community organizations.
- Empowers elected officials to communicate policy priorities to the public and establish tangible targets for performance and accountability.
- Eliminates reactionary impulses and stressors from the annual budgeting process.
- Fosters fiscally responsible decisions when unforeseen challenges (and exciting opportunities) arise.
So, where do you start? Let’s flip Yogi’s advice and instead ask, “How do you know where you’re going if you don’t know where you’ve been?”
To properly construct a forecasting model for your financial management plan, first develop a baseline profile of your city and gain an understanding of basic financial metrics, such as:
- How has your city performed on an “actual-to-budget” basis over the last three years? What are the causes of material budget variances?
- What is the current level of your unrestricted fund balance and how much of it is cash? What are those numbers as a percent of your revenue budget?
- How much debt do you have outstanding and what are the annual payment requirements? How much is that debt on a per capita basis and as a percent of market value?
- How are your enterprise funds performing?
- If you have tax increment districts, are they cash flowing? When might they close?
Additionally, if your city has adopted formal financial policies (e.g., fund balance, debt management, investment, budget, etc.), be sure to assess your current financial condition against them to determine whether you’re in compliance.
If you’re not, figure out why, and then consider if it’s time to amend those policies. This self-examination isn’t meant to be exhaustive or academic; rather, it’s meant to generate meaningful dialogue focused on your community’s financial stability.
Crafting the plan
Once you become familiar with your city’s baseline financial condition and thoroughly review governing policies, it’s time to assemble the data and establish the assumptions needed to craft the plan. The most robust financial management plans combine operating and capital budgets for all departments and use transparent assumptions that decision-makers clearly understand.
Questions to consider when developing those assumptions include:
- Does your forecast rely heavily on tax base growth?
- Do you anticipate additional staffing?
- Should you use standard inflationary indices for revenues and expenses?
Regardless of the hypotheses you employ, make sure they’re consistent for the entire forecasting period, which typically begins at three years (minimum) and can run as long as 10.
While staff and financial consultants build data sets and financial models, your council can work on establishing goals and priorities. Adopt policy thresholds early, so you can use them as guideposts when evaluating the impact of projected operating and capital budgets on tax rates, user fees, and other charges.
This will give you an objective foundation to help avoid debates and competing interests. It allows you to focus on balancing capital spending ideas with realistic revenue expectations and financing strategies.
A well-structured plan gives the city an effective tool to build community consensus around budgets and major capital expenditures. It will provide a long-range financial road map that clearly shows where you’ve been, where you’re going, and the path to get there safely. If you follow it (and be sure to update each year), your city won’t—in Mr. Berra’s words—wind up somewhere else!