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.
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:
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:
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.
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:
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!
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