An automated five-year financial model: applications in Michigan cities.

• Author: Nottley, Mark

Financial modeling and multiyear forecasting, techniques that are often associated with corporate America, are now drawing greater attention in local government, as managers and finance directors strive to minimize future uncertainties and rationalize resource allocation.

In exploring the potential use of financial models, government officials raise a number of questions relating to fundamental issues:

* How will this process be of benefit to the community?

* What does a five-year financial model look like?

* What financial information should be included in the model?

* What is the procedure for developing a model?

* What level of software/computer proficiency is required?

* How do we develop future assumptions?

This article attempts to respond to each of these questions in a balanced fashion, providing overview information as well as some technical detail for current and prospective practitioners. It draws upon the experiences and lessons learned by staff of the Michigan Municipal League's Municipal Consulting Services while assisting Michigan municipalities in developing financial models.

Benefits of a Five-year Model

Although all municipalities obviously have unique circumstances and requirements, municipalities also are largely subject to the same three-step municipal cycle:

* the growth stage, a stage in which planning and service expansion are the overriding concerns and revenues approach their peak;

* the maintenance mode, a stage in which the entity is fully developed, revenue growth has become more static, and maintaining current infrastructure and service quality are the overriding concerns; and

* the retrenchment mode, a stage in which economics are worsening, cutbacks are imminent, and reorganization and redevelopment are critical.

Depending on a municipality's position in the municipal cycle, a well-developed, five-year financial model can be utilized to achieve different objectives. Five Michigan communities offer cases in point.

Delta Township. A financial model provides this rapidly developing community of 25,000 with the ability to monitor and plan service expansion effectively for both general government and utility operations.

Rochester Hills. As this city of 65,000 nears the end of its growth phase, officials sought a rational method of planning for and evolving into the maintenance mode. A financial model provides the ability to assess future capital and resource requirements and associated cost impacts, thus...