FINANCIALLY SUSTAINABLE CAPITAL PLANNING.

Author:Kavanagh, Shayne
 
FREE EXCERPT

GFOA has been developing a new approach to local government financial sustainability based on a Nobel-prize winning body of work called "common pool resource theory" The dilemma that common pool resource theory is intended to solve is encapsulated by an economic parable called "the tragedy of the commons," which goes as follows.

A group of farmers have common ownership of a grazing area. An individual farmer has the incentive to send his animals to the common grazing area as much as possible because the additional cost for using the grazing area is near zero (it is commonly owned). In addition, if he doesn't send his animals, the other farmers' animals still graze, thus depriving the individual farmer's herd of potential food. All farmers face the same incentive, so they all send their animals to the common grazing area. The result is that the common area is eventually overgrazed and becomes barren.

A local government budget has a lot in common with the grazing area in this story. The budget is commonly owned by all the members of the community. Like the farmers, all of these stakeholders have the incentive to get as much as possible from the budget, lest they lose out to others. The eventual result is the same: a depleted resource.

Common pool resource theory offers a number of proven solutions to this dilemma, which GFOA has translated to public finance. In this article we will examine the capital planning practices of Wake County, North Carolina, and how they align with what GFOA research has found to be some of the keys to a healthy, sustainable budget.

ADOPT A LONG-TERM TIME HORIZON

To make its budget sustainable, a local government needs to take a long-term view. This is especially true for capital investment. Many governments adopt capital planning horizons beyond one year. For example, a recent GFOA survey found that 78 percent of governments that participate in GFOA's program for distinguished presentation of annual financial reporting have a capital revenue forecast that looks at least three years into the future; 23 percent go further, with a forecast that looks at least six years into the future. Though the prevalence of long-term forecasting in local government capital planning is a positive development, adopting a long-term mindset requires other supporting practices as well.

Balance Short- and Long-Term Perspectives. In public finance, we often think of the short term and long term as mutually exclusive options: We must choose one or the other. However, the strongest planning processes balance the two in order to inspire a long-term view, while remaining relevant to the challenges that people feel right now.

Wake County does this by establishing annual "goal areas" with its board of commissioners. The county has seven broader goal areas that remain mostly consistent from year to year. Examples include:

* Community Health. Promote an effective behavioral and physical health system of care and practices that benefit all residents.

* Economic Strength. Create a business-friendly environment to attract, retain, and grow business, diversify the economic base, and create job opportunities for all citizens.

* Growth and Sustainability. Establish a deliberate and realistic approach to address growth and mobility while preserving the county's environment and healthy communities.

Each goal area has a number of more specific objectives associated with it. Then, there are even more specific initiatives associated with each objective. The objectives and initiatives provide the opportunity to address issues that are of immediate concern to the community, while remaining within a consistent long-term framework. For example, under the Growth and Sustainability goal, one of the initiatives is to maintain the affordability of transit services and address transit needs in vulnerable communities and rural areas.

When the county is considering potential capital investments, its goals, objectives, and initiatives are important influences. For example, an initiative will at times call for the development of a master plan to address some issue of the community (e.g., a park system master plan). The county's system for evaluating whether to undertake a capital project considers the presence of an approved master plan that supports the project, allowing it to maintain a long-term coherency in its approach to providing services. This practice also allows...

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