The road to fiscal sustainability: five principles of effective financial planning.

• Author: Clifford, Craig

Many different organizations have promulgated best practices for the government finance profession, including the International City Managers Association (ICMA), the National Advisory Council for State and Local Budgeting (NACSLB), the Governmental Accounting Standards Board (GASB), and, of course, GFOA. Similarly, the three major credit rating agencies have published numerous articles and publications identifying the financial practices and indicators they consider important to financial examination and credit ratings for governmental securities. Despite this wealth of information, there is no single indicator of fiscal soundness or a silver bullet action to solve financial problems--it takes constant attention and a variety of policies, decisions, and actions over time to achieve fiscal stability.

This article discusses five principles that have put the City of Scottsdale on a path toward long-term fiscal sustainability. The five principles of effective financial planning are: (1) maintain a multi-year perspective, (2) fund lifecycle costs and reserves, (3) perform revenue and expense analysis, (4) document forecasting assumptions and methodologies, and (5) continually reassess plans. The balance of this article discusses each of these principles in turn.

MULTI-YEAR PERSPECTIVE

The one principle that has had the most significant impact on Scottsdale's financial success is the application of a multi-year perspective to nearly everything we do. The credit rating agencies all use multi-year financial planning as a key factor in their analysis. The NACSLB considers a long-term perspective one of the five essential features of a good budget process and recommends preparing multi-year revenue and expenditure projections; assessing long-term financial implications of current and proposed policies, programs, and assumptions; and developing plans to achieve organizational goals. A multi-year perspective is essential to understanding the full financial impacts of policy decisions and ensures a greater understanding of the issues and adequate time to plan actions accordingly. Failure to look at decisions over many years can create problems, compound problems, or delay recognition of existing problems.

A multi-year perspective can help a government avoid dangerous financial practices, including the following:

* Balancing the budget by repeatedly using one-time sources of revenue, such as prior year's reserves or proceeds from the sale of an asset

* Deferring current costs to the future, such as postponing expenditures for maintenance and replacement of capital assets, or deferring pension liabilities

* Ignoring long-range or lifecycle costs of a liability, such as a decision to build or purchase a capital asset without calculating the full lifecycle costs of owning, operating, and maintaining that asset

Most financial problems do not develop suddenly. Instead, they build over time. As such, governments need to be constantly on the lookout for signs of financial trouble. One of the best tools for assessing financial condition and identifying problems while they are still manageable is fiscal trend analysis. Fiscal trend analysis involves examining the magnitude and rate of change for a variety of key indicators of financial condition, comparing the results to other trends and benchmarks, determining which trends indicate a problem or emerging problem, identifying the possible causes, and planning remedial action.

The City of Scottsdale received the GFOA Award for Excellence for its annual Financial Trends Analysis report. The city also prepares monthly financial update reports for elected officials and management and posts these reports to the city's Web site for informational access by employees and citizens. These reports combine past and current financial trend information with an updated assessment of revenues and expenditures and many local, regional, and national economic indices. This analysis provides the earliest warning of emerging problems, provides direction for future forecasts, keeps stakeholders informed, and helps promote fiscal dialogue. Exhibit 1 is an excerpt from the May 2005 report.

LIFECYCLE COSTS AND RESERVES

The credit rating agencies consider adequate funding of lifecycle costs and reserves a critical factor in analyzing a government's financial condition and assigning a bond rating. The NACSLB recommends that governments identify and conduct an assessment of their capital assets, including the condition of the...