Improving the effectiveness of multi-year fiscal planning.

• Author: Sun, Holly

Long-term forecasting and fiscal planning has long been advocated by the Government Finance Officers Association and other organizations as an effective tool in anticipating and addressing cyclical and structural budget issues. A long-term focus makes sense, as many policies and decisions have multi-year fiscal implications, and adjusting budgets, programs, and policies takes a certain amount of time. However, there is little data on this point. Is this policy tool widely implemented? How is it employed? Does it help achieve budget and policy goals? What are the important factors that can make this policy tool more effective? This article used data from a 2013 survey to shed some light on these questions. (1)

[1] ARE MULTI-YEAR FISCAL PLANNING AND PROJECTIONS WIDELY USED?

Wide Implementation. Survey responses indicated that multi-year projection and fiscal planning is widely practiced among the surveyed group (see Exhibit 1). More than 78 percent of respondents reported using multi-year projections for the general fund, and 68 percent reported using them for other funds. Roughly half the governments conducted long-term debt affordability analyses (53 percent). A relatively small percentage of respondents (14 percent) developed detailed multi-year spending ceilings by department or program. Many respondents also indicated that they use other planning practices including multi-year strategic plans, multiyear fiscal policies and objectives, and multi-year capital improvement program budgets. (2)

Comprehensive Framework. Most responding governments implemented a relatively comprehensive multi-year fiscal planning framework, as encouraged by the GFOA, rather than practicing multi-year projections for the general fund alone. More than 59 percent of respondents implemented at least five out of the seven multi-year fiscal planning practices listed in Exhibit 1. Approximately 29 percent adopted three or four elements, and 11 percent implemented two or fewer.

Increased Momentum, Multi-year projections and fiscal planning appear to have gained popularity among local governments in recent years. Of the respondents that use this policy tool, 55 percent had fewer than 10 years of experience; 30 percent had implemented it for 10 to 19 years, and 15 percent had used it for 20 years or more.

The number of governments adopting multi-year projections has increased significantly in the past 20 years and doubled in the past decade (see Exhibit 2). The increased interest may be explained by the widespread fiscal distress local governments have experienced because of economic hardships and changes in state and federal aid and unfunded mandates during this period.

Medium-Term Horizon. Approximately

55 percent of the multi-year general fund projection models covered five to six years (including the upcoming budget year). Three-year forecasts were used by 19 percent of respondents, and 10-year models were used by 10 percent. A small percentage of users reported that they forecast beyond 10 years. Similar percentages are reported for other operating funds. Nearly 70 percent of the responding governments updated multi-year projections annually, and 24 percent updated them more frequently (15 percent semi-annually, 6 percent quarterly, and 3 percent monthly).

Different Purposes. Approximately 94 percent of respondents indicated that planning and projections were used to show revenue and expenditure trends and identify potential fiscal issues in future years. Nearly 64 percent also used this tool to indicate how a structurally balanced budget could be achieved (meaning that ongoing revenues, excluding use of fund balance and other one-time resources, would support ongoing expenditures). In...