This article is part of an ongoing series about financial sustainability, based on GFOA's new financial sustainability framework. You can learn more about the framework at www.gfoa.org/financialsustainability.
Municipal financial sustainability depends on everyone, in every department, following the same rules and guidelines, such as financial policies and budgeted spending limitations. But it doesn't always work that way; there are always temptations to break the rules to gain an advantage.
Research shows that people are more prone to dishonest and self-interested behavior when they feel that they're out of sight, and their reputations aren't on the line. For example, in one experiment, test-takers cheated more when the lights were dimmed (1) and less when there was a cartoon image of an eye nearby. (2) Hence, to minimize any temptation to break rules, governments should create conditions where decision makers feel that their actions will be closely watched.
Unfortunately, creating a feeling of internal transparency in government finance isn't as simple as installing stronger light bulbs or eye-themed art on the walls. Local governments must develop a capacity to monitor their financial decisions and the impact of those decisions.
This article examines the systems created by the City of Tempe, Arizona, along three dimensions: the financial big picture, the operating budget details, and the details of the capital budget.
THE BIG PICTURE OF TEMPE'S FINANCES
It's easy for public finance discussions to get bogged down in details, but to understand if the organization is truly financially sustainable, big-picture perspective is needed. At the same time, public finances are complex, and the jargon used in managing the details can prevent some public officials from understanding what it means to be financially sustainable, much less monitor sustainability.
Understanding and monitoring the big picture demands terminology that all parties can understand and a shared concept of what financial sustainability looks like.
In Tempe, the big picture starts with the city's reserve policy, which calls for maintaining unreserved general fund balances equal to between 20 and 30 percent of general fund revenues, and to project an unreserved fund balance within those same boundaries over a five-year forecast period.
This is a formal policy adopted by Tempes city council. The target range was arrived at via negotiation among public officials. Other cities set their own reserve targets by considering their risks (e.g., economic dislocation, extreme events) and sizing the reserve accordingly. (3)
THE GOLDEN CONE OF PROSPERITY
In 2009, city policy called for an unassigned fund balance equal to 25 percent of general fund revenues. However, the city had maintained fund balances of more than 30 percent, which caused some to question why the city wasn't in alignment with the policy and if the city had too much fund balance.
The council and staff agreed to change the goal for unassigned fund balance to between 20 and 30 percent of revenue, a range that would provide more management discretion. They also agreed to bring the fund balance into this new target range. To ensure an orderly transition, the new targets and fund balance level would be phased in over several years.
The staff developed a presentation of the city's revenue forecast and called it the "Golden Cone of Prosperity." Exhibit 1 shows the presentation, with below cone representing how the range of desired fund...