A five-year financial model for municipal decision making and resource allocation.

• Author: Nottley, Mark W.

Increasingly, Michigan's municipalities are embracing the concept of financial modeling. Typically, this involves the creation of an automated multiyear budget model which can be used to estimate or forecast the future years' finances of the general fund.

This article examines the reasons for the growing use of this budgeting technique in the public sector and the benefits that can be derived from a five-year future financial model. The City of Lincoln Park, a long-time advocate of financial modeling, is utilized as a case study.

Growing Popularity of Financial Modeling

Michigan's municipal governments have been subjected to a series of fiscal challenges. Since 1978, local taxing ability has been limited by the Headlee Amendment to the state constitution, a statute which requires millage rollbacks when property value increases exceed the rate of inflation. Potentially more onerous, the recently enacted Proposal A, places an inflationary cap on the increase in individual property assessments; a restriction which may severely limit future revenue growth in many municipalities.

Additionally, federal assistance has been significantly curtailed and state-shared revenue has proven to be a volatile, less-than-predictable funding source. Coupled with rapidly rising costs, mandates and increasing service demand, the financial outlook dictates a prudent, planned approach to long-term resource management.

The short-range nature of traditional budgeting systems often renders them inadequate to meet the emerging fiscal challenge. Annual budgets typically consider only incremental changes to existing programs and services, and consequently do little to prepare a municipality for dramatic, unexpected events such as Proposal A. In the absence of a large fund equity, a municipality that is wholly dependent on short-term budgeting may be inviting financial crisis. In contrast, a five-year budget model, properly constructed, may provide the early warnings that are necessary to develop a long-term program which stresses service priorities and sound fiscal practices.

The City of Lincoln Park: A Case Study

The City of Lincoln Park, located in the "downriver" area of Southeastern Michigan, provides a classic example of the successful application and implementation of a financial modeling system. As an older, established municipality with a population of approximately 42,000, Lincoln Park has faced the ongoing challenge of balancing a limited resource base with...