Navigating turbulent times: approaches and strategies.

• Author: Zielke, Nancy

Over the past several years, cities, counties, and school districts have experienced financial challenges due to declining populations and property tax bases, rising unemployment rates, and decreasing state funding limits on revenue-raising potential. In fact, for the sixth straight year, U.S. cities are facing financial pressures that have created a sense of urgency for many local governments. To navigate these turbulent times, local governments need proactive approaches and strategies that address critical fiscal management issues--and a number of best practices are available for finance officers to use in guiding their organizations to fiscal stability and long-term sustainability

TRENDS THAT DRIVE CITIES' HEALTH

The National League of Cities' April 2013 Local Economic Conditions Report recently attributed a number of trends to the underlying economic conditions that drive much of cities' fiscal health and affect their ability to provide critical community services. The common issues that lead to fiscal distress include poor budgeting, accounting, and financial reporting; fluctuations in property values, collections, and retail sales tax base; excess spending (not living within the government's means); difficulty in differentiating the "nice-to-haves" from the "must-haves"; internal borrowing practices; unfunded pension funds and other postemployment benefits; inaccurate forecasting; declines in population; weak management and political leadership; changes in fund balances and governmental revenues and expenses; lack of plans or resources to address increased pension costs; lack of financial policies; major disclosure and internal control issues; unawareness of community needs and expectations for service solvency; use of one-time funds to pay for ongoing expenses; maintenance efforts related to federal funds; borrowing to cover cash flow needs; and unsustainable expenditure commitments during periods of budget surplus.

The NCL research study also indicates that the performance of local, regional, and state economies has improved somewhat over the past year. Despite improvements, however, cities continue to struggle, signaling that growth is not at a level necessary for a sustained recovery (see Exhibit 1). The study found tepid improvement in housing starts, commercial and residential property values, business activity, and health of the retail sector; a persistent lack of growth in incomes and employment rates; and workforce skills that have not kept pace with employer demand. In addition, the number and scope of investment projects are likely to decline if a federal limitation is placed on the tax-exemption of municipal bonds.

STEPS FINANCE OFFICERS CAN TAKE

While the actions of finance officers do not directly affect the local housing market, property values, or crime rates, they can still provide fiscal relief for their organizations by taking immediate steps toward sound financial management policies and practices. Following are six action steps for creating a plan.

Action I: Develop Monitoring Systems to Track Financial Health. Financial officers are responsible for budgeting conservatively and maintaining a balance within their jurisdictions. The first step in addressing potential deficits is committing to a proactive approach. Analyzing the government's financial condition to predict potential issues can help prevent recurring operating deficits and financial insolvency. This method has been adopted by multiple states, as well as the International City/County Management Association. Financial condition analysis looks at environmental, financial, and organizational indicators of distress, helping a jurisdiction gauge its budget solvency, or its ability to generate sufficient revenue within the current fiscal period to cover expenditures. Assessment models also help define historical, current, and projected financial and economic conditions, which helps determine the status of the government's cash flow and long-term financial sustainability.

Environmental trends are not immediately quantifiable, which makes analysis difficult; but they provide an early indication of future economic trends. See Exhibit 2 for examples of major environmental and demographic statistics that are readily available (e.g., crime rate and property value) or quantified over periods of time (e.g., population and poverty). Government officials need to constantly monitor their local environment...