Be prepared: long-term financial planning in San Clemente, California.

• Author: Gudgeirsson, T. Pall

"About the time we can make the ends meet, somebody moves the ends."--Herbert Hoover

The National Advisory Council on State and Local Budgeting recommends that "a government ... have a financial planning process that assesses the long-term financial implications of current and proposed policies, programs, and assumptions and that develops appropriate strategies to achieve its goals." (1) A long-term financial plan can be defined as a plan that identifies fiscal issues and opportunities, establishes fiscal policies and goals, examines fiscal trends, produces a financial forecast, and provides for feasible solutions. As a strategic document, a long-term financial plan should be consistent with a government's goals and identify methods for achieving those goals. A long-term financial plan is used to focus on emerging issues, and should be continually updated to ensure that it addresses the current fiscal environment.

In today's environment of economic uncertainty, financial planning is essential to prudent fiscal management. While long-term planning may not always solve structural budget problems, it serves as a sort of early detection system that allows governments to deal with budgetary issues on a preventive basis as opposed to a reactive basis. Done properly, long-term financial planning may help governments avoid fiscal emergencies (at least those over which they have control) and even seize opportunities. This article offers a practical approach for an annual fiscal assessment and systematic evaluation of local government finances. The process provides a framework for studying fiscal issues and policies, preparing for financial emergencies, determining the impact of past financial trends, and producing financial forecasts.

A CASE STUDY IN FINANCIAL PLANNING

In the early 1990s, the City of San Clemente, California, faced a severe fiscal crisis that prompted the development of a long-term financial plan. Like most other governments, the recession hit San Clemente hard; the city's coffers were virtually empty, with no reserves to fall back on. As a result, the city was forced to find ways of dealing with projected fund balances that were millions of dollars in the red, reserves that were non-existent or unfunded, infrastructure that was failing, a police department that was understaffed, and many other problems. To make matters worse, the State of California "appropriated" a significant share of the city's property taxes. In fact, out of a total budget of $20 million, San Clemente had a shortfall of $6 million--30 percent of the general fund! The city also faced an operating deficit of $1.8 million and urgent capital needs of $2.4 million.

In response to the crisis, the City Council acted decisively and called for a complete review of the city's finances and organizational structure, including staffing requirements. A citizen's task force was formed to provide advice on existing programs and to review the city's organizational structure. The task force relied on previous management audits and detailed programmatic data from city staff. City management developed a mechanism, which evolved into the long-term financial plan, to address the fiscal side of the issues and to provide perspective to the City Council and citizens. Combining these efforts, city staff was able to provide the City Council and citizens with an objective and well-reasoned analysis of all financial and organizational issues in one comprehensive document. As a result, the Council was able to see the "total picture" and consider the consequences of proposed solutions on the entire organization.

What emerged from this process was the city's long-term financial plan, which continues to be used to address emerging issues and is continually updated and modified to ensure that it reflects the current economic and fiscal climate. The plan addresses many aspects of city administration, including economic development, infrastructure needs, capital planning, and financial policies. Financial planning involves all levels of the organization and has become an important component of the annual budget process.

San Clemente's long-term financial planning process is considered an unqualified success by the City Council, staff, and the public. Initially, the plan included the implementation of a series of actions to stem the tide of red ink and to restructure the organization both from a financial and organizational standpoint. Once the tide turned, the city refocused its effort on several longer-term initiatives...