A financial emergency policy is designed to mitigate some of the issues that would be caused by a financial crisis. Having plans in place can save valuable time and lead to better outcomes by reducing the need to make difficult decisions during emotional times.
GARDEN CITY'S SURPRISE
In 2016, the City of Garden City, Kansas, realized that it was more vulnerable to financial emergency than originally thought. The city's finance director received a call from the local bank asking if the Recreation Commission, which provides sports, fitness, and art programming for city residents, was permitted to open the operating loan it had requested--and it was not. Opening an operating loan violated a number of statutes for a component unit of the city government, and the attempt to do so indicated that the Recreation Commission board did not understand its own regulations. As a component unit, the commission was technically accountable for its own finances, but its actions put the whole city at risk. If the commission owed money it could not pay back, the city would ultimately be responsible, at a potential cost to city programs.
After receiving the worrisome news, the local government set about the difficult task of repairing the financial damage. The Recreation Commission had acquired properties it could not reasonably support, its cash balances were dangerously low, and it could not sustain operations through the end of the year. The director was replaced, park maintenance was transferred to the city, properties were sold off, and Garden City's general fund lent $300,000 to sustain the Recreation Commission through the end of the year. The whole ordeal caused controversy among citizens who were concerned that their city administration did not have adequate control over its finances.
This experience exposed the city's vulnerability to financial distress, and as a result, the city commission decided to develop a policy for how to respond if a real financial emergency were to occur. Initially, the city commission was worried about how the public might perceive a financial emergency policy, since even the mention of a financial emergency can be worrying and divisive. To alleviate concerns, the city's finance director took the time to verify and demonstrate that although the circumstances with the Recreation Committee were unfortunate, the city's overall position was still sound. Hence, the city commissioners could be confident that they were wisely...