Leading the way to fiscal health.

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Those who choose a management career in government finance find themselves in the unenviable position of being the visible public steward over monies entrusted to their organization by taxpaying citizens to support programs and services. By virtue of this position, government finance officers assume (or, perhaps more accurately, are thrust into) a position of leadership, not only in their organizations but in the communities they serve. The comfortable role of budget gum, bean counter, or numbers person surrounded by spreadsheets, trend graphs, and databases is quickly being replaced by a new role as the "leading" expert in terms of the organization's financial health and wellness. Finance officers for local governments are expected to internalize and model the traditional leadership values of integrity transparency, accountability, and trust. Uniquely, this position of financial leadership also requires meticulous attention to detail and an ability to "see into the future," which then manifests itself in the delivery of accurate information to the top elected and appointed decision-makers in the organization as well as those who make their decisions in the voting booth.

As the fiscal reality facing government entities across the nation becomes more challenging to manage, and the necessary financial choices become more difficult to make, the leadership role of the government finance officer must assume a new and more critical dimension. The most important leadership role must be that of a true diagnostician--capitalizing on analytical skills and using them to quickly and accurately diagnose the symptoms causing the organization's fiscal "dis-ease," assessing the factors causing these financial maladies and then properly prescribing the right treatment or treatments to lead the organization back to a picture of fiscal health. This new dimension of leadership requires finance officers to more thoroughly test and analyze the underlying causes of the fiscal distress--or, for those few jurisdictions that aren't experiencing any distress, to understand the reasons for this enviable condition. Finance officers must assemble all the facts and data at their disposal and do the analytical work to identify quantify, and verify their suspicions about the factors that have led the organization to its current fiscal situation. Based on this hard but critical work, the financial leader must diagnose the problems and recommend the appropriate actions.

The first step is a quick assessment of some basic information that will allow the diagnostician to eliminate those areas that don't seem to be causing the organization any problems. Then, focus on those areas where the preliminary high-level assessment points toward some tell-tale symptoms that need to be treated to restore the organization to an acceptable level of fiscal health. A simple fiscal health diagnostic approach can uncover the root cause of the organization's ailments through further analytical tests.

Exhibit 1 depicts the basic steps for achieving fiscal health, the first step toward fiscal wellness and long-term financial sustainability By analyzing each of these five areas and applying some basic diagnostic tests, any organization can isolate the potential sources of their fiscal issues and focus more in-depth analysis on them.

SPEND WITHIN YOUR MEANS

In October 2008, the Center on Budget and Policy Priorities declared that 21 states will face shortfalls in the next year, citing the ability to access credit markets for short term borrowing and large budget deficits as the primary concerns. The state of California is "borrowing" against next year's personal income tax withholdings to resolve the current year's shortfall. Municipalities are suffering from similar maladies, as evidenced by the City of Vallejo, California, which filed for bankruptcy in August 2008. (1) The New York Times recently reported on the trend of cities debating about privatizing public infrastructure, with major entities like Chicago's Midway Airport turning to the private markets to "finance a tidal wave of infrastructure projects" that could no longer be funded with traditional sources or the municipal bond market. (2)

Increases in costs--often fixed costs--are outpacing revenue growth in most jurisdictions. At the same time, governments are experiencing skyrocketing expenses for employee compensation fueled by soaring cost increases in employer-provided health care. In addition, the costs associated with infrastructure keep escalating, especially the materials and equipment needed to repair aging assets. But local governments' sources of revenue are going in the opposite direction. The property tax base is being pummeled by the home mortgage crisis, the credit markets have melted down, and the prices for basic goods and services are volatile. As a result, sales tax collections are being slammed, and revenue forecasts for the next five years do not indicate that a cure for this trend is on the horizon.

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Is this the fate of government in our time? Does bankruptcy, privatization of infrastructure, borrowing against future revenues, or a federal fiscal bailout represent the only treatment options? Economic conditions have caused governments to spike a fever, making the need for fiscal stabilization paramount. Although it is increasingly difficult for most cities, counties, school districts, and other governmental entities, the first step in the treatment regimen is spending within your means.

Objectives

* Establish alignment between ongoing sources and ongoing uses.

* Establish alignment between one-time sources and one-time uses.

Sample diagnostic questions:

What symptoms are we looking for?

1. Does your organization differentiate between one-time and ongoing revenues and expenditures? If yes, how are they tracked? Does your forecast demonstrate this differentiation?

* Check to see if your organization is relying on fund balance or other one-time sources, or even volatile and unpredictable ongoing sources to support ongoing costs.

* Check to see if ongoing revenues are greater than ongoing expenses, and if your multiyear forecast matches ongoing revenues with ongoing expenses and one-time sources with one-time uses.

2. Are resource allocation decisions for budgetary purposes influenced by the program revenues generated by your organization's functional units (departments, divisions, elected offices, bureaus, etc)? If yes, how does your organization differentiate program revenues from enterprise revenues such as taxes, earnings on investments, franchise fees, etc.?

* Check to see if program revenues are allocated specifically to the operation responsible for generating them and if increases or decreases in these revenues directly affect that functional unit's budget.

* Check to see if resource allocations made in the budget process are based on the prior year's expenditure budget for each functional unit or if they are based on available ongoing revenues and one-time sources.

3. Does your organization prepare a formal revenue manual? If yes, what type of information is included?

* Check to see if all revenues are included in this document and if forecasts are based on the most appropriate trend data (e.g., historical, economic, demographic, etc.).

* Check to see if fees are updated on a timely basis and if they are based on a written policy supporting the level of cost recovery desired.

Potential treatment options

* Use ongoing revenues only for ongoing expenses (and one-time sources only for one-time uses).

* Establish a distinction between general government (enterprise) revenues and program revenues, and create incentives for self-sustaining programs by allowing functional operating units to keep 100 percent of the program revenue generated.

* Require reductions in program revenues to be offset by reductions in the operating budgets associated functional units.

* Base resource allocations strictly on available revenues and one-time sources (as opposed to historical or forecasted expenditures).

Exhibit 2 illustrates one organization's approach to distinguishing between ongoing fiscal health and one-time fiscal health. Note the pattern of persistent inability to spend within its means that emerged between 2001 and 2002. This fiscal health problem had been masked as the organization continued to use one-time sources to plug the ongoing gap.

ESTABLISH AND MAINTAIN RESERVES

According to an October 2008 Associated Press article, "the U.S. personal savings rate dropped to well below 1 percent in late 2007 and early this year, according to figures from the federal Bureau of Economic Analysis. The figure has edged up in the last few months, but the actual savings rate may still be near zero, given that many people are covering living costs by using credit cards or money saved earlier, according to the BEA." (3)

Unfortunately, the reality facing citizens is the reality facing most local governments. According to the Government Finance Officers Association (GFOA) recommended practice, Appropriate Level of Unreserved Fund Balance in the General Fund, "general purpose governments, regardless of size, maintain unreserved fund balance in their general fund of no less than 5 to 15 percent of regular general fund operating revenues." Similarly, the International City/County Management Association (ICMA) recommends that "the most influential guidance comes from the bond rating firms, which use a 'rule of thumb' figure of at least 5 percent of annual operating expenditures as an acceptable level of (accessible) reserves (on top of restricted reserves)." But a brief scan of news reports reveals that so many cities and counties are experiencing diminished bond ratings because they failed to meet even these minimum requirements.

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