Monday, December 2, 2013

Why Municipal Fiscal Health Modeling Matters!

In a recent article from CFO Magazine Cities on the Brink, author Russ Banham identifies several challenging factors that are pushing (and have pushed) many municipalities into bankruptcy protection. Banham writes, "Prior to its incorporation in 1850, Stockton, Calif., was known as Fat City, and later Mudville. Prophetically, its financial fortunes followed this progression in names from boom to bust. Stockton filed for bankruptcy in 2012, and until Detroit went bankrupt earlier this year, it had the dubious distinction of being the largest city in the country to seek Chapter 9 protection. The cities are two of 12 other municipalities that have petitioned for bankruptcy protection since 2008, among them Jefferson County, Alabama; Harrisburg, Pennsylvania; and Vallejo, California. Eight of these filings occurred in the last three years.

To be sure, the Great Recession was a big factor in these bankruptcies, but it wasn’t the smoking gun. The fiscal distress plaguing dozens if not hundreds of municipalities nationwide are hinged to past sins, and today their finance managers are desperately trying to set them on a straight and fiscally responsible path."

Banham continues with a brief case study on Stockton - "Take Stockton, which city manager Bob Deis calls “a cautionary tale.” Brimming with property-tax revenues in the early 2000s, the city issued millions of dollars in bonds to build a marina and the 12,000-seat Stockton Arena. The booming stock market bolstered city pension funds, giving it the confidence to provide high-paying salaries and free health care for life to city workers. (One month on the job as a courthouse janitor and free health insurance was guaranteed for life — to the spouse, too.) Money flowed into multiple projects to rebuild the downtown core and spruce up the riverfront.

Then the recession rained on the parade, and Stockton was back in the mud. Deis and other Stockton
leaders did their best to forestall bankruptcy, until there was nowhere else to turn. “It was the only thing left we could do,” he concedes. “We had cut services radically, to the point where any more cuts would have been dangerous, affecting public safety.”

That’s how bad things are for many municipalities — trim one more cop off the force and it’s the Wild West. For cities like Detroit, with its $18 billion in debt, the fiscal fissures are too deep to patch. Half the population is gone in a generation, their tax dollars in some other municipality’s coffers.

U.S. cities, counties and states can learn volumes from what went wrong in places like Stockton and Detroit. Chief among the lessons is the need for municipal finance leaders — CFOs, controllers and comptrollers — to stand up and be counted. “It takes a CFO to say, ‘Wait a second. Let’s get an actuary to cost these things out and see where we’re going before we dive in,’” says Deis.

His message to other cities in trouble? “Do an honest inventory, admit mistakes were made and fix them now.” 

A New Environment

The recession may officially be over according to economists, but unlike the normal ebb and flow of the past, the picture is dramatically different than anything managers have experienced during other economic cycles. Local governments are realizing that they will not simply return to the status quo that existed before the recession.

Managers are coming to grips with an environment in which:

  • Revenues will at best remain flat or continue to decline.
  • Costs associated with energy, fuel, health care, and basic supplies will continue to grow.
  • Taxpayers can't afford to pay more because of the recession’s impact on their own personal finances.
Taxpayers are perhaps expecting local government to provide even more support in meeting their social, physical, environmental, and economic needs, especially with the declining assistance in these same areas from federal and/or state sources.

How does local government continue to offer the important, even vital, services required by communities in a responsive and timely fashion?

How will finance chiefs address significant debt obligations while maintaining enough resources to provide prioritized services?

What can managers do to successfully navigate these challenging waters so that their communities become better, stronger, and more relevant than ever before.

Let’s consider a completely different perspective. In order to achieve success and accept the challenges that are ahead, we must see more clearly how to manage, use, and optimize resources in a much different way than has been done in the past. This new environment demands a new vision of the future.

For managers, resources can appear to be scarce because of our tightly clenched grasp on some commonly held assumptions from which they need to break free. Perhaps there is a different way to see things.

Fiscal Transparency

First and foremost, local governments must be clear and transparent about what truly is their picture

of fiscal health. Communicating that picture simply, clearly, and understandably without volumes of numbers, spreadsheets, tables, and an endless series of charts is frankly a challenge that has plagued managers for years. If managers are going to be able to demonstrate financial reality internally to elected officials and staff, and externally to residents, they have to find better ways to make fiscal situations understandable and transparent to everyone.

Finding creative, clear, and nontechnical ways to demonstrate what the next five to 10 years might look like is a must if people are going to address fiscal concerns. All too often, local governments are unable to make sound, timely decisions regarding investing in new resources, starting new programs, or initiating major capital projects because elected officials, local government managers, and staff members are paralyzed by the uncertainty of whether they actually have enough money to appropriate for these purposes. Developing a long-term financial forecast is key to gaining a better understanding of what the future might hold.

Differentiating between one-time and ongoing revenues and expenditures to clearly understand how finances are aligned and where they might be out of alignment is a critical element in eliminating this uncertainty. Managers understand this principle but rarely make a concerted effort to be deliberate about depicting this separation in financial forecasts or budget documents. The need for this separation is understood but without actually “seeing it,” managers may not be aware of its impact on the ability to manage and maximize resources. Not clearly separating the picture into these two revenue categories may obscure some serious looming fiscal problems.

How many officials, for example, have approved a capital project without considering the implications of the associated ongoing costs? Newly constructed public facilities have sat vacant because of a failure to separately identify and depict the impact of ongoing operational costs.
Adhering to this philosophy of differentiating between one-time and ongoing revenues and expenditures also helps ensure that an organization “spends within its means.” This concept is not just about balancing the budget but allows managers to be clear that ongoing operational expenses are funded through ongoing revenue streams. Using such one-time monies as fund balance or grants to support ongoing operations is an unsustainable practice. “How much do you need?” Isn’t this the question that leads off most local government budget discussions? It’s certainly a far easier question to answer, but shouldn’t the conversation begin with the more difficult and oftentimes nebulous question of “How much do we have?”

Devoting more time to revenue analysis is a critical element in gaining a clearer understanding of 1) what factors truly drive our individual revenue streams; 2) how to develop more meaningful and accurate multiyear forecasts, and, most important; 3) how much is actually available to spend. If managers have more clarity about what factors might impact revenue sources, they can improve their ability to foresee those changes before they happen and react to them before they arrive on the doorstep. By taking a more diagnostic approach, it isn’t terribly difficult to determine where revenues specifically come from and assess what internal or external forces might cause them to grow and shrink.

At the Center for Priority Based Budgeting, we're the first to admit we don't have all the answers. However, we do offer unique and innovative concepts and resources that allow local government communities to better understand their fiscal position and comprehensively model a multi-year variety of financial scenarios that provide options and solutions based on each individual communities unique goals and challenges (something very few municipalities perform to their detriment).

As author Banham summarizes his piece, "Still, cities must carefully weigh the risks of bankruptcy. It can tarnish a municipality’s reputation, steering businesses in other directions. It also affects the ability to attract bond investors, potentially scaring them away for good. “I wish we could go back and ask Moody’s, Standard & Poor’s and the other rating agencies why they gave AAA credit to these places years ago, when they were making these risky promises and deals,” Pagano muses.

It’s too late to do that, of course. But it’s not too late to do something. “If municipal finance leaders don’t take charge of these problems now, they’re aiding and abetting the equivalent of a Ponzi scheme,” Deis charges. “Finance is either a part of the solution or part of the problem.”

"But it's not too late to do something." And that "something," as we've previously stated in this article, is to consider a completely different perspective. In order to achieve success and accept the challenges that are ahead, we must see more clearly how to manage, use, and optimize resources in a much different way than has been done in the past. This new environment demands a new vision of the future.

For managers, resources can appear to be scarce because of our tightly clenched grasp on some commonly held assumptions from which they need to break free. There is a different way to see things.

Keep an eye on the CPBB blog for further updates. Sign-up for our social media pages so you stay connected with TEAM CPBB!

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If you're thinking of jumping into the world of Fiscal Health and Wellness through Priority Based Budgeting we would certainly like to be part of your efforts! Contact us to schedule a free webinar and identify the best CPBB service option(s) to meet your organization's particular needs.

"DATA VISUALIZATION" for Local Government

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