Monday, February 10, 2014

The "Rosetta Stone" for Fiscal Literacy: What Municipal Leaders Must Know about Public Finance

"Failure to understand financial outcomes, even when combined with good faith, is more dangerous to states and localities than it has ever been." - Liz Farmer, Governing

"The CPBB's diagnostic approach to Fiscal Health and the development of it's unique "Fiscal Health Economic Modeling Tool" has profoundly changed the conversation between local government managers, finance professionals and elected officials." -  CPBB

There is nothing simple about the world of municipal financial stewardship. City and County elected leaders face a foreboding task with enormous implications. That is, they are tasked with the financial stewardship of their communities, often without any fiscal experience or training what-so-ever. In a strong economy, local leaders can often fake their way through the budget process, and even challenging fiscal decisions, without significant harm. But in a recessionary environment, financial illiteracy can quickly create fiscal peril.... up to and including municipal bankruptcy.

Governing has recently focused on this issue head on. Their new Finance 101 series "goes back to the basics to help public officials navigate the sometimes confusing world of GASB, OPEB, DBs and P3s." In a recent Finance 101 article, Financial Illiteracy: One of Government's Biggest and Least-Discussed Problems, the author Liz Farmer states, "failure to understand financial outcomes is more dangerous to states and localities than ever, and there's a big gap between what public leaders know about finance and what they need to know."

Farmer adds, "Elected officials practically everywhere are forced to make difficult financial 
decisions without the benefit of knowing exactly how the mechanics work. This has always been true
to some extent, but the learning curve is much steeper
now, due not only to the new regulatory climate but to the use of complex Wall Street trading products and gimmicks.

Most smaller jurisdictions are led by people whose understanding of intricate financial dealings is limited. And yet they have no choice but to engage in those dealings. They don't always know the right questions to ask, and if a decision comes back to haunt them they tend to be genuinely surprised. The biggest cities and states have the manpower and resources to pick their way through the new economy, but they are not immune to bad advice or poorly understood decisions."

It isn't just "bad advice" or "poorly understood decisions" that is leading this environment of financial illiteracy. Budget gimmicks, one-off and opaque accounting methods, and elaborate, complex, Wall Street structured "credit swaps" tantalize, and confuse, elected officials. In an age of local government "big data," the biggest loser(s) may be fiscal prudence and transparency if the volume of financial data and misdirected opportunities aren't carefully understood, prioritized and managed.

Farmer goes on to say, "Most elected officials don’t like to talk much about these issues. But they know that even at the most basic levels, government finance and accounting are anything but intuitive. Successful candidates often win their jobs on the basis of personal appeal, not on their mastery of policy or management details, and certainly not on their knowledge of Wall Street trading. Once in office, they are forced to learn an entirely new language—if they choose to. “You have people coming in who have absolutely no idea how the appropriations process works,” says Connecticut Rep. Diana Urban, who is also a former economics professor. “Oftentimes they don’t know what constitutes a fiscal year, and they certainly don’t know that you can push something into the next fiscal year to make it work.”

Budget documents and balance sheets are obscure papers with arcane difficulties lurking beneath the numbers. For example, the bonds that a locality issues to pay for a project will show up as revenue on a general fund statement. That statement is simply a tally of all operations and activities paid for out of general treasury accounts. But those same bonds will count as a liability on the overall government statement, which accounts for debt service and other special funds. Then there are legacy costs such as pension liabilities, which have their own unique accounting. It can make grasping a government’s actual financial status an impossible task for the untrained.

“When you think about it, I’m a retired cop and now I’m chairman of a finance committee of a $3 billion organization and the 10th largest city in the nation,” says San Jose, Calif., Councilman Pete Constant. “Can you imagine a corporation taking someone like that and putting them in charge of it with so little experience?” The same could be said for elected finance officer positions—Nevada Controller Kim Wallin, for example, is the first accountant elected to the job in that state in 50 years."

How can we equip elected officials, those who lead our cities, counties and thousands of other public institutions, often without the financial experience, knowledge, or expertise, to lead their communities? Without subjecting these municipal leaders to a regiment of time consuming fiscal lessons, what options do we have to provide tools and resources to those who determine our communities fiscal health and direction? The answers may not entirely lie in the fiscal education camp, but perhaps changing the conversation between staff and elected officials in the way fiscal information is transparently communicated is the answer. Enter the "New Wave" of municipal fiscal stewardship, communication and transparency!

The Imperative of "New Tools" in Creating Financial Literacy and Transparency

The recently published Volcker-Ravitch report places special emphasis on the harmful impacts that financial illiteracy and budget gimmicks create when the purpose is to intentionally (or unintentionally) mask or obscure financial problems. But what would true financial transparency look like?

CPBB co-founders faced the exact same dilemma when the principles of Fiscal Health were created to address these very issues. The budget book, the certified annual financial report (CAFR), and reports out of the financial system are great tools for finance professionals, but they prove insufficient for elected officials to clearly and simply answer the question: is the organization in "good shape" or is there trouble on the horizon? Furthermore, in a world of rapidly changing economic variables, the answer to that question today might not be the answer to that question tomorrow (see the recent ICMA Report on this very subject). 

Governing has also identified public financial accounting, transparency and reporting as major challenges (and opportunities). In one recent article, This Annual Financial Report Says What?, author Justin Marlowe identifies the challenges even the most sophisticated public finance professionals experience in attempting to digest public finance reports. Justin states, "As new users come into the fold we’re reminded that the defining feature of government financial reporting is complexity. A typical state or municipality’s comprehensive annual financial report, or CAFR, is hundreds of pages long and different parts of it follow different accounting assumptions. Critics say this is because those that set accounting standards are too ambitious. Others say it’s because government financial operations are enormously sophisticated, so reporting on those operations is inescapably complex."

The KEY Breakthrough:"Data Visualization" - A Picture is Worth a Thousand Words (and worth even more in numbers)

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. 

The key breakthrough in this area has been "data visualization" which allows for the easiest way of creating a common view, a common perspective that is simple and that staff and elected officials can agree on. Part of the reason that financial problems can be obscured or hidden is because many times decisions makers have no idea how to interpret the convoluted and often times complex financial information they're confronted with in the first place; hardly anybody can, and certainly not for the purposes of making policy decisions.

Data Visualization allows us to create a common view of the financial situation that is simple to understand and interpret, describes the clearly defined variables that can impact the financial situation, allows for "live" and "real-time" changes in these variables, and offers the ability for "dynamic" modeling of "what-if" scenarios - this is how transparency is created, and this is the essential first component of the paradigm shift required.

CPBB Web-based Economic Modeling Tool Overview

Why have newspapers moved to depend on "info-graphics" to consolidate, interpret and convey complex information? Why did ancient Egyptians depend on hieroglyphics, combining words and pictures to bridge communication differences?

Perhaps financial literacy is nothing more than coming to grips with the fact that policy makers and finance professionals and administrators don't come to the table speaking the same the same language. The Data Visualization of Fiscal Health modeling - the visual portrayal of complex economic datasets, has proven to be a unifying construct, a "Rosetta-Stone" (as we've heard used) to bring all of our stakeholders (elected officials, administration, staff and citizens alike) to see things from the same perspective. It's a "new lens" through which we all can come to see the world as clearly as the other - financial literacy, simplified.

Shifting the Paradigm: From Financial Literacy, to Crafting Policy with Financial Literacy (Priority Based Budgeting)

To complete the paradigm shift, however, requires us to graduate from simply understanding or becoming literate about our finances, to envisioning and enacting policy with a keen financial strategy in mind! How are we to approach the budget, what so many of our elected officials have come to know as "the most important policy document" we influence, with our new-found financial literacy, combined with what we were elected to do: take action to shape our communities for the better, through budgeting? Will our traditional approaches to the budget process get us there?

The truth is, financial problems are also effectively hidden and obscured because the budget process allows for it. Line item budgeting, incremental budgeting, zero-based budgeting were each attempts to better understand "how" money is spent, but these methods fail to address a more fundamental question: "why" money is spent.

To the point of the Volcker-Ravitch report, the question of whether or not public dollars are being used effectively is not answerable with the tools currently available to elected officials, decision makers, staff and citizens.

Priority Based Budgeting provides a comprehensive review of the entire organization, identifying every program offered, identifying the costs of every program offered, evaluating the relevance of every program offered on the basis of the community's priorities, and ultimately guiding elected and appointed officials to the policy questions they can answer with the information gained from the Priority Based Budgeting process, such as:
  • What is the local government uniquely qualified to provide, offering the maximum benefit to citizens for the tax dollars they pay?
  • What is the community truly mandated to provide? What does it cost to fulfill those mandates?
  • What programs are most appropriate to fund by establishing or increasing user-fees?
  • What programs are most appropriate for establishing partnerships with other community service providers?
  • What services might the local government consider “getting out of the business” of providing?
  • Where are there apparent overlaps and redundancies in a community because several entities are providing similar services?
  • Where is the local government potentially competing against private businesses within its own community?
Incredibly, just a few weeks ago, as if to accelerate the ushering in of the "New Wave," the credit rating agency Standard & Poor's upgraded the bond rating of Douglas County, Nevada by two levels, from A+ to AA, citing evidence of the County's efforts "to implement several fiscal health practices, including long-range financial forecasting, revenue and expense stabilization, and priority based budgeting." 

Unlocking the Mystery of Public Finance through "Big Data"

Governing goes further in advocating for greater accountability and transparency through open information or "big data" in public finance. In another Finance 101 article, How Accountability and Transparency Are Improving Public Finance, author Liz Farmer states, "These buzzwords can instill fear and trepidation in even the most progressive and tech-savvy public officials, but open information really does improve how cities operate." 

Liz adds, "But even more importantly, focusing on data and results has allowed Baltimore to hone a 10-year plan financial plan that uses the data to both take stock of its starting point and to outline its future. In other words, you have to know where you are order to figure out how to get to your destination

“Long-term planning is at the heart of being accountable for your city’s future,” Rawlings-Blake. “I know how tempting it is to make financial decisions that postpone tough choices. I think we inherited a lot of those decisions.”

Among the many reflections we've received from the communities we've partnered with, and one of the most unusual and yet eye-opening, was a comment that what is making this work so "useful," is the possibility that Priority Based Budgeting might be local government's version of BIG DATA.

New to the term, we looked it up: BIG DATA - a collection of data sets so large and complex that it becomes difficult to process using on-hand database management tools. The challenges include capture, curation, storage, search, sharing, analysis, and visualization. The trend to larger data sets is due to the additional information derivable from analysis of a single large set of related data, as compared to separate smaller sets with the same total amount of data, allowing correlations to be found to "spot business trends, determine quality of research, prevent diseases, link legal citations, combat crime, and determine real-time roadway traffic conditions."

What a possibility!

Is this BIG DATA in play?

We don't know, but we're excited. The new lens of priority-based budgeting makes it possible for elected officials, citizens, decision-makers and staff to agree and:
  • To see how to align scarce resources with the highest priorities of our communities.
  • To see the most appropriate service provider for the programs we offer.
  • To see what services residents are willing to pay for.
  • To see public and private-sector partnerships ripe for leveraging.                                                
  • To ultimately see a new way of determining which  services our local government is best suited to provide—services that have the greatest impact for the resources within the community’s means.
Our communities are showing us how the PBB model is unlocking previously undiscovered financial answers to questions they've been asking for a long-time. This is the purpose of our work, and based on feedback from our community partners we are definitely seeing results!

Next Steps

We chose "a Unique Lens" as the tagline for our non-profit for exactly this reason - our communities are seeing things we haven't seen before, as if they had a new tool with which to see their world. Our entire September 2012 PM Magazine article struck the same note:
"Challenges facing local governments today literally requires a new way to see. It’s as if our vision has been blurred by the extraordinary stress of managing in this complex economic environment. Whether attempting to rebuild in a post-recession climate, or persevering through another year of stagnating or declining revenues, the challenge remains: how to allocate scarce resources to achieve our community’s highest priorities. Through the new lens of Fiscal Health and Wellness through Priority Based Budgeting, which provides powerful insights, local governments are making significant breakthroughs.”

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).

"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 (economic) vision of the future. And a new fiscal literacy by decision makers.

For managers and elected officials, economic 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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