The Road to Financial Sustainability: Planning Challenges

By Kavanagh, Shayne C. | Government Finance Review, October 2007 | Go to article overview
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The Road to Financial Sustainability: Planning Challenges


Kavanagh, Shayne C., Government Finance Review


Long-term financial planning is a vital discipline for creating and maintaining financial sustainability However, it requires a shift away from the short-term perspective associated with annual budgeting and towards a five- to 10-year perspective not normally associated with government financial management. Accordingly, long-term planning presents several implementation challenges. The purpose of this article is to identify the key challenges of long-term financial planning, especially for those just starting the process, and to describe how local governments experienced in long-term planning have addressed those challenges.

CHALLENGE #1 MOBILIZING FOR PLANNING

It can be difficult to mobilize an organization for planning, especially if there is not a pressing financial crisis motivating planning. Thus, the leaders of the planning process must make stakeholders aware of the need for planning and create a desire to participate.

Solution #1. Describe the better future available through planning. The leaders of the planning process, such as the city manager and CFO, can help participants envision a better future through financial planning. The interviewees for this article take a number of approaches to this. Some create a general vision around protecting the community's assets and reserves and taking action now to prevent future crises.This vision is captured by the adage of "running government like a business" and tends to resonate especially well with governing board members who have a business background.Others accentuate the ability of longterm planning to enhance service delivery. This vision focuses more on the services and capital improvements that the financial plan can help provide for the community and less on the numbers themselves. This vision speaks to board members who see service delivery as their primary purpose.

Once past the initial planning cycle, the leader of the planning process can point to previous successes resulting from planning in order to inspire the next planning cycle. For instance, Minneapolis used the planning process to develop and commit to a long-term strategy for managing its employee pension obligations, while PaIo Alto used financial planning to improve its bond rating to AAA, making Palo Alto one of very few California communities to achieve this rating. Scottsdale also benefited with improved bond ratings - as one of the few communities with AAA rating from all three credit rating agencies.

Solution #2. Describe the consequences of not planning. The converse of the better future available through planning is the deterioration in financial position that comes from inadequate planning. When using this approach, the leaders of the planning process must be careful not to be perceived as fear-mongering.

Minneapolis officials successfully used this tactic by simply pointing to an instance where insufficient financial planning put the city in an unsustainable position. In 1996, the city purchased some police cars outside of the normal purchase/ replacement schedule, and increased spending on internal services, such as computer replacements. The expectation that the spending would lead to longer-term efficiencies and savings did not materialize and the city was left with a combined deficit of $60 million. The repayment is scheduled to continue for many years. The council is now more inclined to consider the long-range implications of its decisions and is more reluctant to approve spending that results in immediate gratification but may prove unsustainable.

CHALLENGE #2 - PRESENTING FORECASTS

Presenting revenue and expenditure forecasts can be challenging because they can distract the governing board with questions of forecast precision and assumption validity instead of how to develop strategies to achieve and maintain financial sustainability This derails the planning process as the board becomes focused on scrutinizing the forecast and not on recognizing potential future financial imbalances and how to solve them.

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