Academic journal article The Journal of Government Financial Management

Developing a Comprehensive, Data-Driven Financial Risk Management Assessment: THE CASE OF THE CITY OF CHICAGO

Academic journal article The Journal of Government Financial Management

Developing a Comprehensive, Data-Driven Financial Risk Management Assessment: THE CASE OF THE CITY OF CHICAGO

Article excerpt


The global financial crisis of 2008 greatly impacted the finances of many state and local governments in the United States. These impacts are most clearly seen in the form of significantly lower tax revenues and increased expenses associated with greater use of social safety net programs. However, a portion of the stress on subnational government finances may have been avoidable if these entities had properly assessed their financial risks. This is most acutely seen in the recent receivership activities by some sizeable municipalities that did not prudently manage portions of their debt and financial derivatives portfolios. However, these municipalities are not alone. While many governments assess risk on an informal basis, few state or local governments have in place formal, comprehensive risk management frameworks that systematically assess and manage the various risks to their financial balance sheets.

This article provides a case study using data from the city of Chicago, the third largest municipality in the country, to show how it may be possible to more formally, comprehensively and systematically assess and manage its financial risks. While states and large cities forecast revenues and expenses under different economic scenarios, the advancement demonstrated is the aggregation of all financial assets and liabilities into a single risk assessment including items on the balance sheet that often are not forecasted/modeled systematically, such as variable rate debt, financial derivatives, pensions and reserve/ bond proceed funds (Glazier, 2013). By detailing how one city might measure and manage its financial risks, the case study offers governments a practical framework and potential platform to make similar risk assessments. While other government finance associations and public policy bodies have offered frameworks and other metrics for assessing financial risks, the Chicago case provides a real-world example of financial risk assessment that put in practice at the municipal level.


BMO Capital Markets and Martin Luby, an assistant professor at DePaul University, instigated and developed the financial risk management project to provide the city a comprehensive financial risk management platform related to its aggregate risk exposure. The platform was an attempt to allow the city to regularly assess and manage its financial risks as a means of making better long-term financial decisions that would mitigate impacts on city finances from future exogenous events similar to the recent global financial crisis. The objectives of the project were:

1. Measure and manage financial risk holistically;

2. Quantify the effects of stress scenarios on taxpayers;

3. Support financial contingency planning; m

4. Assist in focusing attention, setting priorities and justifying decisions for internal and external stakeholders such as:

8. Mayor and other city elected officials

b. Finance and budget departments

C. Rating Agencies

5. Identify Asset-Liability management opportunities; and

6. Enhance financial-economic sophistication among city staff.

One of the most notable aspects of this project was its scope and timeframe. The financial crisis had acutely alerted the city to risks related to its debt and interest rate swap portfolios, as well as other areas of city finances such as operating budget revenues and expenses, investments and pension funds. As such, the risk management platform quantifies financial risk by these functional areas. It also combines these analyses in an aggregate view of city financial performance and risk. From a presentation standpoint, the platform produces output data that detail financial risk statistics for each functional area as well as a high-level output data called the 'CFO Dashboard' that presents major financial statistics most relevant to a senior financial manager such as the CFO or mayor. …

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