Financial Policies: Rules of the Game for Local Governments

1. Financial Policies: Rules of the Game for Local Governments By Shayne Kavanagh, GFOA

2. Topics • What are policies? • The reasons for policies • Common policy areas • Making financial policies relevant

3. What Are Financial Policies? • Rules of the game set by the people in the organization • Baseline standards for financial stewardship that everyone agrees to

4. Why are policies important? • Institutionalize good financial management • Define boundaries • Promote long-term & strategic thinking • Manage risks to financial condition

5. Example: Reserves Policy • We will maintain reserves equal to 20% of our regular operating revenue • We will not use reserves to fund recurring expenditures, except in emergencies • When we use reserves, we will seek to replenish them as quickly as practicable.

6. Key Concept Accountability vs. Flexibility • Accountability: The requirements of responsibility to the public and to follow regulations • Flexibility: The ability of managers to take action in pursuit of public goals Policies can provide varying levels of discretion to public officials.

7. Accountability vs. Flexibility

8. Policy Areas We Will Examine • Reserves • Revenues • Budgeting and Financial Planning • Capital Planning • Debt • Investment

9. Reserves

10. How much is enough? Reserves are a Hedge Against Risk Current services? Preparing for Risk?

11. Consider Your Risks • More is not necessarily better. Too much reserves can erode public confidence. • Helps you find the “just right” amount • Helps elected officials better appreciate why you have reserves • Risk analysis process produces other ideas for mitigating risks

12. Extreme Events

13. Recessions

14. Triple-A Approach Uncertainty • Accept • Uncertainty is inevitable • Assess • Find potential impact, using reference cases • Augment • Uncertainty will usually be underestimated!

15. Assess Sales Taxes

16. Assess Monthly Revenues

17. For more information see GFOA report on Colorado Springs(Google “GFOA Colorado Springs”)

18. When Can Reserves Be Used? • Generally, limit to one-time uses • Avoid using for on-going commitments • Exception could be where there is a plan in place

19. Who Can Authorize Use? • City Manager, Council? • Right answer depends on your structure, but have an answer • Creative approaches… • Staff have authority up to a point, but council approval required if reserves get to low • Supermajority required to use reserves past certain point

20. What are the biggest risks your government faces? How confident are you that your reserves are sufficient to address them? 1 minute to think about it 2 minutes to talk with a neighbor Optional 4 – minutes to talk with three others

21. Revenue

22. What is the Proper Use of One-Time Revenues? • One-time revenue should be used for one-time uses • Buy a capital asset • Build reserves • Pay down debt • Think about volatile revenues… • Should usually large yields be considered one-time revenues?

23. How Do We Set User Fees? • Set cost recovery goals. Higher recovery goals may be appropriate when… • Service benefits individual, not general public • People can be excluded from the service • Service is elective • Periodic review of fees • Regular review and update • Review how services are provided

24. How Can We Make Sustainable Use of Grants? • Grants should align with your community’s goals • Don’t be enticed into things you wouldn’t otherwise do • Address what happens to grant-funded programs after the money runs out • Grant funded programs shouldn’t automatically be rolled into the regular budget

25. Budgeting and Financial Planning

26. What is a “Balanced” Budget? • Is it “sources equal uses”? • Would using this to pay staff salaries be sustainable? • Better definition • Ongoing revenues = on-going expenditure • One-time revenues = on-time expenditures

27. What is our Time Horizon? • Commit to Preparing a long-term plan • How far in the future the plan will look • Funds to be considered • Find Imbalances • Where and when do imbalances occur? • Find Solutions • Develop a balanced long-term plan

28. Capital Improvement Planning

29. What will the Scope Be? • Go for a long-term time horizon • 5 year minimum • Define what counts as a “capital asset” • Minimum dollar threshold – different from accounting standard for a capital asset • Consider maintenance projects that extend the useful life of the asset

30. What are the Operating Impacts? The cost to operate and maintain an asset often exceeds the original acquisition price The capital plan must take this into account

31. Are we Going to Maintain our Assets?

32. Debt Policies

33. What are Acceptable Conditions for Debt? • Fundamental: Debt should be used for capital assets and not operations • Compare debt to desire for cash financing • Wake County: “80/20 rule” • Permissible instruments • Avoid or limit risky instruments • Wake county limits VRD to 20% or less

34. What Maturity is Acceptable? • Maximums on life of debt • Address back-loaded payment schedules Wake County Policy: Repay 70% or more of principle within 10 years

35. How Much Debt Can We Afford? Wake County Policies • General & debt service fund balance at least 30% of revenues • Debt at less than 2.5% of County AV • Debt service at 20% or less of total expenditures • Repay 70% or more of principle within 10 years • 80/20 rule • 20% or less VRD

36. Investment

37. The Foundation: Scope • Which funds are subject to the policy? • Usually all but could be some exceptions… • Component units? • Funds held in trust? • Bond proceeds? • Objectives • Safety • Liquidity • Yield

38. Standard of Care • Authority to Invest • Who is responsible for investment? • Charged with creating detailed procedures • Conflicts of interest • Prohibit them! • Disclosure of financial interests • Prudence • Prudent person or prudent expert rule

39. Portfolio • Authorized Investments & Diversity • State law is a starting point, but address extent to which instruments could be used • Promotes safety, liquidity, yield • Prohibited Investments • Some may be allowed by state law but still may not be a good idea… • Derivatives? • Variable rate debt?

40. Keeping Policies Relevant

43. Making Policies Relevant • Pay attention to compliance with policies • Consider a compliance review checklist • Use policies to guide important decisions • Show how policies solve problems • Regular review and revision • Orient new elected officials

44. Example of Policy Self-Assessment

45. Using Policies to Guide Decisions Dashboard from Wake County’s Debt & and Capital Financial Model Helps decision-makers visualize current & expected position relative to policies. Includes scenario analysis.

46. Policy Solving a Problem Tempe’s Golden Cone of Prosperity

47. What steps could you take, within your existing power and resources, to make policies more relevant in your government? 1 minute to think about it 2 minutes to talk with a neighbor Optional 4 – minutes to talk with three others

48. The End If you liked the presentation, get the book Financial Policies