Multi-Year Projections & Fiscal Planning in Local Governments – Status and Impact

1. Multi-Year Projections & Fiscal Planning in Local Governments – Status and Impact Presentation at the 2014 MD GFOA Summer Conference Holly Sun, Deputy Director of OMB, Prince George’s County, MD and Ph.D. Candidate, George Washington University June 20, 2014

2. Background • “State and local government sector continues to face near-term and long-term fiscal challenges that grow over time.” - GAO projections in April 2012 • A long-range fiscal planning framework and has been advocated by professional organizations as a promising approach/tool • GFOA: “long-term financial planning” • World Bank: “medium-term expenditure framework” (MTEF) • Limited information on the actual practice among local governments

3. Questions • Are multi-year fiscal planning and projections widely used among local governments? • How are they implemented? (design, process, players, etc.) • Does such a practice make a difference? • How to make multi-year projections and fiscal planning more effective?

4. 2013 Survey (Spring) • Survey developed in collaboration with GFOA to study the practice and perceived impact of multi-year fiscal planning and projections among local governments with a focus on the General Fund • Distributed to approximately 1,341 GFOA Distinguished Budget Presentation Award winners, with 559 responses (41.7% response rate): • 537 local governments from 44 states (344 municipalities, 91 counties, and102 special districts such as schools, parks, transit authority, etc.) • 2 state governments • 20 local & provincial governments in Canada

5. Is Multi-Year Projections and Fiscal Planning Widely Implemented?

6. Wide Implementation More than 78% of responding governments reportedly implement multi-year projection for the General Fund. The percentages are also high for multi-year planning practices for CIP , fiscal policies, strategic planning, and other funds.

7. Comprehensive Multi-Year Frameworks Many governments use a comprehensive multi-year fiscal planning framework with multiple components – over 59% reportedly implement at least five out of the seven listed multi-year practices.

8. Increased Momentum Among the responding governments, the portion that adopts multi-year projections for the General fund has increased significantly in the past two decades.

9. How are these multi-year frameworks developed and implemented? Design, Purpose, Players, Process, etc.

10. Comprehensiveness of Document Most of the reported multi-year projectionsand fiscal plans include key revenues, expenditures and projected fund balance, but less than half of them offer solutions or scenarios to address identified issues.

11. Transparency & Communications Most projections results are presented to critical decision makers – the legislative authority (84.0%) and the executive authority (70.6%). Slightly over one fifth of the governments present projection results to five or six stakeholders; about one third share the results with three to four listed stakeholders; 44% inform only two stakeholders or less.

12. Engagement in Multi-Year Projections / Planning Central budget/finance offices reported play a critical role in developing multi-year projections. Other main players include: • senior management (nearly 90% of the time) • individual departments (three fourth of the time) • the legislative authority (slightly over 50%) Other players (citizen advisory boards, revenue/expenditure panel, etc.) are less frequently engaged.

13. Integration With Strategic Planning Close to half of the responses indicate that their multi-year expenditure projections either have no observed linkage with the government’s long-term strategic plans or are primarily driven by other factors. The rest respond that their multi-expenditure projections largely match strategic priorities by • sector (e.g., public safety) – 17% • Department – 26% • Program – 10%

14. Key Challenges / Obstacles • Lack of confidence in projections for out years • Administrative burden • Concerns on its usefulness • Difficulty to integrate multi-year projections with long-term strategic priorities • Lack of interest from the elected officials

15. Does Multi-Year Projections and Fiscal Planning Make a Difference?

16. Impact Evaluation – Framework Survey respondents asked to provide ratings (0=no impact, 1=little impact, 2=some impact and 3=significant impact) on multi-year fiscal planning’s effect on improving five aspects: Fiscal discipline and long-term fiscal sustainability Allocation efficiency (match strategic priorities) Operation efficiency Agencies’ involvement Transparency / Citizens’ understanding Note: the five aspects are primarily based on the framework used by the World Bank and IMF to assess the effectiveness of MTEFs and public finance management

17. Effectiveness Perceived High In particular, 90% responses indicate that multi-year fiscal framework has an impact on fiscal health, and 60% believe this impact is “significant”

18. How To Make Multi-Year Projections and Fiscal Planning More Effective? Survey Responses Statistical Analysis Results

19. Strong Purpose and Clear Targets • Multi-year projections and fiscal planning is designed to not only inform on trend and issues, but also to help achieve clearly identified fiscal/strategic policy goals, such as: • Certain fund balance level • A structurally balanced budget • Improved performance on priority services

20. Quality Projections and Presentation • Quality – Accuracy, Comprehensiveness, and Simplicity • Engage stakeholders and experts to improve projection accuracy • Include detailed assumptions, analysis and implications • Use graphs and bullets to deliver key messages • Strategies / options / scenarios needed • Showing strategies / options to address the predicted fiscal issues is critical to facilitating candid dialogues among key stakeholders regarding tradeoffs between options and consensus building • Integration • Projections/plan closely reflects multi-year strategic priorities rather than showing a status quo scenario alone

21. Collaboration and Transparency • Involve key players in the development of multi-year projections/plan development to improve: • quality of the projections • understanding of fiscal outlook • consensus building on priorities • Communicate results of the multi-year projection results with key stakeholders • Facilitate strategic discussions for understanding and decisions

22. Integration with the Annual Budget • Present multi-year projections to the legislative authority (Council) before or during the annual budget reviews • Make the multi-year fiscal outlook and planning an official component of the annual budgeting process • On-going modifications, evaluation and follow-up

23. Summary of Success Factors Survey Reponses Statistical Analysis Results Quality of multi-year forecasting On-going modifications, evaluation and follow-up Multi-year projections made an official component of the annual budgeting process Support or buy-in of elected officials Collaborative approach Comprehensiveness of the multi-year projection/planning materials Strategies / Options included Multi-year projections/planning designed to achieve a structurally balanced budget or certain level of fund balance Integration between projections and multi-year strategic priorities at a detailed level Multi-year projections are presented to the legislative authority (council) before or during the annual budgeting reviews Engage more players in developing multi-year projections Projection results are presented to more stakeholders

24. Conclusion • Multi-year Projections and Fiscal Planning can be an effective policy tool that helps improve decision making and fiscal health • Its success lies in the fundamentals (e.g., the quality of projections and presentation materials) as well as its ability to inform decision makers and facilitate candid dialogue among key stakeholders regarding priorities and strategies to reach policy goals in a multi-year framework • Certain factors (purpose, comprehensiveness, collaboration, integration level, etc.) prove to be critical to its effectiveness

25. Reference and Contact • More details regarding findings from the survey can be found in an article by Holly Sun (“Improving the Effectiveness of Multi-Year Fiscal Planning”) published on Government Finance Review, February 2014 • Feedbacks, questions, and experiences to share… are welcome • Contact: hsun@co.pg.md.us or holly.w.sun@gmail.com