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How to Develop and Adopt Financial Policies

How to Develop and Adopt Financial Policies. Government Finance Officers Association of Arizona August 10, 2006. Financial Policy. The establishment of a framework to encompass the broad scope of governmental planning and decision-making with regard to the use of resources. Legal Constraints.

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How to Develop and Adopt Financial Policies

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  1. How to Develop and Adopt Financial Policies Government Finance Officers Association of Arizona August 10, 2006

  2. Financial Policy • The establishment of a framework to encompass the broad scope of governmental planning and decision-making with regard to the use of resources.

  3. Legal Constraints • State • Expenditure limitation • Property tax levy • Budget adoption • Governing charter • GAAP

  4. Charter Examples • Ability to levy taxes • Maximum property tax levy • Annual audit • Direct investments • Contract/purchase limits • Sale of city property

  5. Charter Examples (cont.) • Establishment of fiscal year • Vote required for certain bond issues or municipal construction • Direct budget process/adoption

  6. Stakeholders • Council • Citizens • Lenders

  7. Areas of Consideration • NACSLB – Recommended Budget Practices – Four Principles • Establish Broad Goals • Develop Approaches • Develop Budget • Assess & Adjust • GFOA – Adopted Policies Under NACSLB Principle 2

  8. Areas of Consideration • GFOA Recommended Financial Policies (Minimum) • Financial Planning Policies • Revenue Policies • Expenditure Policies • Other Policies • Purchasing, Capital, Investment

  9. Financial Planning Policies • Balanced budget • Long range planning • Asset inventory

  10. Financial Planning Considerations • Balanced budget approach • Balance for current year/longer term • Sustainability • Fund balance (reserve) requirements • Governmental • Enterprise

  11. Financial Planning Considerations (cont.) • Fund balance available for reappropriation • Revenue

  12. Revenue Policies • Diversification • Fees & charges (rate review) • Use of one time/unpredictable revenue • Fund balance • Grants Revenue Diversification

  13. Revenue Diversification • Improves the ability to handle fluctuations in individual revenues • Policy should identify approaches used to improve diversification (i.e. sensitivity to rate changes, fairness/burden of the tax or fee, etc.)

  14. Fees & Charges • Identifies the manner & extent to which these revenues cover the cost of service provided • Should also address the frequency of studies • May want to be explicit about costs not covered

  15. One-Time/Unpredictable Revenue • Policy should limit the use of these types of revenues • Allowable uses should be defined – reserve funding, capital purchases, early debt retirement • Bond refundings, sale of assets, grants

  16. Expenditure Policies • Debt Capacity, Issuance & Management • Reserve/Stabilization Accounts • Expenditure Accountability

  17. Debt Capacity • When is debt financing to be used • Repayment terms • SID, MPC, COP’s, revenue, etc • Financial covenants • Citizen debt load burden • Interfund borrowing

  18. Reserve/Stabilization • Discretionary Protect Against Temporary Revenue Short Falls or One-Time Exp. • Consider Minimum & Maximum Level In the Policy • Unreserved • Unreserved/Designated – Rainy Day, Contingency, Etc.

  19. Expenditure Accountability • Policy to Compare Actual Expenditures to Budgeted Expenditures • Both Operating and Capital • Ensure Consistent Basis of Reporting

  20. Purchasing/Accounts Payable • Dollar limits • Capitalization limits • Cooperative agreements • Payment turnaround time

  21. Capital • Single year or multiple year plan • Pay as you go vs. debt • How will you budget/pay for future expansion/replacement/maintenance • Sinking fund? Grant? Bonding? • Minimum levels of investment

  22. Investment • Risk • Liquidity • Yield • Pooled cash • Management – in house/outsource • Collateralization of deposits

  23. Adopting Policy • Formally – Council or Board Action • Summarized/Adopted in Budget Documents • Separate Council Action • Informally – Internal Policy

  24. Adopting Policy • Tempe’s Process to Establish Policy Levels • Debt Policies • Goal = Maintain Bond Rating • 10 Benchmark Cities With Comparable a) debt ratings, b) population, c) General Fund revenue d) Cert of Achievement • Indicators measure debt burden and debt capacity • Indicators Measured

  25. Adopting Policy (cont.) • Tempe’s Process to Establish Policy Levels (cont.) • Reserve/Stabilization Policies • Goal = Maintain Bond Rating • Same 10 Benchmark Cities • Indicators measure debt burden and debt capacity • Policies Established at/above the average of the benchmark cities

  26. Adopting Policy (cont.) • No One Size Fits All for Each Government – Policies should be customized to address the long term goals of organization • Policies should be reviewed/updated, added and deleted regularly

  27. Resources • GFOA & GFOAZ • NACSLB • Other governmental entities • Read those budgets! • Lenders • What do they need to give you money?

  28. Barbara Goodrich – City of Flagstaff (928) 913-3201 bgoodric@ci.flagstaff.az.us Tom Duensing – City of Tempe (480) 350-8866 tom_duensing@tempe.gov Thank you!Questions?

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