The Recession is Behind Us, but Government Finances Have Not Changed

A decade or so after the worst financial crisis in modern American history, some state and local governments continue to grapple with unbalanced operating budgets and inadequate reserves. With the U.S. in the midst of the longest expansion phase ever, the likelihood of a downturn continues to grow, making it increasingly important for governments to assess their fiscal sustainability and proactively prepare for uncertainty ahead.

Unlike annual budgets, which only consider short-term revenue and expense targets, strategic financial planning projects analyze the impact of changing assumptions on an entity’s long-term horizon. Detailed below are five best practices that governments should adhere to when developing a long-range forecasting model:

#1 Focus the Scope – Do Not Let Your Planning Wander

It is essential to define a financial model’s requirements, intended use and audience. Establishing the scope of the model provides a decision-making framework for controlling changes and yields a clear process for capturing requirements and meeting the expectations of stakeholders.

Many governments make the mistake of trying to incorporate too much financial data into the model by projecting every line item from the general ledger. Doing so, however, makes the planning process overly complicated and unwieldy, while also introducing false precision into the projection.

Instead, identify a list of key revenue and expense drivers and focus sensitivity and “what-if” analyses on those critical components.

#2 Make it Comprehensive – Strike the Right Balance Between Specificity and Inclusiveness

The multi-year plan forecast must strike a balance between being comprehensive enough so that it accurately represents the operations of your government, while also avoiding unnecessary details that can impede the planning process. Therefore, the appropriate revenue and expenditure drivers, such as property taxes, personnel expense, and debt and capital, must be considered in order to accurately determine the impact on your bottom line.

Relevant funds should also be included. A good multi-year plan will include the general fund and any major operating funds guaranteed by the general fund or those that receive transfers from it. Where applicable, water, sewer and other enterprise funds should all be considered.

#3 Consider Alternative Scenarios – Explore Beyond Best, Worst and Expected Cases

Flexibility in scenario analyses and sensitivity testing is critical. Available tools, such as those found in traditional budgeting and forecasting programs, generally require limiting the analysis to best, expected and worst-case scenarios.

Meanwhile, projection forecasting models should permit consideration of unlimited variables and various permutations of scenarios. Anything less may limit the full functionality of the model, making governments less prepared for unpredictable economic conditions.

#4 Collaborate with Stakeholders – Do Not Plan in a Bubble

A multitude of internal and external stakeholders should invariably be involved in the multi-year planning process. To reach a consensus on a long-term financial direction, budget analysts, operating departments, elected officials and executive stakeholders require the ability to effectively communicate with one another.

Version control issues can obstruct or hinder communication channels between model builders and their stakeholders. Consequently, be sure to consolidate versions or utilize tools that facilitate version control and communication. Effective planning necessitates the consideration of a multitude of opinions with a platform that enables real-time data collection and reporting functionality.

#5 Tell your Story – Build a Narrative Around your Government’s Financial Outlook

The main purpose of planning and modeling is to tell a financial story that moves decision-makers to action. Taking a multi-year approach changes the conversation on data and metrics – you can present the financial challenges to interested parties from a broader perspective and encourage people to think beyond their departmental boundaries.

Multi-year planning allows you to talk about what investments are worth making down the road in addition to what reductions you need now. Communicating those trajectories in a clear and concise manner will drive consensus in your stakeholders and inspire action in your government.

How can Synopsis Benefit your Government?

Synopsis is a financial planning software designed for local governments. It helps decision-makers answer the following questions:

• How would a change in local economic conditions affect local revenue and overall operating balance?
• How should labor negotiations or other personnel strategies be prioritized across wage adjustments, benefits reform, and work rule changes?
• What impact will increased spending on capital projects have on the operating budget?
• Is the local government well prepared to weather the next economic downturn, with sufficient reserves and manageable risk exposure?
• How might my credit rating be affected by any or all of the above?

Bottom Line

During periods of economic uncertainty, it is vital that governments continually assess their fiscal sustainability and simultaneously prepare for the future. To that end, the above steps are a good start toward achieving that goal.