January 19, 2011
The Civic Federation often recommends that local governments undertake long-term financial forecasting and planning, which the Federation believes is one of the single most important financial practices for local governments to undertake. Other groups such as the Government Finance Officers Association (GFOA) and the National Association Advisory Council on State and Local Budgeting also consider long-term financial planning to be a pillar of proper financial management. A recent GFOA white paper identified long-term financial planning as the central tool for local governments to become financially resilient, which is characterized by an ability to sustain external shocks such as an economic downturn.[1] Credit rating agencies have also recognized the importance of long-term financial planning. For example, Standard and Poor’s Ratings Services states in its ratings criteria that “a government’s financial management practices is an important factor in […] analysis of that government’s creditworthiness” and one of the practices examined is long-term financial planning.[2]
The lack of long-term financial planning has been a key contributor to some of the biggest fiscal challenges facing Northeastern Illinois area governments. For example, as identified in our FY2011 analysis of the City of Chicago Budget, the City’s operating shortfall began prior to the economic downturn. In 2007, the City’s economically sensitive revenues were peaking[3] yet the City was drawing down its Corporate Fund balance and beginning to use its Skyway Mid-Term Reserve Funds. Prudent long-term financial planning should entail building up reserves in favorable economic conditions to prepare for inevitable economic recessions. The Civic Federation has been recommending since at least 2001 that the City of Chicago undertake a formal long-term financial planning process that is presented to key policymakers and stakeholders.
A lack of financial planning was also a major deficiency of Cook County’s 2008 sales tax rate increase. As described in the Civic Federation’s Cook County Modernization reportreleased in October 2010, the sales tax increase was not implemented within the framework of a larger financial plan and as a result the County’s deficit quickly reemerged. The report recommends that Cook County undertake a long-term financial planning process in 2011. Cook County Board President Toni Preckwinkle’s transition team recently released a report, which concurred that adopting the sales tax increase without a plan was problematic and that the County’s budgeting should be improved through long-term financial planning.
Some governments have a financial planning process that is undertaken internally by management. However, no matter how sophisticated a local government’s internal planning process may be, unless it is shared with all stakeholders it is insufficient. The chief executive and his or her management team is only one actor in the budget process. In order to successfully take on the difficult decisions all stakeholders need to be engaged in the planning process. The GFOA describes the long-term financial planning process as “not just a staff-driven process. It is consensus-driven and inclusive, involving elected officials, staff, and the public.”[4]
The following are some benefits of involving all stakeholders in the long-term financial planning process:
Refinement of Forecast:
Involving stakeholders in financial planning can help make forecasting more realistic. Operating departments can improve the qualitative judgments while elected officials can review critical assumptions.[5]
Shared Sacrifice:
Stakeholders will be more likely to make sacrifices if there is open dialogue and clear communication of budgetary challenges. For example, Oakland County, Michigan regularly shares budgetary projections with all employees, which allowed them to reduce salaries by 2.5 percent in two successive years without great controversy in order to avoid layoffs.[6]
Institutionalizes Financial Planning:
The involvement of elected officials provides legitimacy to the process.[7] In addition, formal financial policies adopted by the legislative body can help preserve practices through changes in leadership. Citizen engagement can generate grassroots support for financial planning within the community so that it becomes a routine and expected government practice.[8]
Promotes Strategic Decisions:
A long-term financial plan helps promote strategic thinking as it makes “the long-term consequences of decisions apparent […] Financial planning transforms discussions that occur among the management team and elected officials.”[9] For example, governments studied by GFOA were able to build support for strategic investments such as technology enhancements through financial forecasting.
Prioritization of Services:
Input from the public and elected officials is critical in effective prioritization. The long-term planning process is an opportunity to communicate the cost of services and available resources. The long-term financial plan should consider the preferences and policy outcomes that the community desires.[10] As governments are increasingly faced with difficult decisions they should seek public input regarding appropriate service and taxation levels. In addition, using the long-term planning process can help provide guidance to departments who are implementing budget reductions.
Implementation of Plan:
The involvement of all stakeholders results in a long-term financial plan that better reflects the interests of various groups and will therefore garner more support for the plan’s implementation.[11]