Long-term Financial Planning for Local Governments

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Challenges facing local governments

1) Economic transition impacts the tax base
2) Aging population (change in voting/spending patterns)
3) Structural adjustments resulting from shifting energy use
4) Tax and expenditure limitation measures
5) Federal government deficit impacts on local government
6) Deteriorating capital infrastructure

TELs

tax and expenditure limitations

TABOR

Tax payer bill of rights legislation

Demographic Dividend

population within the age range to produce economic surplus but w/o dependents using up the resources

What is Long-term Financial Planning

Combination of financial forecasting w/ financial strategizing to identify future challenges and opportunities, cause of fiscal challenges and opportunities, cause of fiscal imbalances and strategies to secure financial stability

Why undertake an LTFP

* Incorporate financial perspective into organizational planning
* Stimulate long-term thinking
* Stimulate "big picture" thinking
* Raise specific issues
* Clarify strategic intent
* Impose discipline
* Communicate to citizens
* Demonstrate good management to bond rating agencies

LFTP Phases

1) Mobilization Phase
2) Analysis Phase
3) Decision Phase
4) Execution Phase

The Mobilization Phase

1) Aligning resources
2) Preliminary financial analysis
3) Identifying service level preferences and policy
4) Validating and promulgating financial policies
5) Articulating the purpose of LTFP
6) Defining scope

The Analysis Phase

* Information gathering phase
* Trend projection
* Financial balance analysis

Trend Projection

* Analysis Phase
* project long term revenue and expenditures
Step 1: revenue projections
Step 2: expenditure projections
Step 3: long-term debt analysis

Financial balance analysis

diagnose any potential future imbalances btw desired financial position and projected position

The Decision Phase

* Decision on how to respond to the information uncovered
* Financial strategies for bettering the financial position

The Execution Phase

* budget and other tools
* regular monitoring

Fiscal Environment Analysis

identifies a government's fiscal strengths and weaknesses, which define both opportunities for improvements and constraints on future activities

Domain Knowledge

subject matter expertise about a particular field of interest

Contextual Information

specific factors in the environment that could impact financial position

6 Factors Common to Fiscal Environmental Analysis

1) Sufficiency
2) Flexibility
3) Vitality
4) Equity
5) Demand
6) Political Environment

Sufficiency

* Ability to obtain resources adequate to provide planned services
* Must include economic activity b/c economy determines revenue

Macroeconomic Drivers

* larger economic environment

Interest Rate Spread btw short and long-term bonds

* Macroeconomic Drivers
* leading indicator
* indicator of general financial condition
* rises when short-term rates are low
* falls when short term rates are high

Indications by market of Recession

When the difference btw long and short term rates begins to narrow or short term rates exceed long-term rates

Housing Starts

* Macroeconomic Drivers
* leading indicator
* willingness on the part of consumers to make a major investment

National Association of Purchasing Managers Index

* Macroeconomic Drivers
* leading indicator
* national survey of purchasing managers
* indicator of how well businesses are doing

Employment

* Macroeconomic Drivers
* coincident indicator
* proxy for income currently being generated in the economy

Industrial Production

* Macroeconomic Drivers
* coincident indicator
* estimate of all non-service goods currently being produced in the US

Job Growth

* Macroeconomic Drivers
* Regional coincident indicator
* number of persons employed in the current month by the number employed in that same month of the previous year

Exports

* Macroeconomic Drivers
* Regional coincident indicator
* drive basic employment or employment that brings in new income from outside the region

Consumer confidence

* Macroeconomic Drivers
* Leading indicator
* willingness of people to spend in the economy

Building Permits

* Macroeconomic Drivers
* Leading indicator
* consumer and business willingness to make a major investment

Leading Indicators

gives a picture of where the economy is going

Coincident Indicator

describes the economy's current condition

Microeconomic Drivers

local economic environment

Current Resource Sufficiency

an inward examination looking at revenue and expenditure structures to first identify any weaknesses inherent to either and second if they are likely to remain in balance

Revenues per Capita

* Current Resource Sufficiency measure
* revenue relative to population

Revenue Growth Rates

* Current Resource Sufficiency measure
* if revenue source is unlikely to grow at least as quickly as inflation, reliance on that revenue may compromise sufficiency

Levels of Interfund dependency

* Current Resource Sufficiency measure
* If other funds heavily support GF revenues then this may indicate insufficient resources to support the level of service the government is providing

Underfunded Liabilities

* Current Resource Sufficiency measure
* may indicate insufficient resources to both make expenditures to provide day to day services and to fund long term liabilities

User Charge Coverage

* Current Resource Sufficiency measure
* describes the extent to which user fees cover the cost of providing the service

Use of Debt to Fund Current Requirements

* Current Resource Sufficiency measure
* A sign that current resources are not sufficient to cover current service obligations

Expenditures per Capita

* Current Resource Sufficiency measure
* may indicate if the cost of providing service is increasing beyond the government's ability to pay

Employees per Capita

* Current Resource Sufficiency measure
* rising ratio has the same implications as a rising expenditures per capita ratio

Expenditure Growth Rates

* Current Resource Sufficiency measure
* can current service levels be maintain in future years without the need for significant changes

Operating Expenditures Over Total Expenditures

* Current Resource Sufficiency measure
* A lower result suggests that infrastructure is being maintained adequately

Flexibility

* govnt's ability to adapt its fiscal structure to changing conditions
* Ability to modulate service levels according to resource availability
* Ability to shift resources to where they are most needed

Fund Balance

* Component of Flexibility
* describes the resources the government has available in reserve to meet unexpected needs

Revenue Portfolio Composition

* Component of Flexibility
* extent to which revenue sources are under direct control of the agency
* composition of revenue sources and revenue restrictions

Elasticity

degree to which a revenue increases or decreases with economic conditions

Cost Structure

* Component of Flexibility
* extent to which resource commitments can be quickly realigned to adjust to changing conditions

Debt

* Component of Flexibility
* current debt levels, payment stream obligations and ability to issue new debt

Mandates

* Component of Flexibility
*higher levels of gov. can mandate subsidiary levels of gov. to provide certain services

Components of Flexibility

1) Fund Balance
2) Revenue Portfolio Composition
3) Cost Structure
5) Debt
6) Mandates

Vitality

ability of the community's economy to sustain government services

Components of Vitality

1) Population
2) Businesses
3) Land Use
4) Infrastructure (ie capacity & condition)

Equity

distribution of tax burden for funding government services

Components of Equity

1) Value for Tax Dollar
2) Total Price of Government
3) Intergenerational Equity

Value for the tax dollar

* The most fundamental component,
* The extent to which taxpayers perceive they are receiving good value

Total Price of Government

understand the total (all forms of government) cost of government to which residents are subject

Intergenerational Equity

How payment for debt is distributed over current and future generations of taxpayers

Demand

match between services provided by government and the revenues available to fund them

Current Demand

scrutinizes the current level of service for mismatches btw public requirements and current service efforts

Service deficits

useful to identify pent-up demand

Service-Specific Demand Indicators

Performance measures can be used to gauge demand

New and Changing Demands

* forward looking techniques
* indicator of demand: Population growth, future planned developments and annexations or personal income changes

Political Environment

politics influences how and what revenues are collected, resource allocation and how the organization is managed

Components of Political Environment

1) Elected Officials
2) Management Infrastructure
3) Interest Groups
4) Other Governmental Units

Elected Officials (political environment)

prime factor in determining the financial position of government through both financial and service policies

Management Infrastructure (political environment)

the strength of government's management infrastructure determines the quality of day-to-day financial management

Principle of subsidiarity

decisions should be made by the organization level no higher than that required to perform the function relative to that decision

Practices for Effective Fiscal Environment Analysis

1) Maintain flexibility in the environmental model
2) Follow the Causal Chain
3) Make Use of Qualitative and Quantitative Analysis
4) Extend Capabilities Through Collaboration

Revenue Forecasting Techniques

1) Judgmental
2) Historical Trend Analysis
3) Regression Analysis
4) Hybrid Techniques

Judgmental Revenue Forecasting Technique

the forecaster relies on his/her professional expertise to predict future values

Historical Trend Analysis Revenue Forecasting Technique

historical average rate of change in a revenue source and then use this rate to predict future revenue yields

Regression Analysis Revenue Forecasting Technique

a statistical procedure based on the relationship between independent variables (factors affecting revenue source) and a dependent variable (resource being predicted). Assumes a linear relationship exists
* Must have sufficient historical data (10-15yrs)

Independent variable(s)

the factor the financial planner believes, based on observation and expert judgment causes change in revenue yields

Hybrid Techniques

* most common combination is historical trend analysis and judgmental techniques
* Advantage to doing so is that they are based on different sources of information

Economic Modeling

* practice of building elaborate models of the economy (local, state or national) using mathematical techniques
* improves the forecasters domain knowledge

Three Examples of Economic Modeling

1) Location quotient analysis
2) Shift-Share Analysis
3) Fiscal Impact Analysis

Location Quotient Analysis

examines the prevalence or concentration of a particular industry in the locality compared to the nation as a whole

Shift-Share Analysis

examines how employment by industry has changed compared to the national economy

Fiscal Impact Analysis

provide useful information on yield from new development leading to a more precise overall projection

Practices for Good Revenue Forecasting

1) Develop and Explicit Revenue Model
2) Aggregate and Disaggregate Projections
3) Know the Data
4) Extend Capabilities Through Collaboration
5) Make Effective Use of Technology
6) Refine Forecast Methods

Revenue Model

is an intellectual framework that describes the government's revenue sources and the factors that impact their yield

Five Central Characteristics of a Revenue Model

1) Source Significance
2) Composition of individual sources
3) Revenue Policy
4) Revenue Cycles
5) Role of One-time Revenues

Disaggregate Projections

examining the subcomponents of an individual revenue source can provide important additional insight into revenue behavior

Aggregate Projections

* it is useful to analyze different revenue sources together
* Only by looking at all forecasted revenue can one determine there is enough resources to meet service demands

Statistical Validation Techniques

* Sensitivity analysis
* Regression Analysis statistics

Two Key Factors of Expenditure Forecasting

1) Cost escalation
2) New operating expenditures

Cost Escalation

* increases in the cost of doing business
* includes inflation, general rise in prices and the reduction in the relative value of money

New Operating Expenditures

* cost to operate and maintain capital assets (OCI)
* cost of new services or programs

3 ways to capture new service costs

1) Modified zero base approach
2) Explicit Policies Adopted by Elected Officials
3) Provide a general allowance

Perspectives of Debt Analysis

Budgetary Impact
Community ability to pay

Community Ability to Pay Debt Ratios

*Net direct debt per capita
*Net direct debt by AV(or full cash value)
*Net direct debt divided by personal income
*Debt service per capita or per capita personal income
*Net overall debt per capita (overlapping debt)

Budgetary Impact Debt Ratios

* Debt service as a % of non-capital expenditures
* Debt service divided by general fund revenue
* Comparison against statutory debt limitations

Revenue Debt Debt Ratios

* Debt Service coverage
* Debt service safety margin
* Debt service as a percentage of net revenues

Scenario Analysis

can describe the potential long term impact of future debt issuances

Fiscal Deficits

* comparing revenue and expenditure projections to see where they diverge

Environmental Challenges

Unfavorable trends in the environment such as decreasing property values

Financial Policy Weakness

1) a failure to live up to the financial standards described in policies and
2) the need for new/revised policies to provide standards where they were lacking or inadequate

Financial Strategy Development Mechanisms

1) Executive Staff and Board Collaboration
2) Constituent Prioritization Survey
3) Citizen Advisory Committee
4) Community forum
5) Employee workgroups
6) Board Workshop

Budgeting for Results

* set out the priorities/needs
* then the government "buys" solutions from service providers up to the $ amount available

Modified Budgeting for Results

* base budgets are left relatively intact
* additions are highly visible and subject to intensive scrutiny in the context of priorities

Prioritization Single-Iteration service reduction

* explicitly prioritize the services
* cut funding or even eliminating lower priority services

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