Most state and local government entities are obligated to assemble and publish an annual financial report (AFR) once a year. Whether the report is in the form of a Federally guided comprehensive annual financial report (CAFR) or a locally guided annual financial report (AFR), these municipal AFR's generally range from 110 to 250 pages, can take up to six months to complete and are intended to identify service provisions and the fiscal position of the organization.
In December 2013, the International City/County Management Association (ICMA), in conjunction with Northern Illinois University's Center for Governmental Studies, published a white paper titled Management's Perceptions of Annual Financial Reporting. This survey sets out to not only describe "the well-known, complex state of public sector financial reporting," but more importantly to "explore management's perspectives on how the various financial statements affect management, provide a benefit to stakeholders and assist management with understanding and implementing changes to their year-end financial statements."
The Center for Priority Based Budgeting (CPBB) is in business to assist local government leaders who are seeking service excellence, transparency to their stakeholders, a strong desire to achieve long-term fiscal health and to achieve the Results that are important to their community. This financial survey is of great importance to us as we strongly advocate the importance of using municipal fiscal data in the most innovative and effective ways possible. This includes economic fiscal modeling, multi-year budgeting and providing a "picture of fiscal health" through data visualization (which allows management and elected officials to actually see and model the current and future fiscal economic health of their community).
Key Survey Results
The two key local government consumers and, coincidentally, producers of these reports are:
- city/county managers and administrators
- finance officers/directors/managers
These two groups are collectively referred to as "management" going forward.
For entities reporting in accordance with generally accepted accounting principles, annual financial reports offer management a comprehensive view of their finances that acknowledges economic events.
These annual financial reports are valuable resources for assessing fiscal conditions, conducting comparisons to comparable entities and integrating their other managerial roles such as capital improvements planning, budgeting, strategic planning, investing, financing, benchmarking, etc.
For the most part (64 percent), management uses little to no audited financial statements to inform their policy decisions; less than 25 percent use their financial reports to inform their policy decisions.
It is estimated that annual financial reporting costs taxpayers approximately $10k to $50k, with some larger communities spending more than $200k.
Management perceives the purpose (or key benefit) of financial statements to be for compliance and accountability, not as useful information for informing decisions.
Key Survey Recommendations
Reassess content, semantics and structure of annual financial reports. More work must be done to determine how detailed the annual financial reports should be and how the information should be defined, standardized, and structured in order to increase its use in management's decision-making. Most respondents feel that these reports are predominantly a tool for compliance. However, there is rich data in these financial statements that could be used for added input in the decision-making process.
Leverage new technologies. New technologies could lend themselves to include rich details about government's finances without all the "noise" to better articulate the meaning of what is being reported based on the audience/consumer of information. For instance, digitized financial information could allow for consolidated reporting to present the big picture but still allow for others such as tax-payers or investors to go more deeply into the data.
CPBB Observations and Recommendations
What an interesting survey! From our perspective, local government entities (for the most part) are obligated to produce some form of annual financial report. Yet after spending up to six months of staff resources and somewhere between $10,000 to $200,000 of financial resources to produce a 100+ page financial report, less than 25% of local government leaders use their financial reports to inform their policy decisions or for input in assessing future operations?
We see a tremendous opportunity here to better utilize and expand the scope and purpose of annual financial reporting so that this critical economic information can be used for forecasting and will directly tie to all significant policy decisions. And we already have the economic data visualization tools to do just that!
The New (Economic) Lens
Taxpayers are perhaps expecting local government to provide even more support in meeting their social, physical, environmental, and economic needs, especially with the declining assistance in these same areas from federal and/or state sources.
How does local government continue to offer the important, even vital, services required by communities in a responsive and timely fashion?
How will finance chiefs address significant debt obligations while maintaining enough resources to provide prioritized services?
What can managers do to successfully navigate these challenging waters so that their communities become better, stronger, and more relevant than ever before?
Let’s consider a completely different perspective. In order to achieve success and accept the challenges that are ahead, we must see more clearly how to manage, use, and optimize resources in a much different way than has been done in the past. This new environment demands a new vision of the future.
For managers, resources can appear to be scarce because of our tightly clenched grasp on some commonly held assumptions from which they need to break free. Perhaps there is a different way to see things. A new lens.
Case Study - Wheat Ridge, Colorado
In 2012, Wheat Ridge City Council included the identification of core services as a top priority goal in their strategic plan. The City was already operating at a base level of service due to budget cuts implemented to cope with the nationwide economic downturn. In addition, the City continued to face a long-term lack of funding for Capital Improvement Projects (CIP). With no dedicated revenue stream to fund more than 250 million in infrastructure projects and a systemic budget shortfall, 2014 would be the final year the City could fund minimal preventive maintenance projects with a transfer from the General Fund.
The Fiscal Health Model provided a new visual tool to help facilitate budget discussions. The Fiscal Health Model allows staff to develop live scenarios to provide elected officials an instant picture of the financial impacts of their decisions. One of the more powerful traits of this process is how it has equipped Council and staff with information presented in a format that is resulting in new conversations around budget and resource allocation.
The power of the Fiscal Health Model was realized on May 19th, 2012 at the City Council’s annual planning retreat. City Manager
Patrick Goff used the model to show Council members how different scenarios affected the City's financial situation. Wheat Ridge
has a backlog of more than $250 million in unfunded CIP projects. The Fiscal Health Model allowed staff to illustrate to Council, not by pointing to numbers in a budget book but by modeling the financial data, that given the current fiscal situation, “cutting” the budget to solve the problem was not a viable option. The City needed to identify new dedicated revenue sources to ensure the success of these projects in the future. One Council Member in particular had a very interesting reaction to this new way of looking at budgeting opportunities. Although he believes there are still ways and areas to find efficiencies to save money, he now sees and concedes to the fiscal realities the City faces. He realizes, as we all do, that no amount of reductions or cuts would ultimately solve the City’s long-term budget issues related to capital improvements.
Seeking clearer understanding and communication with your elected officials?
· Elected officials have adopted Fiscal Health as their preferred means of communicating with staff regarding any decisions brought before them that potentially might have a fiscal impact – asking staff to “show us” those impacts using the principles of Fiscal Health as the primary communication device.
Working through challenging conversations about compensation with staff or bargaining units?
· Organizations have entered into labor negotiations with their bargaining units using Fiscal Health as a way to quickly agree on the assumptions behind the City’s fiscal forecasts, therefore establishing a basis of trust in the discussion – then modeling the bargaining units’ requests to demonstrate impacts to the City’s fiscal position.
Weighing various financial related decisions, with complex variables, and long-term impacts?
· Fiscal Health modeling is a powerful scenario-planning tool, providing easy to understand visualization of data. It has even been used to help a Water and Sewer District prioritize capital projects, understand the ongoing impacts of those projects, and effectively develop rate increases by better understanding their ongoing and one-time sources and uses of funding in their operation.
Local governments choosing to implement the concepts of Fiscal Health as a treatment regimen are making substantial progress because they are doing the analytical work required to more accurately diagnosis the reasons behind their fiscal issues and then determining the best treatments that lead to a viable cure. Once an organization is on the road to being fiscally healthy, it can then become more financially sustainable by implementing a Fiscal Wellness regimen centered around the principles of Priority Based Budgeting.
First and foremost, local governments must be clear and transparent about what truly is their picture
of fiscal health. Communicating that picture simply, clearly, and understandably without volumes of numbers, spreadsheets, tables, and an endless series of charts is frankly a challenge that has plagued managers for years. If managers are going to be able to demonstrate financial reality internally to elected officials and staff, and externally to residents, they have to find better ways to make fiscal situations understandable and transparent to everyone.
Finding creative, clear, and nontechnical ways to demonstrate what the next five to 10 years might look like is a must if people are going to address fiscal concerns. All too often, local governments are unable to make sound, timely decisions regarding investing in new resources, starting new programs, or initiating major capital projects because elected officials, local government managers, and staff members are paralyzed by the uncertainty of whether they actually have enough money to appropriate for these purposes. Developing a long-term financial forecast is key to gaining a better understanding of what the future might hold.
Differentiating between one-time and ongoing revenues and expenditures to clearly understand how finances are aligned and where they might be out of alignment is a critical element in eliminating this uncertainty. Managers understand this principle but rarely make a concerted effort to be deliberate about depicting this separation in financial forecasts or budget documents. The need for this separation is understood but without actually “seeing it,” managers may not be aware of its impact on the ability to manage and maximize resources. Not clearly separating the picture into these two revenue categories may obscure some serious looming fiscal problems.
How many officials, for example, have approved a capital project without considering the implications of the associated ongoing costs? Newly constructed public facilities have sat vacant because of a failure to separately identify and depict the impact of ongoing operational costs.
Adhering to this philosophy of differentiating between one-time and ongoing revenues and expenditures also helps ensure that an organization “spends within its means.” This concept is not just about balancing the budget but allows managers to be clear that ongoing operational expenses are funded through ongoing revenue streams. Using such one-time monies as fund balance or grants to support ongoing operations is an unsustainable practice. “How much do you need?” Isn’t this the question that leads off most local government budget discussions? It’s certainly a far easier question to answer, but shouldn’t the conversation begin with the more difficult and oftentimes nebulous question of “How much do we have?”
Devoting more time to revenue analysis is a critical element in gaining a clearer understanding of 1) what factors truly drive our individual revenue streams; 2) how to develop more meaningful and accurate multiyear forecasts, and, most important; 3) how much is actually available to spend. If managers have more clarity about what factors might impact revenue sources, they can improve their ability to foresee those changes before they happen and react to them before they arrive on the doorstep. By taking a more diagnostic approach, it isn’t terribly difficult to determine where revenues specifically come from and assess what internal or external forces might cause them to grow and shrink.
At the Center for Priority Based Budgeting, we're the first to admit we don't have all the answers. However, we do offer unique and innovative concepts and resources that allow local government communities to better understand their fiscal position and comprehensively model a multi-year variety of financial scenarios that provide options and solutions based on each individual communities unique goals and challenges (something very few municipalities perform to their detriment).
"But it's not too late to do something." And that "something," as we've previously stated in this article, is to consider a completely different perspective. In order to achieve success and accept the challenges that are ahead, we must see more clearly how to manage, use, and optimize resources in a much different way than has been done in the past. This new environment demands a new (economic) vision of the future.
For managers, economic resources can appear to be scarce because of our tightly clenched grasp on some commonly held assumptions from which they need to break free. There is a different way to see things!
Keep an eye on the CPBB blog for further updates. Sign-up for our social media pages so you stay connected with TEAM CPBB!
If you're thinking of jumping into the world of Fiscal Health and Wellness through Priority Based Budgeting we would certainly like to be part of your efforts! Contact us to schedule a free webinar and identify the best CPBB service option(s) to meet your organization's particular needs.