The Value of Five Year Financial Forecasts for Cities
The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.
By James Bourey
June 20, 2021
It is encouraging that more and more cities are doing five year financial forecasts, but surprising that it has taken as long as it has for this trend to develop. The organizations I have managed have been engaged in long range financial planning for more than 25 years. This includes a county, a regional organization and two cities, where I initiated the process. The value of this process in developing a more strategic approach for the organization and, in particular, for the council was outstanding. This column is an abridged version of a much longer piece that will appear in my most soon to be published book, The Journey to Make a Difference; Advice for City/County Managers.
Local governments generally approach developing a five year financial forecast in a similar fashion but there are some important considerations that may not always be included. Both revenues and expenditures are usually projected using trend line information. This would include not only projected inflationary increases but also items such as employee salary enhancements and health care costs at a rate of the projected increase. It is important to examine other events the city is relatively confident will occur and further modify those trend lines. For instance, if the city has an aggressive capital improvements program in the next few years, the cost of staff that will be needed to operate the facilities, which will be coming online during this time, should be added. This might also include instances where a grant might have been used to add employees and the city is obligated to pick up the additional cost to maintain those employees. It is important that the long range financial forecasts involve each of the departments as they will always best know their programs and the budget pressures they will be facing in the next few years.
While virtually every place that does long-range forecasting includes the general fund, many do not focus on other funds as well. Including the enterprise funds for sewer, water, stormwater and solid waste can be very valuable. It is also important to develop scenarios based on some different assumptions about future overall economic conditions to gain a sensitivity for what a change in the economy might have on the budget. It is especially critical to look at what might happen with a major downturn in the economy and how that would affect the potential revenues and the implications for expenditures.
It is also vital to develop a balanced budget scenario. The council needs to see ways that revenue shortfalls can be addressed. By showing some different alternative approaches to funding revenue deficits, the council can provide feedback on their most favored options. It is also most important to help the media have the proper perspective if they are reporting on the exercise. I painfully remember a year when faced with a doom and gloom newspaper headline about the huge deficit the city was facing.
Aside from getting the Council focused more strategically, there are many benefits to doing a five year forecast. It becomes an educational process for the council, who will better understand the budget. It also helps the council think about challenges the city faces a few years down the road and encourages them to make decisions that are not simply stop-gap measures to merely get through the following year. They will be able to better see the longer term consequences of annual budget decisions. For example, in two instances, with both the City of Greenville, South Carolina and Newport News, Virginia, the councils went along with my recommendation that they make an assumption that each year the city will make an inflationary adjustment to utility rates. The long range forecast showed them that if they did not do this each year, they would be stuck with making a fairly large increase at some point, causing a significant discontent with customers.
My experience has borne out the idea that the best time to do a long range forecast and discuss it with the council is after the departments have had an opportunity to put their budgets together but before the manager has started to work through the departmental requests and make funding decisions. This gives the departments a better understanding of their needs, which can be included in the process. It also gives the council a chance to provide input on their priorities and views on revenues and expenditures. I have found that this timing and process has helped the council to feel like they have had early input into the budget process and develop a level of confidence in the budget. I believe this is partly responsible for the fact that both in Greenville and Newport News, there were a few years when the councils did not change one penny of my recommended annual budgets. This was because the budgets truly reflected the desired policy direction of the council, which should be the goal of every city manager.
Author: James Bourey served local government for 37 years, including as a city and county manager and regional council executive director. He also worked as a consultant to local government for another six years. He is the author of numerous professional articles as well as the book, A Journey of Challenge, Commitment and Reward; Tales of a City/County Manager.
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The Value of Five Year Financial Forecasts for Cities
The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.
By James Bourey
June 20, 2021
It is encouraging that more and more cities are doing five year financial forecasts, but surprising that it has taken as long as it has for this trend to develop. The organizations I have managed have been engaged in long range financial planning for more than 25 years. This includes a county, a regional organization and two cities, where I initiated the process. The value of this process in developing a more strategic approach for the organization and, in particular, for the council was outstanding. This column is an abridged version of a much longer piece that will appear in my most soon to be published book, The Journey to Make a Difference; Advice for City/County Managers.
Local governments generally approach developing a five year financial forecast in a similar fashion but there are some important considerations that may not always be included. Both revenues and expenditures are usually projected using trend line information. This would include not only projected inflationary increases but also items such as employee salary enhancements and health care costs at a rate of the projected increase. It is important to examine other events the city is relatively confident will occur and further modify those trend lines. For instance, if the city has an aggressive capital improvements program in the next few years, the cost of staff that will be needed to operate the facilities, which will be coming online during this time, should be added. This might also include instances where a grant might have been used to add employees and the city is obligated to pick up the additional cost to maintain those employees. It is important that the long range financial forecasts involve each of the departments as they will always best know their programs and the budget pressures they will be facing in the next few years.
While virtually every place that does long-range forecasting includes the general fund, many do not focus on other funds as well. Including the enterprise funds for sewer, water, stormwater and solid waste can be very valuable. It is also important to develop scenarios based on some different assumptions about future overall economic conditions to gain a sensitivity for what a change in the economy might have on the budget. It is especially critical to look at what might happen with a major downturn in the economy and how that would affect the potential revenues and the implications for expenditures.
It is also vital to develop a balanced budget scenario. The council needs to see ways that revenue shortfalls can be addressed. By showing some different alternative approaches to funding revenue deficits, the council can provide feedback on their most favored options. It is also most important to help the media have the proper perspective if they are reporting on the exercise. I painfully remember a year when faced with a doom and gloom newspaper headline about the huge deficit the city was facing.
Aside from getting the Council focused more strategically, there are many benefits to doing a five year forecast. It becomes an educational process for the council, who will better understand the budget. It also helps the council think about challenges the city faces a few years down the road and encourages them to make decisions that are not simply stop-gap measures to merely get through the following year. They will be able to better see the longer term consequences of annual budget decisions. For example, in two instances, with both the City of Greenville, South Carolina and Newport News, Virginia, the councils went along with my recommendation that they make an assumption that each year the city will make an inflationary adjustment to utility rates. The long range forecast showed them that if they did not do this each year, they would be stuck with making a fairly large increase at some point, causing a significant discontent with customers.
My experience has borne out the idea that the best time to do a long range forecast and discuss it with the council is after the departments have had an opportunity to put their budgets together but before the manager has started to work through the departmental requests and make funding decisions. This gives the departments a better understanding of their needs, which can be included in the process. It also gives the council a chance to provide input on their priorities and views on revenues and expenditures. I have found that this timing and process has helped the council to feel like they have had early input into the budget process and develop a level of confidence in the budget. I believe this is partly responsible for the fact that both in Greenville and Newport News, there were a few years when the councils did not change one penny of my recommended annual budgets. This was because the budgets truly reflected the desired policy direction of the council, which should be the goal of every city manager.
Author: James Bourey served local government for 37 years, including as a city and county manager and regional council executive director. He also worked as a consultant to local government for another six years. He is the author of numerous professional articles as well as the book, A Journey of Challenge, Commitment and Reward; Tales of a City/County Manager.
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