Protect Your Community with Financial Planning

Public Management  June 2007

Protect Your

Community with

Financial Planning

by Shayne Kavanagh

ong-term ﬁnancial planning combines ﬁnancial forecasting with ﬁnancial

strategizing to identify future challenges and opportunities, causes of ﬁscal

imbalances, and strategies to secure ﬁnancial sustainability. Participants in

the planning process consider a range of possible futures confronting the

organization, examine the ﬁnancial consequences of those possibilities,

and determine the most appropriate policy and strategy responses.

It is from this broad consideration that the primary beneﬁt of ﬁnancial plan-

ning ﬂows: to stimulate discussion and thinking about the long-term impacts of

decisions made today and how the organization can begin positioning itself now

to meet challenges, exploit opportunities, and deliver a stable level of essential

services.

Long-term ﬁnancial planning, strategic planning, and budgeting combine to

form a full system of planning and evaluation. Figure 1 on page 19 shows how

ﬁnancial planning and strategic planning work together to establish long-term,

strategic direction, which then affects the budget process. The budget is used to

operationalize strategies called for by the ﬁnancial plan and strategic plan.

Results are then evaluated, which causes ﬁnancial planners and strategic plan-

ners to modify plans and strategies. Thus, long-term ﬁnancial planning is an es-

sential piece of a government’s planning framework. As the person responsible for

helping a local government establish a clear strategic direction and then taking the

organization in that direction, the local government manager is profoundly inﬂu-

enced by long-term ﬁnancial planning.

ICMA.org/pm

Public Management  June 2007

The Government Finance Of-

ﬁcers Association (GFOA) has been

conducting extensive research on

long-term ﬁnancial planning as it has

become a topic of increasing inter-

est given the environment of ﬁscal

constraint in which many public

agencies now ﬁnd themselves. The

purpose of this article is to describe

how ﬁnancial planning, which is of-

ten primarily sponsored from outside

the manager’s ofﬁce—typically by the

chief ﬁnancial ofﬁcer (CFO)—affects

the management of city and county

government, the role of the manager,

the budget process, and the manager’s

relationship with the CFO and elected

ofﬁcials.

For this article, GFOA interviewed

the city managers and CFOs of six

communities of varying sizes; these

ofﬁcials also have varying experience

in long-term ﬁnancial planning.

ManageMent of the

organization

Long-term ﬁnancial planning empha-

sizes the long-term effects of decisions

made today. By making the long-term

consequences of decisions apparent

through tools like long-range forecasts

and ﬁnancial performance measures,

ﬁnancial planning transforms discus-

sions that occur among the manage-

ment team and elected ofﬁcials.

The common experience of the

interviewees was that their council-

members have become much more

cognizant of both short-term funding

and long-range ﬁnancial sustainability

when they consider new programs.

This is crucial in an environment of

ﬁscal constraint where it might other-

wise be tempting to implement band-

aid solutions to ﬁnancial problems

that can hurt the locality over the long

term—solutions such as asset sales or

deferring maintenance expenditures.

In fact, in San Clemente, California,

a city with a long history of ﬁnancial

planning, the council now routinely

insists on an analysis of the long-term

ﬁnancial impacts of all programs and

initiatives.

The move toward a long-term

perspective also inﬂuences staff. This

is manifested primarily through the

transformed role of the CFO and the

budget process, both of which are

discussed later in this article. It also

applies, however, to other decisions

taken by departments as they become

more cognizant of the ﬁnancial impli-

cations of their activities.

As a result of this emphasis on

long-term thinking, a more rigorous

test is established for undertaking new

programs and services. For instance,

the cost of operating and maintaining

an asset after it is built is given greater

weight in capital planning, and the

ability of the city’s revenues to keep

up with rapidly escalating employee

beneﬁt costs is given careful thought

if the city is considering increasing

the city workforce to provide a new

service.

This means that the city manager

must more carefully plan how to meet

the city’s service-level objectives be-

cause initiatives that may have passed

muster in the absence of a long-range

perspective may not pass when the

sustainability of those initiatives is

considered over the longer term.

Hence, long-term planning promotes

the creation of a stable set of services

and service level expectations that can

be consistently funded over time.

The second major impact of ﬁnan-

cial planning on the management of

the organization is the shared under-

standing of the community’s priorities

produced among council and staff.

Sound ﬁnancial planning requires that

the government produce an explicit

consensus in a number of areas. Of

four such areas listed below, the ﬁrst

two occur at the beginning of the

planning process, and the last two oc-

cur at the end:

Financial policies. The baseline stan-

dards for how stewardship over the

community’s ﬁnancial resources will

be maintained.

Service-level preferences and pol-

icy. A ﬁnancial plan must be created

in the context of the services that the

community intends to deliver to its

citizens. These may be expressed as

qualitative goals and objectives or as

quantitative performance measures.

Financial strategies. Strategies for

addressing ﬁnancial imbalances such

as revenue shortfalls or spiraling areas

of expense.

Monitoring mechanisms. Tech-

niques for monitoring progress against

ﬁnancial strategies. Examples include

action or project plans and perfor-

mance measures.

When created through an inclu-

sive and consensus-driven process,

these bookends of ﬁnancial planning

A financial plan works with other planning processes to form a complete

planning framework.

Figure 1. A Comprehensive Planning Framework

Public Management  June 2007

Addison’s dashboard communicates key financial information at a glance.

establish a clear set of parameters for

decision making. To illustrate, Long

Beach, California, created the follow-

ing ﬁnancial policy: “General fund

long-term debt payments shall not

exceed 10 percent of operating expen-

ditures. In addition, the city shall not

issue long-term (more than one year)

general fund debt to support operat-

ing costs.” The policy provides guid-

ance on acceptable uses of debt and

thus creates a parameter on decision

making designed to preserve ﬁnancial

condition.

The third and final change to

organizational management is the

reconception of ﬁnancial information

and reporting. Traditionally, ﬁnancial

reporting has been based on trailing

indicators (what has happened in the

past) and often focuses on spending

control. With long-term planning, the

focus shifts to the information needed

for long-term decision making and

for best addressing the community’s

priority issues. Addison, Texas, de-

veloped a simple and effective quar-

terly “dashboard” of key indicators. A

dashboard for the town council sum-

marizes the performance of impor-

tant funds. An example of one such

dashboard for hotel fund revenues is

shown on this page (Figure 2).

The predominantly green color-

ing denotes that revenues are mostly

within acceptable ranges, with the

exception of conference centre rev-

enues, which is an area of concern as

denoted by yellow. This snapshot of

key ﬁnancial information helps direct

discussion toward the larger areas of

concern for the city and away from

individual budget line items.

A similar but more detailed dash-

board is created for executive staff.

Their dashboard covers financial,

economic, and operational indicators,

including more forward-looking indi-

cators. It includes, for example, trends

on hotel occupancy rates and revenue

per available room that are prospective

indicators of hotel fund revenue.

Monitoring of key indicators and

forward-looking analysis allows the

manager to better anticipate concerns

of the council and community and

to formulate responses. This kind of

analysis also gives the manager and

council more conﬁdence to take a

response because the long-term impli-

cations of that response are clearer.

role of the Manager

Because long-term ﬁnancial planning

affects the fundamental way in which

the organization conducts its busi-

ness, it can’t help but have implica-

tions for the role of the local govern-

ment manager. The most prevalent

change is the increased emphasis on

ﬁnancial issues as a strategic concern

for the manager.

Many managers are already deeply

involved in ﬁnancial issues, but this

does not mean that the manager

now begins to take over the CFO’s

responsibilities with the advent of

ﬁnancial planning. It means that the

manager spends more time thinking

strategically about ﬁnancial issues

and more time interacting with ﬁ-

nance staff as the information they

produce becomes more relevant to

strategic considerations and as long-

term ﬁnancial stability is elevated to

an organization-wide priority.

In Addison, Texas, for example,

long-term forecasting of the city’s rev-

enues and expenditures suggested that

the city needed more ﬁnancial ﬂex-

ibility because continuation of then-

current trends would have caused

the town to fall below its policy for

minimum levels of fund balance. This

led the town manager to spearhead

an organizational redesign to reduce

the town’s long-term, structural cost.

The result was a $1.6 million savings

over ﬁve years and, more important,

a thorough examination by the town

and its departments of how best use of

available resources could be made to

meet service objectives.

One of the greatest virtues of a

good manager is the ability to accom-

plish work through others. Accord-

ingly, as the manager becomes more

attuned to ﬁnancial concerns, the

manager develops a collaborative ap-

proach toward maintaining ﬁnancial

stability with the other members of

the executive management team.

Because financial planning cre-

ates a more rigorous test for new

or expanded services, spur-of-the-

moment or go-it-alone decision mak-

ing becomes less feasible. Shared

decision making and concerted action

is required for the locality to make

best use of available resources. In a

number of the cities in which the

manager and CFO were interviewed,

for example, the executive staff held

quarterly meetings at which the entire

executive staff reviewed progress to-

ward service-level and ﬁnancial goals,

and, like Addison, they often used key

indicators or scorecards.

In government the creation of

value is not deﬁned in terms of ﬁnan-

cial resources as it is in the private

sector. Instead, it is deﬁned terms of

achievement of an outcome of value

to constituents. Financial resources,

however, do enable a public agency

to create value. Mark H. Moore, au-

thor of Creating Public Value: Strategic

Management in Government (Cam-

bridge: Harvard University Press,

1995), points out that, when consid-

ering a strategy to create public value,

public managers must focus attention

“outward” toward the value produced

Figure 2. Addison’s Hotel Fund Revenues

Overall

Assessment

Hotel Occupancy Taxes

Special Event Fees

Conference Centre Rental fees

Long Term Trend

Public Management  June 2007

for constituents by the agency, “up-

ward” toward the political deﬁnition

of value, and “downward” toward the

organization’s current performance

and capacity.

When all three pieces of this “stra-

tegic triangle” align, the agency is

optimally positioned to create public

value. Long-range ﬁnancial planning

makes the manager a more effec-

tive strategic actor by solidifying the

downward perspective and providing

the manager with a clear picture of

current ﬁnancial condition and an as-

sessment of likely future position.

This allows the manager to work

more effectively with elected ofﬁcials

(upward) and constituents (outward)

because the manager is more conﬁ-

dent of having personal knowledge

of ﬁnancial and organizational re-

source capacity (downward). As Erik

Kvarsten, city manager of Gresham,

Oregon, put it: “Clarity of resources

makes the city manager better able to

craft and clarify the choices and chal-

lenges faced by the organization over

the long term and injects reality into

decisions.”

Budget Process

As the introduction to this article

described, the budgeting and long-

term ﬁnancial planning processes are

inexorably linked. Managers are often

heavily involved in the budget process

because the budget is a government’s

single most important operational and

The Financial Plan and the Strategic Triangle

Why did the award-winning City of Naperville’s procurement

office seek out NIGP’s Professional Consulting Services?

Unrivaled expertise.

When the City of Naperville, Illinois, committed to establishing its procurement office as

a role model for the public procurement profession, it turned to NIGP’s Professional

Consulting Services for the insight and guidance it needed to achieve the coveted Pareto

Award for Excellence in Public Procurement.

NIGP is the National Institute of Governmental Purchasing. For over 60 years, NIGP has

dedicated its resources to the development and support of state and local public

procurement agencies and the professionals who serve them. Whether your agency seeks

accreditation, process improvement, benchmarking services, or management assessment,

NIGP provides the public sector with unrivaled professional resources for procurement-

related business issues.

For more details about NIGP’s Professional Consulting Services and how to achieve your

procurement agency’s development goals, contact us at 800-367-6447 x246.

n i g p . o r g

ICMA.org/pm

Public Management  June 2007

policy document. The experience of

the interviewees suggests that ﬁnan-

cial planning can greatly improve the

budget process by reducing conﬂict,

creating greater structure and disci-

pline, and improving monitoring of

plan or budget implementation.

Budget formulation is often charac-

terized by ﬁerce competition for lim-

ited resources. Although a ﬁnancial

plan cannot eliminate all such ten-

sion, it can help mitigate it. The em-

phasis placed on long-term thinking

and the shared understanding of com-

munity priorities provides an over-

arching context for the budget pro-

cess. This gives departments a greater

appreciation of how the full range of

local services ﬁts into the city’s overall

ﬁnancial and service strategy, making

the departments more understanding

of resource allocation decisions, even

when those decisions are not in favor

of their particular programs.

The context provided by ﬁnancial

planning also gives elected ofﬁcials

greater conﬁdence that the budget

reﬂects the community’s service pri-

orities while it maintains the long-

term ﬁnancial balance. A number of

communities interviewed report that,

thanks to up-front ﬁnancial planning,

their ﬁnal public budget hearings now

are concluded in a matter of minutes,

whereas before the hearings may have

taken hours or even days.

This same budgetary context makes

for a more structured and disciplined

approach to budget formulation.

Departments know the service priori-

ties of the city as well as the ﬁnancial

constraints. This makes it possible for

departments to create budget submis-

sions that are more closely aligned

with priorities and funding realities

from the beginning. Departments also

know that long-term sustainability of

programs is a central consideration,

so they address this issue in their bud-

get requests. This reduces the long,

iterative process of mutual adjust-

ment between departments and the

central authority that can occur in the

absence of such a context.

Finally, a long-term ﬁnancial plan

includes tools for monitoring progress

(tools such as performance measures

and action plans) against the ﬁnancial

strategies advocated by the plan. Be-

cause these strategies are operational-

ized through the budget, these moni-

toring tools ultimately improve the

quality of budgeting and execution

against the budget. Demonstrating the

success of the ﬁnancial plan through

these tools causes departments and

elected ofﬁcials to increase their com-

mitment to planning and reinforces

the transformation of the budget pro-

cess from one characterized by com-

petition between departments to one

characterized by teamwork toward

shared goals.

relationshiP with the

cfo

The CFO is usually the sponsor of

the long-term ﬁnancial planning pro-

cess. Therefore, as ﬁnancial planning

changes the management of the orga-

nization and the role of the manager,

it transforms the relationship with the

CFO. The CFO becomes a strategic

partner in the management of the

organization, moving beyond tradi-

tional concepts of ﬁnancial control to

include the broader responsibility of

ensuring long-term ﬁnancial balance

and a stream of resources sufﬁcient

for uninterrupted provision of crucial

public services.

The CFO becomes the source of

ﬁnancial information who also un-

derstands the strategic direction and

priorities of the local government.

This enables the CFO to bring crucial

information to the manager’s attention

without being asked for it because the

CFO knows what information is valu-

able, and that knowledge is reﬂected

in the ﬁnancial reporting processes

created by the CFO.

The ﬁnancial plan allows the CFO

to move into this strategic capacity.

The ﬁnancial plan creates consensus

between the manager and CFO on the

leading long-term considerations and

ﬁnancial issues facing the community.

The CFO can then create a reporting

and control structure and budgetary

process that best address these items.

The more strategic role of the CFO

requires the CFO to become more

involved in the operations of local

government, as concerns of ﬁnancial

sustainability take a higher proﬁle.

This may require some adjustment on

the part of department heads and the

manager, but the interviewees found

this transition to be beneﬁcial and

natural, especially when the CFO takes

to the role as a partner or valued ad-

viser, rather than as a control authority.

Here are examples of how the CFO has

taken a greater role in operations:

Economic development. In Brook-

Through its research, GFOA has identified a four-phase process for financial

planning:

Mobilization phase. The first step is getting ready to plan. This includes

identifying the leader of the planning process, the participants, the process they

will follow, issues to be addressed, service level preferences and policy, and fi-

nancial policies.

Analysis phase. The analysis phase produces information that supports plan-

ning and strategizing, including environmental scanning, trend projections, and

financial analysis.

Decision phase. After the analysis phase, the organization responds to the

information uncovered. These decisions result in a set of financial strategies for

bettering the financial position of the organization.

Execution phase. After financial strategies have been developed and formally

committed to, the government carries out the financial plan through its budget

and monitoring tools like performance measurements and action plans.

The Steps of Financial Planning

Public Management  June 2007

ﬁeld, Wisconsin, the CFO has taken a

greater role in reviewing and advising

on the large, multiyear ﬁnancial com-

mitments that are often involved in

economic development projects.

Capital projects. The CFO in San

Clemente, California, is involved in

the initial stages of planning capital

projects in order to identify funding

sources and to estimate the operating

costs of the asset.

Performance management. In Long

Beach, California, the CFO heads the

city’s operational review and per-

formance management programs

because they are seen as crucial to

the ongoing ﬁnancial stability of

the city. The CFO’s personal abil-

ity to work with departments as a

strategic adviser, rather than as a

control authority, has been indis-

pensable to the city’s success with

this approach.

elected officials

When discussing the impact of

ﬁnancial planning, the city manag-

ers interviewed were most enthu-

siastic about its effects on their

relationship with elected ofﬁcials.

Because these effects are a natural

outgrowth of the characteristics

of long-term planning discussed

earlier in this article, they are pre-

sented here in a summary form:

Shared understanding of priorities.

The manager and council come to a

common set of priorities and expecta-

tions for how these will be addressed.

Stabilized nancial decision mak-

ing. Elected ofﬁcials focus more on

big-picture ﬁnancial decisions and

strategies for achieving and main-

taining ﬁnancial balance. They more

carefully consider the long-term

impacts of current decisions and de-

emphasize discussion of budget line

item detail. Elected ofﬁcials like being

associated with a government that has

a reputation for businesslike ﬁnancial

planning and stability, so there is a

self-reinforcing character to this im-

pact of ﬁnancial planning.

Enhanced communication with

the public. The plan identiﬁes cru-

cial ﬁnancial and service information

and puts it in a format that is highly

accessible and understandable. This

enables elected officials to have

better-informed discussions with

constituents.

Transformed relationships among

ofcials. The ﬁnancial plan is a great

way to get new elected ofﬁcials up

All of the city

managers interviewed

for this article have

found long-term

ﬁnancial planning to

be a boon to their city,

and they have become

great advocates of its

practice.

to speed on the issues facing the city

and the plan for addressing them.

A number of the interviewees have

found that the ﬁnancial plan has been

instrumental in making believers out

of council members who were elected

as skeptics of city government.

Instilled condence. The ﬁnancial

plan gives elected ofﬁcials conﬁdence

that the city has a clear plan for ad-

dressing its most pressing priorities

and that this plan is reﬂected in how

resources are allocated. This conﬁ-

dence is key to realizing ﬁnancial

planning’s potential for transform-

ing the budget process.

conclusion

Though usually sponsored by the

CFO, a long-term ﬁnancial plan has

profound implications for the man-

ager’s role in the local government.

Fortunately, all of these implications

are quite beneﬁcial as they enhance

the manager’s ability to lead local

government, improve communica-

tion with elected ofﬁcials, and posi-

tively transform the budget process

and relationship with the CFO.

All of the city managers inter-

viewed for this article have found

long-term ﬁnancial planning to be

a boon to their city, and they have

become great advocates of its prac-

tice. In fact, Mike Parness, the former

city manager of San Clemente, where

he was ﬁrst exposed to long-term ﬁ-

nancial planning, is now the city man-

ager of Napa, California, where he has

been the initiator of Napa’s new long-

term financial planning initiative.

Perhaps this marks the beginning of a

new trend: managers taking the lead

role in making sure their local gov-

ernments have this crucial practice in

place. PM

Shayne Kavanagh is senior manager of re-

search, Government Finance Ofcers Asso-

ciation, Chicago (SKavanagh@GFOA.org).

For their assistance with this article, the

author would like to thank the city man-

agers and chief nancial ofcers of these

communities: Addison, Texas; Brookeld,

Wisconsin; Gresham, Oregon; Long Beach,

California; Napa, California; and San Clem-

ente, California.

Searching for a local

government job?

06-007

The ICMA

JobCenter

can help.

Untitled-3 1 1/9/06 11:37:56 AM

Searching for a local

government job?

The ICMA

JobCenter

can help.

http://jobs.icma.org