Fiscal health is an elusive concept with many definitions. I define fiscal health as the ability to continue current service levels for the foreseeable future without jeopardizing the financial stability of the organization or suddenly increasing the price of government. In other words, fiscal health is about maintaining or increasing outputs without significantly increasing inputs.
Responsible Budgeting
The annual budget is the one tool with the singular ability to promote fiscal health or destroy it. Overestimating revenues, under-budgeting and depleting surplus reserves automatically build problems into future budgets and steadily erode fiscal stability. Responsible budgeting promotes revenue stability, realistic spending and long-term thinking.
Revenue estimates should be conservative. Only recurring revenues should be used to fund ongoing expenditures. One-time revenues, or temporary spikes in recurring revenues, should be used for one-time expenditures, or not at all. User fees should be regularly reviewed. The revenue base should be diversified with a solid foundation of inelastic revenues and minimal reliance on external funding sources over which there is little control.
We shouldn’t spend what we don’t have by initiating new programs, or expanding existing ones, unless they can be supported long-term. All known expenses should be budgeted because delaying necessary expenditures, such as equipment maintenance, will lead to higher costs in the future. Expense budgets should be realistic. Managers that consistently over-budget can cause other service areas to be under-funded or eliminated. Those that consistently under-budget can create a great deal of fiscal stress toward the end of the budget period.
Sufficient Reserves
We all know that surplus is necessary for cash flow purposes, and to provide for unforeseen events. Surplus also provides us with the necessary liquidity to pay our bills. It is important to analyze cash flow needs and assess risks to establish a baseline amount of surplus to be maintained. All stakeholders should understand that reducing this amount can have negative consequences.
The link between responsible budgeting and surplus funds cannot be ignored. Limit the use of surplus as a revenue source to fund ongoing expenses, and avoid the necessity of constantly making withdrawals from the savings account to pay bills. Conservative revenue estimates and prudent spending plans promote superior operating performance – which replenishes and builds surplus reserves. One or two years of poor operating performance can jeopardize surplus reserves, making it difficult to match the amount needed for the budget from year to year, reducing the amount of funds available for emergencies and restricting cash flow.
Although surplus is the star of the reserve world, we cannot forget about the supporting roles played by other spending reserves. Analyze historical spending patterns to establish reserve amounts for appropriations that vary significantly from year to year, such as storm recovery, payments for compensated absences and post-retirement benefits. Maintain these reserves to avoid the need for emergency appropriations and to eliminate significant fluctuations in the budget from one period to the next.
Information Systems
Accurate and timely data is needed to make informed, intelligent decisions. The most sophisticated planning and analysis methods are useless if the data they use is stale or inaccurate.
Identifying the most useful data, and using the most effective analysis methods doesn’t necessarily require a large investment in technology. The incremental benefits realized from the additional time and expense of implementing new tools are cost effective only if those changes make us more efficient and better informed. The best technology solutions help us to narrow down the amount of data necessary to produce reasonably reliable and accurate analyses using the simplest methods possible.
With all of the focus on technology and automation, we have to remember that data analysis, and fiscal health, begins at a much more fundamental level. Reliable information systems require proper internal controls. Without proper controls – and a regular review of their effectiveness – our data may prove to be invalid. Remember: Garbage In, Garbage Out.
Analysis and Planning
We can’t know whether we’re focused in the right areas, or doing the right things, or headed in the right direction if we adopt a wait-and-see attitude. To effectively gauge our performance, and the state of our fiscal health, we need to monitor our progress and engage in constant analysis and planning.
A trend analysis will help explain how we got to where we are, and in what direction we’re going. Taking a critical look at our strengths and weaknesses, and evaluating potential threats to our financial stability are vital elements of a comprehensive planning process. Financial projections show us where we’re likely to arrive at a point in the future, and highlight the gaps between where we want to be and where we’re actually heading.
It is not essential to analyze our history to the nth degree, or to forecast our financial position with pinpoint accuracy. The most essential goal of the process is to stimulate thinking. By involving the governing body and other members of the management team, we can create a pervasive focus on long-term planning that becomes infused into all financial decisions.
Financial Policies
Financial policies are “rules of thumb” that establish acceptable and unacceptable courses of action for daily operations and annual budget decisions. Policies are often the result of the analysis and planning process – distilling all of the analysis and all of the plans into a set of guidelines that, if followed, will take us in the direction we need to go.
But we need not wait until we’ve gone through a long and complicated planning process to adopt and follow financial policies. For the most part, financial policies are just common sense. No one could successfully argue that judiciously using surplus as a budget revenue, increasing budget flexibility by reducing fixed costs, and prudently investing our money are bad things to do. So why not just start doing them – whether or not they are part of a more formal process?
Financial policies won’t work unless they are actually followed. The most effective policies are specific and written. They should be formalized, adopted by the governing body and shared throughout the organization. Then they need to be followed – day to day and year to year.
There is always something up ahead waiting to challenge us. For the fiscally healthy organization, these are just bumps in road. Critically assessing our fiscal health and adopting a plan to improve it is just as difficult as embarking upon a new diet and exercise plan to improve our physical health – and there are certainly more moving parts. But the long-term benefits far outweigh the short-term investment. As the saying goes, “the best way to predict the future is to create it.” Fiscal health is about creating our future rather than having it haphazardly molded for us.
