Fiscal Position and ParametersThis part of the fiscal health model covers cash position, reserves, revenues, and expenditures. Your objective is to discover problems in these elementary components of financial stability and their severity.
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Cash is king during financial distress, so you should first get a handle on the cash flow situation. Develop a basic monthly cash flow budget that shows anticipated income and expenses for each month. Ideally, this budget will be informed by three to five years of historical monthly data so that seasonal variations can be identified (e.g., property tax revenues that come in during a certain point of the year, increased overtime expenses in public works during snowplowing season, etc.). The budget will allow the recovery leader to examine year-over-year trends in the budget and control spending at a more detailed level.
The charts on this page show useful analytic techniques.
The first is cash uses versus cash sources. This shows that although a spike in revenue occurred in the early part of the year, this pattern is not expected to persist.
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The second shows net cash flow and accumulated balance. It also shows the impact of the pattern we saw in the first chart. In this case, cash balances head below zero under forecasted conditions. By identifying this potential shortfall early, actions can be taken to bolster cash reserves and/or reduce expenditures in a much more proactive fashion.
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A detailed cash flow budget underlies these graphs. A budget shows expenses for salaries, fringes, consulting, supplies, and other relevant categories, as well as revenues. It allows the recovery leader to focus on those items having the greatest impact on cash flow and discern patterns that have lead to distress.
GFOA’s MuniCast can be used to help you create a cash flow model.
ReservesFinancial reserves can be used to buffer shocks and provide bridge financing to pursue an orderly restructuring. It is important to clarify reserve requirements:
- Are there external restrictions on a portion of fund balance that must be honored?
- Are there internally imposed commitments of fund balance?
- Are duplicate reserves being maintained in different funds?
Your goal is to ensure that reserves are maintained in accordance with an established reserve policy and applicable restrictions. You should also identify reserves maintained across the entire organization to ensure that all reserves are appropriate — not too much, and not too little. Some governments have found that certain commitments have been over-reserved and, thus, were able to free up these amounts for appropriation.
If reserves are available, you should also clarify the policy on what portion of reserves are available to help manage through the financial distress and how the time frame over which the organization is willing to use them to compensate for declining revenue.
RevenuesStart by aging receivables and calculating collection rates to see if collections can be enhanced. Improving collections can be done relatively quickly and easily, compared to other revenue enhancements.
Graph revenues to see if the yield of any source is declining relative to others. This may point out an economic trend. It may even highlight an opportunity for auditing a revenue. For instance, the chart shows per capita revenue for utility, property, and sales taxes. Utility taxes haven’t experienced the same growth that property and sales taxes did at the beginning of the period. It is possible that utility taxes hadn’t been properly remitted.
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Compare user fees or other revenues from program activities to the associated expenditures. If a program is covering a decreasing portion of its expenses through program revenues, then it may indicate:
- An outdated fee structure
- Inadequate incentive and control systems for departments to improve their fee coverage.
- Insufficiently vigorous pursuit of grants
- Inadequate grants management (poor documentation of grants activities)
- Changing priorities of grantors
ExpendituresGaining control of or reducing expenditures is usually of top priority during the initial phases of financial recovery.
Examine Basic Controls First
First, examine the basic controls to ensure they are up to par:
- Position control. Employees are very expensive and often almost a fixed cost. Prepare/validate a position budget for all staffing.
- Budget controls. Examine the level of control. The cost to administer control at the line item level may exceed the benefits of the control. Consider placing control at higher level (e.g., department), where a responsible manager can be assigned the authority (and accountability) to manage within parameters.
- Capital project management. Capital project management controls should maintain schedule and budgeting discipline. Blown schedules can cause mismatches between funding availability and need, and can tie up money on projects that aren’t progressing.
If there are problems with the basic controls, then consider the following:
- Which controls are weakest?
- Which areas of the organization are suffering the most from lax controls?
- Should a strategy of selective control be applied, where those that have shown the capacity to manage their resources are given greater latitude?
- What is the right balance of centralization and decentralization of controls?
- Is the situation dire enough to warrant temporary greater centralization to gain control over outgoing funds?
- If so, at what point can controls be restored to a more optimal balance?
Link Resources to Strategy
Consider controls on how mission and strategy is translated into resource use. All expenditures should tie back to a plan of action that was anticipated during the budget process.
Many financially sustainable local governments develop a “business plan” (either organizational-wide or one for each department) that describes operational activities for the next one to three years. Business plans are staff-level plans for how the mission, vision, and strategy will be put into action. The budget becomes a numerical reflection of the business plan(s).
A business plan makes it easier to determine if: 1) staff activities and expenditures are consistent with the mission and strategies; and 2) if the allocations in the budget are therefore also consistent.
The business plan also makes it easier to eliminate budgetary proposals and programs/projects that are not aligned with strategic direction. A business plan should have controls for plan accomplishment, such as regular status meetings, reports, and performance measures.
Know Your Expenditures
Which areas of expenditure are the biggest? Which are growing the fastest? The answers suggest where to focus cost-control strategies. If overtime has been growing rapidly, then overtime reform may be called for. In most local governments, personnel is the largest area of expenditure. Delving into personnel costs might suggest reducing the costs of employee health care or investigating workers’ compensation claim patterns.
Know Your Programs
Identify the complete inventory of programs offered by your government as well as their direct and indirect cost. A fully costed program inventory tells you where the money is going. It also is indispensible for budget reforms and alternative service delivery plans that may be developed later in the recovery process. An inventory may also highlight services that have survived due to inertia or tradition, but are clearly no longer of much value.
If you already have a program inventory, you might also answer questions about program performance and efficiency.
- What mandates is the program subject to? What does the letter of the mandate require? What does the program provide? Are services being provided beyond mandated levels?
- Does a program contribute to the organization’s strategic goals or is it out of alignment?
- Is a program providing a high level of service that could be reduced in exchange for reduced costs?
- Is the program facing increasing or decreasing demand? A program facing decreasing demand could be downsized. Techniques to manage demand and/or control costs might be needed for a program facing increasing demand.
- Is a program supported by revenues generated by program activities (e.g., fees or grants)? Can these revenues be expanded to take more pressure off of general revenues?
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