Finance Advisor October 2005

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Finance Advisor August 2005

MRSC has joined with Toni Nelson, Small Cities Specialist, State Auditor's Office, Gayla Gjertsen, Finance Director, City of Tumwater, and Mike Bailey, Finance Director, City of Renton, to bring you the "Finance Advisor" column. The "Finance Advisor" will feature a new article each month with timely local government finance information and advice you can use.*

Seeing Red?

October 2005

Gayla Gjertsen, Finance Director, City of Tumwater

Have you ever seen a weekly packet for the Council meetings that the elected officials and CAO gets? Does everyone appreciate the number of competing issues that your Council and CAO deals with everyday? So how do we give all of them good tools to do the job they are not only bound, but have actually signed up, to do? With all of the competing needs and issues, how can we help those that have the final fiduciary duty to make, not only the right decisions, but decisions that will have long-lasting value? One way is to point out the "bumps" in the road along the way and give them the tools they will need to properly recognize and anticipate problems. Or, as my Dad used to say, "Sis, just pay attention to the 'idiot lights' .. if they start blinking red, pull over." We want to be "PC," so let's call them "red flags."

Don't Panic

First — and most important: Don't Panic. Evaluate your position to find out how big the problem is, how much of a problem you have, and when it will really hit.

Don't Overreact

Second — and just as important: Don't overreact. Don't start cutting or slashing your budget. Don't create what I call the "Swiss cheese" effect. The "Swiss cheese" effect happens when you cut the resources (cheese) and say to those making the sandwiches, you still have the same amount of sandwiches to make, but we have only given you half the amount of cheese as last year. This can result in an even bigger problem. No one in the above case is happy. They're still hungry. Basically, you have lowered the services delivered to your constituents, without changing their expectation levels. The result: Very angry constituents.

A Checklist - How Big is Your Problem?

So let's see if we can give you a checklist to help you with that first step: How big is your problem?

Are you dependent on one economic sector?
Has your entity experienced disruption or change with a major employer?
Are other local government entities in your area having fiscal troubles?
Are your local businesses having economic difficulties?
Does your community have limited options for economic development?
Are you able to manage your "one-time" revenues to your "one-time" expenses?
Are you or have you discussed "inter-fund" loans?
Do you understand and agree with the revenue assumptions for your budget?>/li>
Because of the limiting or elimination of revenues, have you, or are you, discussing all revenue enhancement options available to you?
Do you have growing expenses from "mandated" programs with few "discretionary" programs left to cut?
Is your community heavily dependent on property taxes for basic services?
Or, from the above question, are you seeing a big shift such that you can no longer rely upon the property tax as your number one revenue? Have you discussed a plan for responding to this?
Is your growth in expenses for core services (on-going) exceeding or outpacing your revenue (on-going) to support them?
Does your community have a declining unrestricted fund balance?
In addition to having only limited capital investment in your facilities & equipment, are you also deferring needed maintenance work?
Are adopted budgets not substantially anticipating real expenditures; and are you therefore noticing more "year-end" spending?

Analyzing the Red Flags

So now let's analyze how many red flags you have waving.

1 - 5	Opportunity	1. Review specific problems. 2. Seek targeted resources to address the issue.
6 - 10	Growing distress	1. Long-range financial planning is needed that includes the analysis of potential impacts to service levels if improvement does not occur. 2. Identify new resources & potential partners to help your entity. 3. Communicate with your citizens about the potential impacts to the services they receive.
11 - 16	Significant distress	1. Research alternatives to the services delivered to your citizens. 2. This requires strong community leadership to deliver the message accurately and stick to the plan delivered. 3. Must have effective citizen involvement so a concise expectation level can be established.

Tools and Solutions

Now that you have analyzed how big the problem is, let's see if we can provide some tools to get you to a solution.

You need good financial or foundation policies, covering a variety of issues from which you can build on. Some could be: the use of one-time revenues; establishing user fees & charges; reserve or stabilization practices; debt capacity, issuance & management; and revenue diversification. These are just a few. For a much broader listing and further explanation, see the Government Finance Officer Association's "Budget Practices" Web page.
Next determine your community values and create a mechanism for community involvement. Include as many citizens and groups as possible, clearly identify your stakeholders and don't leave out the employees. Try to stay with the "big picture," and remember you need to plan for the long-term, not just for tomorrow. Use these settings as a way to educate all of your community's stakeholders.
Try to put together a long range plan, not just the one you do for land use, but a long range plan for your fiscal health that will allow you to do the things that are contemplated in your plans. The plan does not have to be sophisticated. Make it your own, as no single plan will work for every community. Remember, each community's tax base is different; your programs are different, and that is what makes you unique. Also, in this plan, work on how you are handling your revenue projections. Make certain they are realistic and that you can attain your estimates.

Other Resources

Don't forget the resources that are available to you. I guarantee you that somebody has been down this path or another path like yours and can help. You have the Municipal Research Services Center; the Washington State Economic Forecast Council; contact your peers; stay connected to your community businesses and stay supportive and involved in the Association of Washington Cities.

You can change the course of your entity if you keep your eye on the horizon. Keep open lines of communication amongst all stakeholders. Recognize the landscape has changed and you can win this battle as you have won others in the past. Good luck!

*The Articles appearing in the "Finance Advisor" column represent the opinions of the authors and do not necessarily reflect those of the Municipal Research & Services Center.