Financial Planning for Elected Officials
The information contained in this article is not intended as legal advice and may no longer be accurate due to changes in the law. Consult NHMA's legal services or your municipal attorney.
As an elected official, you play an important role in ensuring tax dollars are spent wisely and that your city is able to continue providing services and infrastructure taxpayers expect. Financial planning is the cornerstone of a successful city, so you need to make it a priority. Arm yourself with baseline knowledge about your city’s finances, so you can ask key questions and make sure your city is making sound financial decisions.
Cultivate long-term stability
Financial planning is essential to a strategic, long-term approach to financial management. It may help your city avoid costly or ill-timed investments, reduce its reliance on debt, and maintain stability in the face of economic uncertainty. A good long-term financial plan should help you adopt a big-picture perspective and prepare for a variety of future scenarios and outcomes. It should include an analysis of the city’s finances, reliance on debt, revenue and operating expenditure trends, capital improvement plans, tax base growth, staff additions, key initiatives, and financial strategy. As summarized by the Government Finance Officers Association (GFOA), long-term financial planning is important because it can help:
• Determine financial position and condition.
• Build the case for action.
• Build accountability and trust with residents.
Most long-term financial plans cover five to 10 years, but some plans forecast as far as 20 years into the future to help the city better project infrastructure or facility needs. The range of time will fluctuate depending on the city’s priorities and key financial issues. You can always start small and expand your time horizon. Your city should update its financial plan annually—it can serve as an important forecasting tool and resource during the budget process.
Understand key documents
While a variety of factors affect a city’s financial health, developing a suitable combination of planning tools allows elected officials and staff to better manage financial impacts. Financial plans, projections, forecasts, and studies are tools that can help evaluate a city’s current position and identify trends to develop a proactive long-range approach. Some key documents include:
• Biennial budget. State law requires cities to adopt an operating budget annually, but some cities opt for a two-year budget to streamline the budget-development process. Through this model, cities work ahead with a second-year budget concept, which allows for flexibility in case of unanticipated events or economic changes.
• Capital improvement plan. A multiyear projection of the capital replacement costs and capital needs assists with budget preparation by detailing upcoming capital expenditures and identifying anticipated funding sources. A capital improvement plan does not give authority to spend but serves as a planning tool. Keep in mind that individual purchases and projects must still be approved in accordance with your city’s purchasing policy.
• Annual financial report. Annual financial reports provide detailed information regarding the city’s financial status, practices, and past trends.
• Debt study. A debt study also helps guide future decisions by assessing current debt levels and financing needs to maintain appropriate and manageable use of debt.
• Utility rate study. A regular evaluation of residential and commercial rates for utilities (e.g., sewer and water) helps maintain consistency and ensures rates will adequately cover future operating and capital costs.
• Other studies. Additional studies, such as street replacement and park replacement, help ensure adequate funding is available for infrastructure maintenance and replacement.
Understanding these documents will help ensure your city’s fiscal stability.
Also keep these tips in mind:
• Do not use an annual operating surplus to support ongoing operations, as it may create gaps in future budgets.
• Use annual surplus to add to reserves, or for one-time or non-recurring expenses or capital needs.
• Do not fixate on tax levy freezes every year, but rather work to stabilize annual levies over time.
• Do the appropriate long-range fiscal planning to provide stability to your annual budget and levy.
Use of debt as a strategy
While debt should be minimized as much as possible, sometimes it is necessary to issue debt. Debt management is a vital part of a city’s financial strategy.
Debt is an important and flexible revenue source that may allow your city to complete necessary capital improvement projects sooner. Debt can also reduce long-term costs due to inflation, prevent lost opportunities, and equalize the costs of improvements to current and future residents.
One of the primary goals in debt management is to stabilize the overall debt burden and future tax levy requirements to ensure that issued debt can be repaid. A high level of debt places a financial burden on taxpayers and can stress the local economy.
Encourage your staff to talk to your city’s financial advisor about looking for ways to pay off debt early to eliminate future debt levies, refinancing for a lower interest rate, or restructuring debt repayment schedules.
Maintaining high bond ratings is beneficial in keeping interest rates low and demonstrating sound financial stewardship to potential investors. Top bond ratings help cities achieve the best possible value for residents because they reduce the amount of interest paid, which directly affects the amount of property taxes required to pay off the debt.
High bond ratings also demonstrate competency to residents and businesses and are indicative of a city’s financial health and reputation. Rating agencies look favorably on cities with long-range financial plans.
Ask key questions
As an elected official, you won’t know the ins and outs of the city’s finances like your staff does. So, throughout the financial planning and budgeting process, be sure to ask questions. Here are some specific questions you can ask:
• What are the major financial documents I should pay attention to?
• Which key components within the city’s financial documents should I focus on?
• What is the council’s involvement in reviewing and approving expenditures?
To learn about the city’s financial health, ask these questions:
• Does the city have debt? If so, how much and what are the terms?
• What are the available reserve balances in each fund?
• What are the annual expenditures and trends over the past few years?
• What are the annual revenues and projected revenues?
• Does the city have long-range financial forecasts?
• What are the assumptions included in the forecasts, studies, or long-range planning documents?
• Does the city have a history of meeting its budget each year?
• What monthly or quarterly financial information should I expect to receive?
By getting answers to these questions, along with becoming familiar with key documents, you will have a good start on doing your part to make sure your city is financially stable.
Dave Callister is the city manager of Plymouth, Minnesota. Reprinted with permission from Minnesota Cities, a publication of the League of Minnesota Cities, copyright 2018.