No one wants to inadvertently steer a community off a proverbial financial cliff. Elected officials and the constituents they serve need confidence in the service delivery and want to know monetary decisions are not being made in a vacuum. Decision-makers, stakeholders and the broader community need to set long-term financial priorities and lay out a path to achieve those priorities. This approach creates organizational clarity. Without clarity, decision-making tends to be reactive to the needs and politics of the moment rather than the long-term.

To achieve organizational clarity, a multi-year financial plan is essential. The framework we offer here comes from our experience working with dozens of municipalities on how to think about, develop, communicate and implement long-term planning. A multi-year financial plan becomes the cornerstone to your community’s decision-making process.

Long-term planning as a decision-making tool

Where do you want to have impact? What is your mission? Are you spending resources wisely? How can our community meet challenges on the horizon? What will it take to achieve success? What future disruptors should we consider? These are the kinds of deep, fundamental questions best addressed with multi-year financial planning.

Without planning, municipalities may end up limping along from year to year, spending down reserves, or using one-time revenues to stay afloat. Furthermore, as many governments have discovered, putting off or ignoring painful decisions doesn’t make problems disappear. If anything, it usually makes them worse and they may later emerge as a full-blown financial crisis.

A multi-year financial management plan allows governments to:

  • Manage and measure the evolving problem(s)
  • Ensure resources and staff are appropriately allocated and budgeted for
  • Determine whether goals are on track
  • Build consensus around goals by focusing conversations and eliminating excessive meetings

Multi-year financial planning defined

Multi-year financial plans project revenues and expenditures for several years into the future, but unlike a multi-year budget, it does not authorize expenditures (though it should be linked to the current budget and be a framework for future budgets). The plan’s purpose is different from that of a budget.

The plan serves as a valuable decision-making tool by illustrating what will happen to a government’s ability to pay for and provide services given a set of policy and economic assumptions.

The major elements typically include the following:

  • Historical revenue and expenditure trends: The basis of any plan starts with knowing where you are. The historical trends in revenues and expenditures demonstrate the current ability of available resources to meet current policy objectives.
  • Benchmarking: Who is your competition and how do you compare? While every community and the services they provide are unique, there are similarities between communities. Understanding how your service delivery compares to other communities will provide important insight to your operational revenue and expenditure efficiencies.
  • Visioning/Goal setting: What are the community issues you need to address? What are the future disruptors that will likely impact operations? What do you want your community to look like in the future?
  • Revenue and expenditure projections: Once you know where you are and have an idea of where you want to go, develop economic assumptions to project out future revenues and expenditures. This will highlight whether current resources are adequate to meet future expenditure needs, or whether additional resources will be necessary to meet your vision and goals.
  • Financial policy development: Key to any plan development is the establishment of clear policy direction. While policy is not meant to be set in stone, policy needs to be established and nimble enough to meet the current and future needs of the community. Formal policy should address reserve targets, capital planning, paying as you go (cash) vs. paying as you use (debt), annual plan evaluation, etc.

Preparing for multi-year financial planning

It’s not as simple as gathering organizational leadership in a room with a whiteboard. To develop an effective long-term financial plan, it takes deliberate preparation to ensure the right data is available to inform and justify community and policy decisions.

There are typically four phases of multi-year financial planning:

  • Stage 1: Onboarding and Information Gathering
  • Stage 2: Model Prep and Analysis
  • Stage 3: Decision-Making
  • Stage 4: Implementation
  • Stage 5: Annual Review

Stage 1: Onboarding and Information Gathering

Stage 1 is preparing your staff and other key stakeholders for a successful planning process. During this phase, we mobilize the appropriate people and help everyone understand goals, timeframe, roles and responsibilities, expected outcomes, and general process to get from where we are now to the end product – a multi-year financial plan ready for implementation.

To some, Stage 1 may seem like “planning for planning” and a waste of time, but in our experience, building stakeholder consensus on goals, roles, timing, and process upfront helps prevent conflicts further down the line and ensures the process is kept on track.

Stage 2: Model Prep and Analysis

Stage 2 involves running various financial scenarios and adjusting assumptions that will support the decision-making to come in the next phase. During Stage 2, the working group builds upon the preliminary analysis done in Stage 1 and may cover such topics as legislative issues, the political environment, areas of economic growth, and demand for services. In sum, during this phase, we seek to answer the fundamental question “What is actually feasible given our financial condition, various constraints and opportunities, and what are their likely effects?”

Finally, we benchmark against similar entities to determine how the community stacks up against regional and national peers. And, if applicable, we determine both debt capacity (the amount of debt a municipality can repay without jeopardizing its financial health) and debt affordability (the burden of repaying that debt), particularly if the community needs to undertake a large capital project.

Stage 3: Decision-Making

In Stage 3, it is time for key stakeholders to make decisions based on the data and analysis complied during Stages 1 and 2. For example, what should be done if a financial deficit is identified? Are any changes to financial policies needed? Are new revenue sources needed? Should expenditures be reduced? Are the service-level preferences still valid?

As one might expect, this process involves a fair amount of input from elected officials and in many cases, resident/community feedback in order to build a consensus on what to do, especially if tax increases or service-level reductions are contemplated. In many cases, town halls and workshops are conducted where government staff and consultants provide data, analysis, and recommendations.

Stage 4: Implementation

In Stage 4, the decisions made in Stage 3 are implemented, typically by government staff. And hopefully, because of the discussion, buy-in, stakeholder engagement, and data analysis that preceded, that job is made a lot easier.

Stage 5: Annual Review

Once you have adopted a multi-year financial plan and are in the implementation stage, Stage 5 is to annually review the assumptions and goals of the plan to determine whether they continue to reflect observational data and the direction the community wishes to move. Plans are not meant to be static as priorities, economics, environmental and other disruptors will impact your original assumptions. The key is to continually adjust the plan to avoid the plans obsolescence.

Final thoughts

A multi-year financial plan should be a “living document,” defining goals for the future and creating a road map or action plan for how to achieve them. Just as challenges will arrive, so will opportunities—so you must be ready to amend the multi-year financial plan to take advantage of opportunities previously unforeseen.

Moreover, by periodically communicating the status of the long-term financial plan, the public’s perceptions of government transparency, trust, and accountability—all good measures of stewardship—are bolstered.

Additionally, the Government Financial Officers Association also offers useful resources for this topic.

Learn more about how UMB Financial Services, Inc. municipal advisors can assist to help find a quality path forward during these complex conditions. Contact us to connect with a municipal advisory team member.

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