How I Kept my City Afloat With Fiscal Health Indicators
I first became intrigued with fiscal health indicators in 1981, the second year of my first finance director’s job. My Florida barrier island city had a stable management team and offered efficient services. There were few vacant parcels, so high-value homes were replacing fishing shacks built in the 40s and 50s, and commercial economic activity provided resources that kept property taxes the lowest in the county. Residents were happy. It was a decade to sit back and enjoy life.
But not for me!
I knew the City’s financial condition depended on its continuing ability to balance demands for service with available financial resources. I needed to find a way to monitor the city’s financial condition so we could identify emerging financial problems to develop solutions in a timely manner. So, when I learned about the International City/County Management Association’s (ICMA) Financial Trend Monitoring System (FTMS) – first published in 1980 – I purchased the guidebooks and gathered the multi-year data. (The FTMS was subsequently revised into the book: Evaluating financial condition: a Handbook for Local Government.)
If it weren’t for another significant event – IBM introducing its first desktop computer on August 12, 1981 – I would not have been able to organize the multi-year data needed to calculate the distinctive ratios included in the FTMS. These ratios are then organized to visualize multi-year trends in operating position, revenues, expenditures, debt and capital, and service levels. The ratios are compared to population, inflation, other similar entities, or benchmarks. Many of the indicators are adjusted for inflation and population to control for growth in these areas. Imagine trying to do all of this without a computer!
I decided to use 10 years of data. I created a report based on the FTMS template. The format for analysis of each indicator was as follows:
- Graphical presentation of the indicator’s trend
- Formula for computing and interpreting the indicator
- Analysis of the 10-year trend
- Fiscal and operational strategies which may recommend policy development, revenue reform, or productivity improvements.
The trend analysis helped me to answer several questions:
- How fast is an indicator changing and in which direction?
- How does one trend compare to another and is there a correlation?
- How do these trends compare to local or regional trends?
- How can the results be used effectively for planning, budgeting, and policy-making?
Armed with this information, I was able to provide the high-level financial policy advice that kept our barrier island above water throughout the 1980s.
Based on my experience, here are seven tips for you in preparing Fiscal Health Indicators for your city.
- Use audited financial information whenever possible – It’s important that reliable, accurate financial information that reflects the city’s true costs, revenues, and financial position be used in calculating health indicator ratios. Non-financial indicators from the statistical section of the CAFR should also be used whenever possible, so the report’s users only go to one source for validating your analysis.
- Use the same formulas from period to period – For the results to be meaningful, consistently apply the methodology. This is critical to avoid skewing the analysis. If changes in formulas are necessary, then retroactive ratios and trends should be re-calculated to present a constant picture to users of the indicators.
- Develop internal benchmarks – Clearly define your indicators and understand the benchmark goals you want to sustain and/or achieve. This will assist in developing strategies, policies, and tactics for your city to remain fiscally healthy.
- Identify comparator agencies – Use comparator agency information to validate your internal benchmarks. Comparisons with other agencies are not easy. They are time-consuming — users must determine other agencies to compare with, compile the data, standardize it, and attempt to interpret the information. This may require significant manual effort to normalize data across different Charts of Accounts for “apples to apples” comparisons. To make this easier, consider exploring OpenGov Comparisons, which uses the OpenGov Network™ to rapidly empower governments with new insights that improve city services and lead to efficient use of public money.
- Visualize ratios and trends – Advanced data visualization tools can be used to present data in visually compelling ways that enhance and expand business intelligence. Use visualizations as a tool for facilitation; leading managers, elected officials, and citizens to interact and understand the city’s fiscal health, and the financial policies necessary to sustain fiscal resiliency.
- Document, index, and cross-reference data – Be totally transparent with where the data is coming from, the mechanics of every formula, and the cross-references to all data sources to enhance the credibility and validity of your fiscal health indicators.
- Formally communicate results – Click the following links to see how several entities have prepared formal documents that effectively communicates the results of the efforts of implementing and monitoring fiscal health indicators.
- Financial Trend Monitoring Systems
- Cody, WY
- Kenneth Brown’s 10-Point Test
- California Municipal Financial Health Diagnostic
Today there are other methodologies for measuring and monitoring fiscal health. Two primary sources are Kenneth Brown’s 10-point test and Michael Coleman’s California Municipal Financial Health Diagnostic. The fiscal health indicators I use now are customized to the city I am managing. I use custom scorecards that incorporate the best practices from the above-referenced templates. I have separate fiscal health indicators for governmental funds and enterprise funds. The fiscal health indicators form the basis for comprehensive narratives that draw conclusions from the indicators and recommend sound financial strategies to policymakers.
Category: Government Finance