Planning For Fiscal Sustainability in Difficult Times

Presented by Mark MosesDeputy City Manager / CFO

City of Stockton

February 19, 2009

Many agencies manage their resources on a year-to-year timeframe. This approach is forgiving under good economic conditions, but often leads to a reactive environment with limited ability to manage effectively.

◦ How does a longer term planning horizon provide the governing body with more choice and control?

◦ How can an agency break the pattern of short-term resource allocation and create a vision of fiscal sustainability that can be defined, measured and achieved?

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“The best way to predict the future is to create it...” – Peter Drucker

Advantages of planning –

◦Legitimate sense of control over the future

◦More resources (esp. time) to adjust to both positive and negative events

◦Likely to set aside resources in good times

◦Consistent with a proactive approach to leadership/management

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Advantages of planning –

◦ Provides ability to link financial resources to strategic actions and priorities

◦ Incorporates discipline of considering long-term implications of decisions

◦ Creates vehicle to demonstrate accountability

It takes strong, pro-active leadership to implement a planning process in the absence of a fiscal crisis, but it’s never too late to start.

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Why organizations don’t plan –

◦ Focus on crisis management

◦ Lack of organizational discipline

◦ No organizational vision (nothing to plan for)

◦ Don’t see value in a plan that will inevitably change

◦ Indecision (plans require leadership & commitment)

◦ Confusion over where to start

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Consequences of not planning –

 Good times

◦ Not many obvious consequences because most news is positive

◦ Revenue estimates are often exceeded

◦ Mistakes are easily compensated for

◦ Missed opportunities to invest in future

◦ Unsustainable habits

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 Consequences of not planning –

Bad times

◦ Reinforces ongoing crisis mode of operations

◦ Sets tone for reactive management

◦ Shrinking array of options to address problems

◦ Trapped with only short-term solutions

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Short-term (non-strategic/unintended consequences)

Mid-term / long-term (requires planning)

Hiring freeze / program freeze Modify scope of services / programs to sustainable level

Across the board cuts Improve service delivery methods

Reduce capital spending /Reduce maintenance spending

Increase revenues

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Strategic plan - incorporating community’s vision & priorities

Financial Plan - multi-year planning model focused on supporting the strategic plan

As contrasted with…

◦ Ad hoc prioritization and assignment of resources revisited annually

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The sooner you begin to extend your planning horizon, the sooner you benefit

  The process of planning is valuable (even in short

term)  The business model for funding local government

is very precarious; prompting a serious review of priorities and strategies

A crisis is a terrible thing to waste

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1. A city can go from reasonably healthy to insolvent or nearly insolvent in two years:

  GF Fund Balance as % of Expenditures (Target = 15%)

◦ June 30, 2006 10%

◦ June 30, 2007 6%

◦ June 30, 2008 0%

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____ __ _______City of Vallejo

2. Dozens of California cities were adding programs in FY07-08 and even FY08-09

Now these same cities are implementing:

◦ Hiring freezes

◦ Furloughs

◦ Voluntary separation agreements

◦ Layoffs

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3. Would you invest in a business with all of the following attributes?

State looks to you (shifting costs or taking revenues) to solve its budget problems

While revenues decrease…◦ Cost of services can contractually increase◦ Demand for services can increase

Pressure to fund current activities makes accumulation of capital (reserves) difficult

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In an environment that doesn’t embrace a planning discipline, planning may be resisted until the organization hits bottom and there is nothing else to do…

Need a vision embraced by organization’s leadership

Has to be sufficiently discontent with the status quo

Must establish fact that current structure is not sustainable

Without these, there is no motivation to support the planning process or change efforts.

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Assessment Criteria: Economic Factors Financial Performance Factors

◦ Reserves◦ Operating ◦ Ability to respond to changing conditions

Political Capital◦ Ability to generate revenues via voting

public

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1 – poor 2 – fair 3 – good 4 – v. good 5 - excellent

Local Economy

In decline Slow growth Growth Strong growth trend

V. Strong growth trend

Reserve Levels

Below 5% 5-10% 10- 15% 15 – 20% Above 20%

Operating performance

> 10% gap 2 – 10% gap < 2% gap No gap Pos. Operating results

Flexibility IOrganization changeability

Difficult / no precedent

Difficult but some experience

w/change mgmt

Moderate difficulty but established momentum

Some proven ability to

implement change

Adaptable organization; well suited to

changeFlexibility IIContractual

commitments

Significant long-term

commitments

Some long-term commitments

Few long-term commitments

Ability to reopen major contracts

All key contracts up for renewal

Political Capital

Voting public disenfranchised

Voting public not historically engaged

Beginning education process

Educated community support?

Educated community supportive

Planning Horizon

1 year 2 years 3 years 5 years > 5 years

High scores – need to maintain long-term perspective and discipline to stay healthy

Moderate scores – need to focus strategically (difficult to address everything at once)

Low scores – need to break the pattern (likely with outside assistance)

Organizations with low scores have limitedability to fulfill their goals, vision.

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Provide for a strategic and financial plan

Both the strategic plan and supporting financial plan need to be embraced by entire organization

Ensure sufficient resources to do justice to the process (e.g., facilitation, process design)

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Don’t oversell or overstate short-term benefits; this is a discipline that will take time

Additional Resources◦ CSMFO website/members◦ GFOA website, materials, research staff

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Planning/good fiscal policy are necessary but not sufficient for success: strategic plans need to be executed; the organization still needs to be managed

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