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Being a Fiscal Impact City: Long-Term Planning

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Introduction

In recent weeks we looked at how adopting a fiscal impact approach to operating and capital budgeting can help a community make more sustainable choices. This week we apply the same logic to long-range fiscal planning.

Framework for Long Term Planning

Long range planning, according to the National Advisory Committee on State and Local Budgeting (NACSLB)  is a process to assess the long-term financial implications of current and proposed policies, programs, and assumptions. This process creates appropriate strategies to achieve a community’s long-term goals. Though finance officers and budget managers are daily working with a city’s budget, revenue and operating numbers, financial planning expands their awareness of how these statistics relate to each other and to external variables like economic indicators and demographic trends. Taking a long-term perspective helps these local leaders improve their awareness of options, potential problems, and opportunities. The range of issues that they can examine with this approach includes revenues, expenditures, and the service implications of changing or eliminating programs or adding new programs, services, or debt.

A summary of the key steps should include:

  1. Analysis of financial trends
  2. Assessment of problems or opportunities facing the city and potential actions to address them
  3. Long-term revenue and spending forecasts
  4. Consideration of how these trends relate to citywide and departmental goals set out in strategic or comprehensive plans

Such a process is not just a forecast. It engages all internal departments, key external stakeholders and the general public in so far as all these have some role in setting and helping achieve key goals.

The NACSLB identifies several best practices that can support the long-range planning process including:

  • Prepare multi-year revenue and spending forecasts using a variety of methods
  • Evaluating and understanding how changes in the tax base and revenues will impact city operations
  • Examination of tax exemptions, incentives and other policies that can reduce revenue
  • Prepare multi-year projections of spending for each fund and for current and proposed programs
  • Evaluate revenue and expenditure options together, and present these relationships so elected officials and the public can understand the implications of changes in service levels and revenues and how they can impact each other.

Role for Fiscal Impact Models

Other best practices are also presented in the report. For our purposes we want to highlight how fiscal impact analysis can help tie these steps and practices together. The goal is to improve fiscal sustainability with the model, not just use it to evaluate individual projects. Using a full fiscal impact model is the most direct way to use this process to analyze revenue, spending and economic data in ways that help policy makers and the public understand the consequences of budgeting decisions. These decisions may appear harmless when looked at in an annual budget presentation. A community risks making very wasteful and politically damaging decisions without taking a longer term perspective.

First, a good fiscal impact model will make use of extensive, custom information on the city’s spending, revenue and staffing. This detailed data is the only way to make meaningful and accurate predictions of the consequences of changes. At a minimum, the historical data in the model should include enough years of data to see how they budget and how revenues change in good and bad financial times. A full business cycle is a good starting point.

Second, the model will connect these municipal financial statistics to activities in the real economy. Service costs will change based on the population, employment level, industry mix and physical form of the city. As these external factors change, local leaders need to be able to predict how their service demands and resources are likely to change, too.

Third, the model should give local leaders a projection that is long enough to help them make good decisions. A five to ten-year projection is usually adequate for most operations and department-level variables. For capital infrastructure or other longer-lived decisions the projection should go out at least as far as the infrastructure is expected to last and to include maintenance and replacement costs.

Because of these features of a good fiscal impact model, a city can combine its revenue, operation and economic forecasting in a single package that will help the community understand where they stand in terms of their goals and the means to achieve those goals. As always, there needs to be extensive citizen engagement in these processes so that when setting sustainable goals, local leaders can win the support of the community. When the community understands the consequences of these choices, and what can happen when there is a downturn, it will be easier to stay the course.

Being a Fiscal Impact City: Capital Budgeting and Asset Management

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Introduction

Last week we saw how adopting a fiscal impact perspective with the operating budget improves municipal sustainability. Even without doing formal analysis on every project, local leaders can start helping the community think in terms of the long-range costs and benefits of city service levels. This week we turn to capital budgeting and capital asset management. Fiscal impact analysis will help a community align its vision with long-term sustainability. Capital assets – long-lived investments such as buildings, infrastructure or equipment are essential to delivering municipal services. They enabling the private sector to operate more effectively. Unfortunately, many communities have over invested in infrastructure given their tax base. Many also fail to properly manage these assets – either because they find that their tax base cannot support appropriate maintenance or because they don’t have simple procedures to help them get a handle on their real capital needs and costs.

Framework for Capital Budgeting

To begin with, cities should have formal policies set out in a capital budgeting process. Even when cities have good processes in place, they tend to run them in isolation. This makes it harder to learn about community needs and the economics of different ways of satisfying those needs. Without going into too much detail, capital budgeting and management process should include clear definitions of what counts as a capital project and what doesn’t. It should also include common sense policies like making sure the city covers maintenance costs first and isn’t doing deferred maintenance on some assets while trying to build new capital projects. It should look at the total lifecycle costs of the assets. That includes routine maintenance and the staff and materials to run and repair the asset. The process should also include metrics for asset performance that are related to the community outcomes the city wants to impact. There needs to be extensive citizen involvement and the process needs to be linked to other major plans like the city strategic plan and comprehensive land use plan.

Cities have been building up their capital assets over decades if not centuries. Often, documentation was an afterthought. It can be a considerable task just to inventory existing assets, but it is the necessary starting point to understand long-term costs and needs. Above the ground assets like streets, buildings, signs and street lights are relatively easy to address. Unseen assets like water mains, wastewater and storm water systems and other utilities are more difficult to inventory. Once the process is in place and the existing assets are mapped how can fiscal impact analysis support long-term sustainability?

Using Impact Analysis for Sustainability

Communities should invest in assets because they help deliver services. Impact analysis helps communities evaluate capital assets in the context of those services. This helps build a strong conceptual link between the city operating budget and the capital budget. Sustainability requires that all the costs of a service be accounted for, and they need to be covered by adequate revenues. Failure to do this is leads to deferred maintenance. They looked at operating and capital costs in isolation and didn’t try to understand how each service and its associating capital resources contribute to the total municipal budget burden. Fiscal impact analysis is a framework that can integrate these two dimensions of the capital decision. At a minimum the analysis should consider four dimensions when evaluating existing capital assets or evaluating potential new investments:

  • The source of funding and its appropriateness to the life of the asset
  • Potential impacts on the supply of the associated service from changing technology
  • Changes in the demand for the service from demographics and economic trends
  • Legal and regulatory issues that may impact the supply or demand for the service

This type of analysis will give decision makers an idea of the cost effectiveness of the asset in question relative to the desired goals. Fiscal impact analysis can help answer several other key questions:

Is the current production process for a municipal service cost effective long-term (this requires including both operating costs and the associated capital equipment?)

Can the government afford to maintain and eventually replace the capital assets? Our cities are full of underused and abandoned capital projects because of poor planning or a misguided belief that the investment responded to a long-term need. Entertainment and sporting venues are prime examples.

Can the city achieve its vision and performance goals with the approach being proposed? Just because the city has always provided a given service does not mean that the old way is still cost effective or effective at all. There are many public, private and hybrid methods for delivering a given service.

Finally, what are the costs of deferred maintenance? How much deferred maintenance can the asset survive, and for how long before its functioning is compromised? For example, Road quality degrades in a nonlinear fashion. There is a gradual decrease in road performance for several years, then, in a very short time, a road will rapidly decay. Cities should understand the consequences of not maintaining their assets.

A fiscal impact model can help decision makers understand the answers to these questions. Such an analysis documents the full lifetime costs of a capital asset or an entire class of assets. These costs can be compared to the overall municipal tax base. Most communities will enjoy many years of near-maintenance-free benefits from their new capital investments. Eventually, they will face the choice of either maintaining those assets or letting them degrade. Failing to maintain an expected level of service reduces the desirability of the community. The response from the private sector may be a swift loss of confidence in the local government. This can start a downward spiral that the community may not recover from. It is too easy for families and businesses to vote with their feet. Building a fiscal impact process into capital budgeting is very cost-effective insurance against this unhappy outcome.

Becoming a Fiscal Impact City: The Budget

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Introduction

Once you decide to become a more sustainable organization by becoming a fiscal impact city, and have had the serious conversations we recommended last week, what’ next?

A good place to start is with your budget process. Budgets are an ever-present feature of local governments. Most cities are either in the process of planning for, developing, approving, implementing or reviewing their budget. The calendar is full of budget-related responsibilities, actions and deadlines. In too many communities, the budget process dominates everything else puts staff into a continuously reactive mode. They may be focusing more on the internal demands of the budget process than on trying to connect their resources and processes to solve community challenges.

With some minor changes, your budgeting process can be reoriented into a tool to improve long-term organizational sustainability and a way to proactively help you realize your community’s vision. There will still be hard decisions. Community engagement and politics will still be a central part. The rest of this post shows how a budget process can be gradually reformed through using a fiscal impact mindset. The result will help cities realize their community vision and build a more sustainable organization.

A Framework for Budgeting

As a reference point, we will be using the budget framework developed by the National Advisory Committee on State and Local Budgeting. This framework, set down almost twenty years ago, is still one of the best starting points for local leaders who want to be proactive and focus on long-term sustainability. We will give a quick overview of this framework then talk about how a fiscal impact mindset can work in it to turn budgeting into a true tool for organizational sustainability and community prosperity. Though they define budgeting as the planning, implementing and evaluating the provision of services and capital assets, we limit our discussion this week to the operating budget. We will look at capital budgeting in a later post.

Qualities of a Good Budgeting Process

The National Advisory Council emphasized the need for budgeting to go beyond annual balancing of resources and options. They intended their report to help governments upgrade all phases of budgeting: planning, development, adoption and execution. To begin with, the entire budget process should be goal-driven. These are goals beyond preserving departmental operations with given resources. The critical difference in a good budgeting process is that it starts with community needs, vision and issues. These should motivate the government’s quest to create a suite of services that can meet those needs, realize that vision and address the issues that are most important. The budgeting process sheds light on cause and effect, the real issues, so management and elected officials can make the tough decisions and tradeoffs that are always necessary because resources are limited.

In addition to being linked to goals, they emphasize that a good budget process:

  • Takes a long-term perspective – cities should look at impacts of budget decisions over many years and use the process to determine the sustainability of programs and services.
  • Is focused on outcomes and results – the outcomes of the resource allocation process are the services the city provides. These should have measurable results – impacts on the community issue they are designed to address.
  • Provides information and incentives to staff (and other stakeholders) – budgeting should inform decisions makers and increase stakeholder participation. It should also close the loop with all stakeholders.

Sustainability Budgeting and Fiscal Impact Analysis

Fiscal Impact Analysis is usually associated with evaluation of specific policies or development projects. How can this approach support annual budgeting? It isn’t cost effective to produce a formal fiscal impact analysis for every little decision. What is important and possible is to start thinking in fiscal impact terms when making these decisions. Stakeholders, elected officials and staff should all be aware of how resource allocation decisions produce winners and losers. Shifting funding from one area to address a priority is a good choice, but it is helpful to understand what the community is giving up with these decisions. Adopting the perspective and language of cost benefit analysis is the first step in applying fiscal impact analysis. Being aware of the consequences of tradeoffs in resource allocation and documenting the likely changes in service levels are concrete ways to start the process.

A further step requires collecting more information so local leaders can understand the costs per unit of service for various programs, the outputs of those programs and the associated changes in community indicators. This additional data does not exactly prove cause and effect, but can give hints of the relative effectiveness of different approaches to solving the same problem. Not all programs are easy to measure and have a more complicated relation to community outcomes. Still, the data collection and evaluation process can improve decision making.

The final step is to conduct a complete fiscal impact analysis of a policy change. This analysis will measure program costs and document the budget, revenue and economic impact of that change so that policy makers can see what it means for the organization and the community. Combined with community indicators and standard program performance measures, a fiscal impact analysis will help those responsible for setting the budget be well informed. Those decision makers can also share this information with constituents so that everyone is clear about the tradeoffs and likely consequences. This type of analysis can be applied to a part of the budget, the major programs or departments or to the entire budget. When applied to the entire budget it is a useful input into long-range financial planning which attempts to evaluate budget, revenue and impact out at least three years.

Becoming a fiscal impact city is more than a resource challenge. It is a major leadership and cultural challenge. The difficulty is building the organizational culture that can function in this more transparent way and building in community engagement and education processes so the public can increase their support for the hard choices local leaders need to make. In the following weeks we will look at other areas where local leaders can improve organizational sustainability by becoming a fiscal impact city.

 

Construction in Dallas

Fiscal Impact Analysis and Sustainability

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Development agencies, governments and businesses have long used fiscal impact studies. Sometimes these studies are intended to justify a favored project. Sometimes, there is genuine interest in learning whether the project is a good idea for the community. A fiscal impact analysis is a powerful tool for helping local leaders and the entire community understand whether a project or policy change will improve or harm local-government finances. Doing one-off studies of individual projects can mislead local leaders. This is because stand-alone studies can fail to demonstrate a cumulative impact over time that overwhelms departmental service levels, utility and infrastructure capacity. A more holistic approach is better where the fiscal impact process informs public operating and investment decisions throughout city government.

A community can also miss a golden opportunity by only conducting stand-alone studies of its major projects. It misses the opportunity to use the fiscal analysis process to help reorient local public and private decisions to a more financially sustainable way of doing business. Over the next few weeks we will be showing cities how they can take full advantage of fiscal impact analysis not only to help them understand major, individual developments, but to use the fiscal impact process to improve overall operations. Today we will give you a quick overview of fiscal impact analysis as a primer. You can find more information on fiscal impact studies by downloading our local leader’s guide here.

What is fiscal impact analysis?

Fiscal impact analysis measures how local-government revenues and service costs change because of a change in the economy or the local government itself. The change can be a public or private capital investment or a change in government policy. The analysis subtracts government costs associated with completing and supporting the project from the revenues the project generates for local government. Many types of projects can be evaluated with this kind of model:

  • Construction or renovation of residential or commercial real estate
  • Business expansions or closures
  • Public works investments in facilities and infrastructure
  • Changes in government staffing, equipment and operations
  • Fee and tax changes
  • Land use changes (rezoning, annexations and build-outs)

Cities should use fiscal impact analysis to evaluate any major policy change or development. The time and effort are worth it. Some of the benefits of the study include: discovering potential infrastructure bottlenecks, learning the operating budget and revenue consequences of the project and helping the community understand the timing of these costs and benefits. Still, a community doing one-off studies of individual projects can miss the bigger-picture opportunities fiscal impact analysis offers.

Over the next few weeks we will take a closer look at how local governments should rethink their fiscal planning, forecasting and operations using a fiscal impact lens. Essentially, cities can use fiscal impact analysis as a process to make their key development, financial and operating processes work together to put their organization and their local economy on a more sustainable path. This not only helps them understand the implications of individual choices, it helps them:

  • Connect the dots between economic development, planning and budgeting processes
  • Build an organizational culture that makes short term decisions that are consistent with long-term goals and sustainability
  • Improving citizen and elected official confidence that the city resources are being well managed

Next week, we will look at the strategic and tactical choices a community needs to make if it wants to use the fiscal impact process to help improve long-term sustainability.