By Eric Berman
January 24, 2018
The start of a new year is a smart time to look forward to see how we all can do better. For many state and local governments, it is also the start of a new budgeting cycle. So why not utilize both processes to see if there are ways to improve your government?
One of the downsides of the information age is we are drowning in data. We can get lost in the data without knowing it. For example, many governments have websites with an ‘open checkbook’ or similar. The terminology and conventions used by a government may cause confusion or frustration in the potential users of an ‘open checkbook’. This may result in a large amount of data, but perhaps not much information. A key to turning data into information is to provide tools to enhance transparency and to answer commonly asked questions. Perhaps also consider including a dictionary of government terms on such a website.
The City of Fargo, N.D., has a great website that attempts to turn data into information. The website includes links to report issues like snow removal, missed recycling and crime (Fargo One). It is easily navigable and contains links to financial information, including 10 years of audits and budgets. Elements of the budgets are in pie charts—again turning data into information. Websites are the windows to customers, and states and local governments should be no different. They can also be the catalysts to solve problems.
Transparency also needs to include debt management. Debt issuances commonly include debt compliance provisions. A website should include links to filings with the municipal securities rulemaking bureau if required. All forms of debt and borrowings should be disclosed.
Many governments experience financial windfalls at certain times. When I was deputy comptroller of the Commonwealth of Massachusetts, the state had a large amount of capital gains taxation one year. Of course, the state legislature wanted to spend the billions of dollars on new programs. That’s a great idea with a massive catch. All too often, governments get caught in funding new long-term programs and operations with one-time dollars. The program then runs into funding problems and must be curtailed or shut down.
A prudent measure is to fund ongoing programs fully with ongoing revenues that are expected to rise in lock-step with programmatic costs. Otherwise, the program will run into deficit sooner rather than later. Prudent budgets recognize the difference between one-time revenues and costs versus ongoing revenue streams and operations funded by those streams.
Expect Rainy Days
Economic downturns are inevitable in every organization. State and local government finance is no different. Similar to our own personal finances, governments that spend more than they raise in revenues are not saving for that inevitable rainy day.
The United States economy has been growing for a long time. Like all cycles, growth turns to decline before one sees it. A prudent measure is to expect a decline by funding the rainy day in advance. The Government Finance Officers Association has a best practice recommending a formal policy addressing the level of unrestricted fund balance maintained in the general fund for rainy day purposes or to stabilize tax or rate increases or to provide savings for the future. The level would be appropriate for the individual government. A measure that is commonly used is an accumulation of average days spending. For example, if a city has budgeted expenditures for 2018 of $100,000,000, it amounts to approximately $274,000 daily.
An admirable goal for the city would be to have 60 days of expenditures in a rainy day fund that would provide for draws upon approval by the city council. A total of 60 days of spending would be approximately $16,440,000. If the city’s most recent comprehensive annual financial report showed a $32,000,000 unassigned fund balance in the general fund, then 32 percent of budgeted expenditures for the next year are available in accumulated available balances from prior years. The city may be reasonably prepared for that rainy day. There are many other mechanisms to hold aside funds into a rainy day fund—percentages of revenues or spending are most common.
Understand Risks are Everywhere
One of the lessons learned from implementing the Committee of Sponsoring Organizations (COSO) Internal Control-Integrated Framework- 2013 is that the COSO can be applied in almost any situation in any organization to help manage risk. The COSO expanded this platform in June 2017 with the publication “Enterprise Risk Management – Integrating with Strategy and Performance.”
How we react to natural disasters are a common indicator of how well we recognize risk. Too often, state and local government finance personnel focus on the integrity of data and information. In a natural disaster, such as what has occurred recently in multiple areas of California, the integrity of data and information should be secondary to the safety of citizens and personnel. After all, people should always be any entity’s most important asset.
Some governments are utilizing ‘reverse-911’ and similar devices to make sure that citizens and personnel are safe and accounted for. As an example, winter has set in. During heavy snowfalls, my town government has a text system if lights go out, for heating issues, water main breaks, snow plowing needed and similar. This is especially important for the elderly and infirmed. My town has understood risk and has instituted measures to attempt to mitigate it as much as possible. The town is also transparent. When lights go out, a follow-up text estimates when it will be repaired.
In terms of the integrity of data and information, disaster recovery plans are essential. The plan needs to be well understood, documented, with clear lines of authority for decision-making. Ultimately, the plan needs to be tested regularly. A plan is useful to manage risk. But until it is tested successfully, it is just a plan.
These are just some of the tools that a government can use to achieve. From thought leadership to internal audit services to forensics to sound technology controls, your Eide Bailly professional can help take your government to the next level. Give us a call!