10 Questions Local Officials Need to Ask Their Budget Directors About Long-Term Fiscal Sustainability

SEATTLE — Plenty of city and county jurisdictions, caught off guard by the economic downturn leading into the depths of the Great Recession, are still recovering from the tough budgetary blows they endured. Are those local governments destined to make the same mistakes down the road or have they learned their lessons about long-term fiscal sustainability?

What are the important questions local government officials should ask their fiscal managers?

These were some topics of discussion at a Tuesday session at the International City/County Management Association’s 101st annual conference at the Washington State Convention Center.

Dennis Strachota, who served as management services director for the city of Chandler, Arizona, and budget director for the city of Long Beach, California, outlined important questions local government leaders should be asking their budget teams.

The Great Recession demonstrated the “consequences of not looking beyond the next fiscal year,” said Strachota, an adjunct professor of public finance at the California State University at Long Beach.

And while having the discipline to balance a budget is certainly good practice, it’s simply not enough.

“A county or city can have a balanced budget, but that doesn’t mean their finances are fiscally sustainable,” Strachota said.

So, what are the most important questions local government officials should be asking their chief financial officer, financial manager or budget director?

Strachota outlined 10 questions that should be involved in regular assessments of a local government’s long-term fiscal sustainability.

10.) How much do we rely on elastic revenues?

Some examples of these revenues include sales taxes, business income or license fees. And if those elastic revenues make up 30 percent or more of the total General Fund revenues, that  could mean trouble. “You could find yourself in a budget crunch even in a mild recession,” Strachota said.

9.) What’s been population growth over the last five years?

More people generally means more revenue. So population trends are an important indicator of economic growth and competitiveness. Stagnant or declining population rates are worrisome, which shouldn’t be surprising.

8.) How much does actual spending vary from budget spending?

This is an important reality check and necessitates drilling down into the numbers. If there’s a track record of more than 10 percent variance, that should raise a red flag.

7.) How much does the General Fund rely on interfund transfers?

If your local government is moving money around from one fund to prop up another, that is a sign that there’s trouble and that’s not a sustainable strategy is based on one-time revenues. And that might able put undue stress on otherwise self supporting operations.

6.) What portion of ongoing spending is covered by ongoing revenues?

If that number is 90 percent or less, hope for strong revenue growth because dependence on one-time resources for ongoing spending eventually catches up with you. Strachota recommended that local governments consider budgeting only 90 percent of ongoing revenue growth.

5.) What percentage of the General Fund is spent on public safety?

Funding public safety is obviously one of the most important priorities for a local government. But the road to sustainable finances is put on shaky ground when public safety eats up too much of a budget, especially when it goes north of 60 percent. (That can mean that there’s not enough for other community services.) The public safety budget should be proportional to the size of the department and increases and decreases in public safety spending should be proportional, too.

4.) What is the value of capital infrastructure replaced or maintained every year?

When times get tough, it’s often tempting to cut the capital budget. But Strachota noted that those cuts are the hardest to make up. Also, take a long-term view with the capital budget and examine annual investment over 30 years. “If it would take more than 30 years to replace your capital infrastructure … there’s a serious infrastructure deficit,” he said.

3.) What is the funding ratio for pension and post-employment benefits?

This is probably one of the most challenging questions, since each jurisdiction is different and funding ratios and needs can vary widely. Long-story short, Strachota said: Underfunding will mean future taxpayers will pay for current-day services. And plenty of local governments are reckoning with that fiscal predicament. (Hello Chicago City Hall!)

2.) What percentage is the unrestricted General Fund balance of total General Fund revenues?

A guideline: 20 percent is the minimum. And greater reliance on economically sensitive revenues requires more reserves.

1.) What will be our cumulative structural budget surplus or gap in three years?

Think long term and assess the impacts of spending proposals. Credible long-term financial forecasts are needed.

Overall, these important questions will require time and effort by a local government’s finance staff to assess and properly consider. But it’s critically important for decisionmakers to ask these questions and press for answers. “Unless you’re asking for it and say it’s a priority, it’s not going to happen,” Strachota said. “That’s just a fact.”