A recipe for getting the finances right
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COMMENTARY | Cities across the country are currently finalizing their budgets. But budgeting is just one ingredient in a city's financial success.
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In a 1957 speech, Dwight D. Eisenhower shared a lesson he’d learned in the Army that he said worked for the whole of government. “Plans are worthless,” the president said, “but planning is everything.”
Like so much about Ike, there was a lightness to what he was saying that made the central paradox a little easier to digest. The fact is governments often have to change their plans on the fly. And that means long-range plans tend to fall by the wayside, putting leaders in a reactive position rather than the driver’s seat.
You can see this indirectly in the way arguments over city budgets seem to suck up all the oxygen in the room. For the past several months, mayors and city councils have been going back and forth over budgets. Right now, in Minneapolis, Mayor Jacob Frey and the city council are butting heads over a $1.5 million grant for a homeless advocacy group. In Houston, policymakers are debating whether to raise property taxes to help close a $129 million deficit. And in Seattle, Mayor Bruce Harrell has released his proposed budget to close a $250 million budget gap.
I’m not saying budgets aren’t important—they’re extremely important. But budgets are, or should be, the implementation phase of a long-term financial plan, part of a longer, cascading process that engages stakeholders at every level. If you think about city governance as a kind of recipe, there are five key ingredients:
- The strategic plan
- A long-term financial plan
- The budget
- An annual financial report
- The auditor’s report on internal controls
The strategic plan is the one with the widest lens: What are we going to do? What do we want to do? The long-term financial plan provides answers on how we’re going to pay for it. Since the needs and wants of the community typically exceed its resources, there’s going to be a gap between the revenues we get and the expenditures we’d like to make. The financial plan tells us how we intend to close that gap.
As Kevin Coffey, a select board member in Andover, Massachusetts, put it during a recent interview, the process for strategic planning tends to be more “like the kid in the candy store. There’s rarely sufficient discussion about tough choices ... and plans end up ‘loaded’ for a couple of special interests and do little to surface real costs or trade-offs between different priorities.”
As policy documents, the strategic and long-term financial plans are aspirational. Implementing them requires practical steps and tactical decisions.
That’s where the budget comes in. It’s a year-over-year implementation document. It’s where a city asks itself, how are we going to get closer to our strategic goals this year and pay for those steps sustainably?
Once the budget is set, the annual financial report comes next, offering a kind of taste test. It’s a look back. In it, a city asks itself, are we getting stronger or weaker financially? The budget may be an implementation document, but it still builds on aspirational plans. Even well-informed projections may not work out as planned, so the annual financial report tells us where things may be going off course and identifies gaps that need to be addressed to get back on track.
The auditor’s report is where you find out whether the ingredients you’ve put together are working to make a healthy, nourishing meal. It’s not an assessment of our current financial condition, but it tells us if the recipe is correct, if the right ingredients are in place. If policymakers put in the proper amount at the right times, things should come out well.
The auditor’s report offers three classes of deficiency: reportable conditions, significant deficiencies and material weakness.
A material weakness is a critical warning that something’s gone badly wrong in your kitchen, something in your internal controls that could create a torrent of serious problems. A significant deficiency is a pot boiling over. A material weakness is the stove on fire.
Like most recipes, the directions are straightforward, but the cooking can get complicated quickly. That’s why it’s troublesome that many cities go without a clearly defined long-term financial plan. Cities that are doing well almost always have one. Cities that find themselves in distress almost never have one. They rarely have timely audits either. And that’s a recipe for disaster.
There’s an adage about not eating your seed corn. When cities abandon the long-term planning recipe I’ve just sketched out, that’s in essence what they’re doing. Without taking the long view, year-over-year budgets increase a city’s liabilities as they toss more ingredients into the pot, hoping to offset (or put Band-Aids on) earlier mistakes. If during your government’s budget deliberations no one asks, “How does this advance our strategic or long-term financial plan?” it’s fair to worry that the cooks aren’t watching the kettle closely enough.
When decision-makers limit their focus, and public debate, to just the budget, it is to the detriment of long-term community well-being. Just think about our nation’s problem with unfunded infrastructure liabilities. Of course, promises are politically expedient; long-term liabilities are not.
When I was mayor of Kansas City, for example, the city council decided to greenlight the construction of a recreation center, but it didn't budget money for its ongoing operation and maintenance. So essentially, you could say that the plan was that the day the recreation center was completed you lock the doors and don't let anybody in. While it’s easy to see the foolishness in that premise, governments all too often ignore the long-term consequences of decisions. They frequently prefer not to be transparent about those long-term implications by preparing and publishing long-range financial plans.
As Ike might have warned my colleagues, plans can go awry. That’s all the more reason for careful planning. Generate strategic plans that are linked to strategic budgets and ensure that long-term financial plans are in place to pay for those wants and needs.
Mark Funkhouser, president of Funkhouser & Associates, is a municipal finance expert who has spent decades in government service and is a former mayor of Kansas City. He is an advisor to Route Fifty.
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