Leading Edge Research for Financial Management & Beyond. By Bob Eichem GFOA President-Elect & CFO, City of Boulder, Colorado

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1 Leading Edge Research for Financial Management & Beyond By Bob Eichem GFOA President-Elect & CFO, City of Boulder, Colorado 1

2 Today s Objective Inform you of some of GFOA s current research; Give you resources on how to learn more; and Give you some ideas to think about! 2

3 Topics Financial policies Reserves Other key policies Priority budgeting A response to traditional incremental budgeting Performance measurement 3

4 Financial Policies Reserves Other key policies 4

5 Reserve Policy GFOA recommendation GF: 16% of regular operating revenues, or 2 months of regular operating expenditures S&P views on Reserves Low: Below 0% Adequate: 1 to 4% Good: 4 to 8% Strong: 8 to 15% Very Strong: Above 15%

6 Other Drivers to Consider When Setting Reserve level Government size Management plan Borrowing capacity Public perception Political support Is there a level of reserves that resonates? Can elected officials be engaged in the analysis?

7 Reserves Most Important Policy Elements Conditions for use of reserve Authority to use reserves Replenishment of reserves Excess reserves

8 New Area of GFOA Research Risk-based approach to analyzing reserves Identify key risks salient to your community Extreme events, revenue volatility, infrastructure failure, expenditure spikes? Assess risk Probability of occurrence and magnitude of loss Translate exposure into reserve targets Consider supplemental risk mitigation strategies See free case study report on Colorado Springs 8

9 Key Policies Balanced Budget Defines a balanced operating budget Goes beyond Provincial requirements True structural balance: Recurring revenues = recurring expenditures Asset Maintenance & Inventory Establish intent to keep assets maintained Inventory and assess the condition of all major capital assets. Consider cost of maintenance when making new investment decisions Commit to funding a maintenance plan

10 Key Policy - LTFP Policy Commit to doing a Plan Scope of the Plan What s in it? Time Horizon? Funds? Analysis? Relation to Strategic Planning Make sure plans are realistic and aligned Find Imbalances Long-Term Balance The plan contains solutions

11 Key Policies Revenue Encourage more stable revenue base Encourage new sources Positive return from economic development Vigilant collections Earmarks Use of One-time Revenues Use of Unpredictable Revenues

12 Resources Financial Policies Book on LTFP available through GFOA Colorado Springs Case Study About using GFOA s risk-based approach to sizing your reserves Visit Shorter articles about the Colorado Springs case study are forthcoming in Government Finance Review and Public Sector Digest GFOA is currently working on applying the same risk model to other cities. Results will be published on-line and in the magazine. 12

13 Priority Budgeting A response to traditional incremental budgeting 13

14 Incremental Budgeting Incremental budgeting is Taking last year s budget as the starting point and making changes at the margin Deciding how to spend incremental new revenue Deciding to cut if there are decrements Problems with incremental budgeting Past patterns of spending may not longer be affordable or relevant In cut-back environment, across-the-board cuts are the common, but not strategic solution 14

15 Across the Board Cuts Address $14.5 Billion Shortfall From 2007 California Governor s Office: Across-the-board approach spreads reductions as evenly as possible so no single program gets singled out. Reaction: the governor s approach would be like a family deciding to cuts its monthly mortgage payment, dining-out tab and Netflix subscription each by 10%, rather than eliminating the restaurant and DVD spending in order to keep up the house payments.

16 Zero-Base Budgeting (ZBB) ZBB asks managers to build a budget from the ground up, starting from zero. ZBB was a response to dissatisfaction with incremental budgeting GFOA surveys show that text book ZBB is almost unheard of in practice. Those who report using ZBB use practical versions that do not conform to the text book ideal Alternatives to ZBB exist 16

17 Satisfaction with ZBB 17

18 Why Priority Based Budgeting (PBB)? PBB is a powerful tool that helps us Better meet the expectations of constituents Address current or anticipated fiscal constraints Focus on the revenues we have and on using them in the most productive ways possible Spend within our means Attain the best results for the money we have

19 Key Philosophies of Priority Driven Budgeting Prioritize Services Do the Important Things Well Question Past Patterns of Spending Spend Within the Organization s Means Know the True Cost of Doing Business Provide Transparency of Community Priorities Provide Transparency of Service Impact Demand Accountability for Results

20 Overview of Steps in the Process Identify Available Resources Identify Your Priorities Define Your Priority Results More Precisely Prepare Decision-Units for Evaluation Score Decision-Units Against Results Compare Scores between Decision Units Allocate Resources Create Accountability for Results & Create Service Efficiencies

21 Cultivates a wide range of recreational, cultural, educational and social opportunities Supports and enhances neighborhood livability for all members of the community Facilitates housing options to accommodate a diverse community Enhances multigenerational community enrichment and community engagement Healthy and Socially Thriving Community Fosters inclusion, embraces diversity and respects human rights Supports the physical and mental well-being of its community and actively partners with others to improve the welfare of those in need

22 Scoring Programs to Identify Value Based on their Influence on Results City of Boulder Community Planning and Sustainability Department Program Name Accessible and Connected Community City of Boulder Community Results Economically Vital Community Environmentally Sustainable Community 0-4 Scale Healthy and Socially Thriving Community Safe Community Community Program Attributes Mandated to Provide Service 0, 1, 2 or 4 Change in Demand for Service -4, -2, 0, 2, 4 Reliance on City to Provide Service Self Sufficiency/ Cost Recovery 0, 1, 2 or Scale Community Planning & Sustainability Community Planning & Sustainability Community Planning & Sustainability Community Planning & Sustainability Comprehensive Planning Ecological Planning Historic Preservation Business Incentive Programs Community Planning & Sustainability Community Planning & Sustainability Economic Vitality Program & Sponsorships Building Permit Plan Review & Issuance (Zoning Compliance) Community Planning & Sustainability Community Planning & Sustainability Development Review Building Permit Site Inspection City of Boulder, Colorado

23 Total Number of Programs Prioritization Scoring Array Community Oriented Programs Total Score for Community Oriented Programs Quartile 4: 58 Programs Quartile 3: 103 Programs Quartile 2: 103 Programs Quartile 1: 79 Programs Quartile 1 Quartile 2 Quartile 3 Quartile 4 City of Boulder, Colorado

24 Quartile Ranking (Quartile 1: Highest Rated Programs; Quartile 4: Lowest Rated Programs) Step 7: Allocate Resources Based on Prioritization Priority Based Budgeting: Spending Array Perspectives 1 $93,240, $48,715,601 $51,783,789 $13,159,334 $- $10,000,000 $20,000,000 $30,000,000 $40,000,000 $50,000,000 $60,000,000 $70,000,000 $80,000,000 $90,000,000 $100,000,000 City of Boulder, Colorado

25 Resources Visit for... Free ZBB research report that features a number of Canadian cities Free priority budgeting research report 25

26 Performance Measurement Lessons form Performance Measurement Leaders: A Sample of Larger Local Governments in North America 26

27 Performance Measurement Report Key Findings Chief executive support is indispensable Regular performance review meetings are essential Performance measurement s greatest value is as a tool for learning A centralized performance measurement coordinating authority provides a locus for performance measurement activity 27

28 Not so important Highly sophisticated analysis High tech Robust training programs For the details visit Download the report, which features a number of Canadian cities. 28

29 The End Questions? To contact me: To contact GFOA s research program: Shayne Kavanagh, GFOA skavanagh@gfoa.org 29