Financial Management: The “Big Picture,” Part 1

Coming up on my six months now with MRSC and I’ve noticed a few things that many local governments struggle with. I thought I’d share these observations and a few suggestions in the hope that it helps you and your agency avoid some of those same pitfalls.

You already know there are numerous obligations and requirements in place for those in your agency who have financial responsibilities. Those persons could have “finance” in their title, or they could be the Clerk / Treasurer, or a fiscal-type person in a front-line department. They might be a program manager responsible for complying with grant guidelines or procurement responsibilities. In any event, these people have lots of daily or weekly responsibilities to comply with either state laws, auditor requirements, grant obligations, or their own policies. This point was made especially clear in Toni Nelson’s blog posts on Annual Financial Report development.

However, amidst these myriad obligations one can become distracted from “The Big Picture.” By “Big Picture” I’m referring to the overall management of an entity’s funds and fiscal health. As we often say, this should be a shared responsibility but much of the heavy lifting falls to that finance professional (or team) in your organization. In this 2-part series, we’ll look at how all staff, from frontline to leadership can contribute to the good fiscal health of our agencies. Part 1 will review how an agency can establish a blueprint for big-picture fiscal health, and Part 2 will look at the tools an agency can employ to monitor fiscal health.

Blueprint for Fiscal Health

If you levy a property tax, you likely also have an obligation to prepare a budget. Many local governments have a calendar fiscal year—so their fiscal year starts in January and ends in December. If so, you recently adopted a budget covering the next year (or in some cases, two years). That budget is your blueprint to fiscal health.

The budget includes estimates of your beginning cash or fund balances for each fund, the amounts you expect to bring in during the budget period, and the amounts authorized to be spent. It also estimates your ending cash or fund balances. A good budget is the best way to layout a plan for fiscal health.

Presuming you’ve got as good budget as your blueprint, now you can use it to evaluate how the actual year is going compared to your plans and expectations. While the first few months of the year are not going to reveal much in this regard, by the third month you should be producing reports of actual activity compared to the budget. A good practice is to prepare this comparison each month to evaluate progress toward the plan. If relevant, also include the same information from the same time last year as another point of comparison. Since fiscal health is a shared responsibility, others in your organization should be reviewing this report from their specific perspective.

Monitoring

Reviewing financial activity should occur at several levels in your entity depending on your agency’s size and complexity. We’ll review a recommended approach as to how to do this effectively using the reporting pyramid as our context.

Bottom of the Pyramid – Detailed Reviews

Staff close to the day-to-day operations should be reviewing purchase orders and approving expenses as they occur. Likewise, they should be seeing the detailed transactions that relate to that operational activity in the reports they review.

Staff should be looking for anything that is unfamiliar to them in their work, items that might be miscoded, and other anomalies. They are in the best position to catch a problem before it gets buried too deeply in mountains of paperwork and transactions. Also, others further “up the pyramid” are less likely to recognize a transaction that might be out of place.

This detailed review is an important part of the internal controls that help make your overall systems reliable and sound.

Middle Level – Division Reports

Depending on the complexity of your organization, there can be multiple “middles.” While I worked at the City of Redmond, there were field supervisors, program managers, division managers, and department directors. Right now, I’m consulting with a city that has field staff, department directors, and a city administrator. In that case, there is only one “middle”—the department directors.

In any event, an important part of any public manager’s responsibilities is to participate in the financial oversight and monitoring of activity under their purview. These middle managers should be approving the purchase orders and other fiscal activity under their responsibility (Depending on the size and complexity of the organization, there should be a delegation of purchase order approval to some level of supervisory oversight). They should be able to recognize if the reports look “right."

A public manager should also investigate any fiscal report or activity that doesn’t appear in a manner it was expected to appear, if at all. In my own experience, this was a very effective way to help ensure the integrity of the coded transactions and reporting that goes along with these. If the middle managers are familiar with their budgets and the fiscal activity, they can play an important role in maintaining the integrity of the entire system.

Top Level – Summary Review

Those at the top of the monitoring pyramid include top managers (city administrator, city manager, mayor) and the elected board (council, commission, etc.). Again, these participants on the fiscal health team need good and timely reporting to be able to complete their responsibilities. While state law calls for quarterly reports for cities (RCW 35.33.141) and monthly reports for counties (RCW 36.40.210), I recommend monthly reports no later than the end of the following month for all local government entities.

These monthly reports are at a summary level for each fund in the organization, so it could be difficult to identify specific problems or errors. However, if trends emerge that reflect mistakes being made, these can begin to skew the reports and might be detectable at the summary level.

Reports to leadership should provide comparisons to the budget (again, the overall blueprint for the financial plan), and top-level leaders should be monitoring reports for deviations from the budgeted expectations. An example of a deviation can be under-collections in anticipated revenues, accelerated trends in expenditures, or activity in accounts or at times when it is not expected.

Special Responsibilities—Approval of Vouchers: State law also calls for elected bodies to approve an agency's vouchers (payment of accounts payable claims) as well (see RCW 42.24). While the reporting pyramid suggests that the elected legislative body has a high-level summary perspective, state law calls for elected bodies to approve all specific claims.

I’m often asked, “What role does the elected body play in the review of claims?” The answer to this question will vary based on the size and complexity of an entity. Smaller entities rely heavily on their elected body review of vouchers as an integral part of their internal controls. In my experience with mid-sized organizations, the most effective way to incorporate elected body claims review into maintaining the overall fiscal health of the organization involves the following steps:

1. Review your system’s design with your elected officials and how the system was developed to comply with state law (such as RCW 42.24) and the State Auditors’ guidance found in the BARS (Budgeting, Accounting and Reporting Systems) manual.
2. Describe the internal auditing that occurs prior to submitting vouchers for elected body consideration (including who you’ve designated as the Auditing Officer consistent with RCW 42.24.080).
3. Explain the format for presenting claims to the elected body and why this format was chosen. Discuss with them what they might like to see included in this format as well. For example, many agencies provide a report of the claims rather than the original documentation itself.
4. Make yourself available to answer any questions that may come up in their review and offer to present the original documentation upon request.

In my experience, your elected officials will appreciate understanding the systems better even though they may be reluctant to ask you about it. In many cases the actual review of vouchers is done by a committee (either a Finance Committee or an Audit Committee) appointed by the policy board or its leadership.

In Part 2 of this series, I’m going to review some tools an agency can employ to monitor fiscal health.

Questions? Comments?

If you have comments about this blog post, please comment below or email me at mbailey@mrsc.org. If you have questions about this or other local government issues, please use our Ask MRSC form or call us at (206) 625-1300 or (800) 933-6772.