Which Financial Policies Work Best? 'It Depends.'

I was preparing a presentation on financial management recently and was reminded of a concept that has been reinforced to me many times over the years. For purposes of this blog post, I’ll call it the 'It Depends' concept.

I first gave some thought to this idea some time ago when I was involved in a discussion on what the right level of fund balance should be for local governments. This discussion occurred in the Committee on Budgeting and Financial Management for the Government Finance Officers Association (GFOA).

The most common question GFOA regularly got from its 19,000 members was “what is the right level of fund balance for local government?” and the answer, in its entirety, was “it depends.” That was all – an “it depends” followed by a “thank you for asking!”

Fortunately, we soon realized that while “it depends” was the right answer, it was also totally unsatisfying. Real GFOA members, who worked with real councils / boards seeking to adopt meaningful financial policies, wanted more. So the budget committee went on to provide some additional guidance around the “it depends” answer.

The current GFOA best practice has since evolved into different aspects on the fund balance question. There are published best practice documents on Fund Balance in the General Fund and Working Capital in Enterprise Funds. Essentially, the general guidance is to maintain at least two months of fund balance or working capital – but, of course, it depends.

Different Strokes for Different Folks

So, why do I think that “it depends” is the right answer? As pointed out in the GFOA’s best practice documents on the topic, each government’s context will be different. Our economies are different, our sources of revenues are different, our habits and practices are different. These differences are what makes local government an interesting and challenging place to work.

No one set of answers will always (or ever) apply to the challenges and opportunities that we are confronted with. But these differences also need to be taken into account when we determine the best policies for our specific jurisdiction.

Have a Conversation

I also like this answer because it gets at the heart of what makes for the best policy guidance: Before a meaningful policy can be developed, a good conversation needs to occur. This conversation should be informed by such things as the best practice guidance mentioned above, your own past experiences, a review of the issues and influences that may come into play, and other elements.

A discussion of this nature allows participants to interact with data, advice, experience, their own ideas, and the ideas of others. Thoughtful discussion allows best policy guidance to emerge, to be documented, and then, to be adopted by the legislative body. This is a great way to start a budget process.

Take a look at the policies you’ve adopted (or maybe should still adopt) and consider if these continue to provide the best ‘guardrails’ to guide your local government into the future. Have the conversation!

Beyond Fund Balance

The “it depends” concept extends beyond fund balance. There are many, many areas where it is important to provide policy guidance for an organization to work effectively together and make progress over time. There is a tension inherent in these discussions that should be recognized as part of the discussion. Too much policy control will limit the flexibility of the staff to function as efficiently as possible. Too little control may enable administrative action that is outside the bounds of what the legislative (policy) body would prefer.

Finding that happy medium between efficiency and preferred behavior will only occur through a thoughtful discussion.

Potential Discussions

Examples of potential discussions resulting in good policy guidance include:

Purchasing limits—At what points do procurement of goods and services require council / board approval?

Fees and charges—Who has what authority for setting fees in your organization? What are the goals in fee setting: cost recovery, equity, accessibility?

Grants—Who can apply for grants? Are there any priorities for which grants to pursue? Where is responsibility for grant compliance?

Investments—Who is authorized to invest public funds? What are the goals of the program? What investments are permissible?

Balanced budgets—Is cash forward, or fund balance, available as a revenue to balance budgets?

Capital expenditures—What is the capitalization threshold? What qualifies for a capital project in the budget: cost and life of the resulting asset?

In each of these examples it can be very helpful to know the right answer before confronted with the challenge. The ‘right’ answer will be different from one local government to another. Therefore some discussion will be necessary to arrive at the best answer for your entity.

Fortunately, in the public sector we can benefit from each other’s experiences. The MRSC website has many good examples of financial policies adopted by various local governments (and is a great place to start).

However, at the end of the day, the best financial policies for your jurisdiction can only be determined after a good conversation. That is because the answer to any of these questions is – "It depends."