3 ways municipalities can use agile financial planning to prepare for unexpected events
May 11, 2023
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Cities face rising costs and shrinking budgets. How can communities effectively plan for a sound financial future?
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Baseball Hall of Famer Yogi Berra once said: “It’s tough to make predictions, especially about the future.”
While Berra was never in charge of a municipality’s budget or capital improvement plan (CIP), what he said rings true. That is especially the case with the economic headwinds that have plagued the 2020s.
Think of all that’s happened since March 2020. We start with a multiyear pandemic. It led to significant supply chain issues. Add in a war. And then inflation sent costs soaring. Both citizens and communities are still feeling the impacts.
With so much economic uncertainty, how can a municipality make financial plans?
A plan that was developed in 2019 would have little use in 2023. The entire financial landscape has changed.
That’s why an improved and adjustable approach to financial planning is essential. As stewards of taxpayer dollars—and infrastructure—municipal governments must be flexible. And not just because of a pandemic and inflation. Things change. An agile financial plan is key.
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A financial modeling tool can prioritize capital projects under different funding scenarios.
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Here are three ways to keep your community along the proper course—no matter what obstacles might arise in the next few years.
1. Navigating municipal financial planning
We know that it’s more than just numbers when putting together financial plans. Changes in local economic conditions, such as the pace of development, can change many elements of a forecast.
And cities can’t escape climate change. The impacts may adjust utility sales and infrastructure investments to improve resiliency. The Environmental Protection Agency (EPA) says US energy systems are at risk to more frequent and extreme weather. The top four climate impacts are disruptions to energy supply, interruptions to electricity transmission, strain on the energy system, and more air pollution. Naturally, those are hard to include in a plan.
There is so much uncertainly. Given that, what will benefit the financial forecasting process?
Tools that allow users to nimbly update data and assumptions in response to changing conditions. And then a way to develop different scenarios and evaluate all the “what ifs.”
Having mechanisms that give cites and utilities the ability to save ranges of assumptions would create more accurate and viable financial assessments. These can include rates of customer growth and development, ranges of inflationary assumptions in certain operating costs, and ranges of capital improvement.
For example, the City of Fullerton, California, recently completed a water rate study. The city had been dealing with a high number of water main breaks. The City needed to evaluate the costs around that capital improvement.
We used Stantec’s FAMS (Financial Analysis & Management System) digital solution to provide an analysis for the City. Other capital investment needs and alternative CIPs were part of the analysis. The utility rate impacts of each scenario were also considered.
Modeling flexibility is powerful. It allows for the quick shift to an alternative cost program, capital funding strategy, and/or level of service.
Budgets must be viable 5 and 10 years down the road. It’s important for utilities to have flexibility to allocate their limited resources over a multiyear period. It helps keep their capital projects on schedule and within funding budgets.
" }With so much economic uncertainty, how can a municipality make financial plans? A plan that was developed in 2019, would have little use in 2023.
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2. Optimize your financial forecasting
Dynamic capital funding optimization.
That’s a phrase that feels as though you need an MBA to understand what it is, but it’s quite simple and essential to agile financial planning.
It sets up rules for capital projects in terms of possible funding. Then it conducts a scenario analysis that allows you to adjust. For any scenario, you can change the revenue streams or the assumptions that drive those streams. This can be applied dynamically and allows municipalities to optimize the capital funding for their projects.
For example, say funding for your community’s new rec center was going to come from a property tax increase. But property value increases are less than expected. And the funding is coming up short.
For the project to move forward, funding will need to change. It must come from a different revenue source, another part of the city’s budget, or maybe even borrowed.
A lot of this boils down to increasing costs and resource limitations. You want to search your operations for efficiency at every opportunity. In the context of financial planning, you want to be able to easily integrate data from different systems and eliminate as much data entry as possible.
The City of Palm Springs, California, recently completed a wastewater master planning and rates analysis. The City was in the process of developing an updated master plan and capital improvement plan. We used FAMS to evaluate various capital plans and funding strategies. We could quantify the rate impacts of each.
The scenario analysis and comparison helped the board see the financial burden each option would place on ratepayers. It helped the City reach a decision.
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Funding projects like wastewater treatment plant upgrades typically require increases to utility rates.
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The ability to dynamically apply funding sources based on what’s available is essential to financial planning. Why? Because changes in economic factors often result in changes to available funding sources.
Since the technology exists, let it work for you.
3. Accept help, but don’t depend on it
Recently, there’s been a huge wave of funding available, mostly driven by federal legislation. Those funds are helping propel communities through some near-term challenges. The legislation is the biggest wave of federal infrastructure funding in public works in decades.
The State of Michigan in incentivizing sound financial planning to access such funds. The State Revolving Fund and Drinking Water Revolving Fund are two ways for communities to get financial help from the state. Traditionally, these funds would provide low-interest loans and, at times, principal forgiveness for a community’s CIP.
The funds changed the application process. Now an applicant gets additional points if they have an asset-management program. This includes an up-to-date financial plan, forecasting a variety of rate models, and a current CIP.
Bottom line: the more financial modeling a city has, the faster they get funding. We’re helping our clients in Michigan understand how integral FAMS can be for this application process.
It’s important that municipal leaders view this funding as a way to bridge a gap. It is not a long-term solution. Communities need to also think about how they’re going to diversify the recovery of revenue for their services in response to increasing capital and labor costs.
It’s vital to not base decisions only on economic-based pricing models. Decision-makers need to think about social value, social equity, and environmental justice. These, too, are part of a community’s cost-recovery strategies.
Looping in the social elements allows cities to broaden the types of funding they seek. It helps ensure that policymakers are efficiently and fairly covering the long-term costs of providing services to all residents today and improving them for tomorrow.
Helping to predict the unpredictable
To refer back to Mr. Berra, the future will still be difficult to predict. Optimizing and streamlining your financial planning will give you a multitude of tools to handle whatever the future will throw at you.
Our team is using FAMS to help. It aids cities when addressing these economic challenges. And it helps them keep long-term sustainability and affordability of service in mind.
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