The concept of sustainability—including financial sustainability—has captured the attention of local government leaders. Sustainability in the realm of finance has come to signify such practices as directing the use of one-time revenues for one-time uses (which can include paying down debt) and taking into account long-term maintenance and operating costs when planning capital projects.

The recent recession has taught us, however, that sustainability is a necessary but insufficient condition to ensure ongoing financial health. A sustainable system is balanced, but an external shock such as a severe economic downturn can unbalance the system and even collapse it.

Local governments will continue to face serious challenges like economic adjustments, natural disasters, and important policy changes by other levels of government. Municipal officials and managers, therefore, must strive to help their organizations go beyond sustainability to a system that is adaptable and regenerative—in a word, resilient. This selection describes the characteristics of a resilient system, drawing on the authors’ experience and interviews with local government and finance professionals from across the country.

Characteristics of a Resilient System

Presented here are eight characteristics of a resilient system(1) and descriptions of how they apply to public finance. This selection also presents the practical realities of implementing a resilient financial system.

Diversity: Avoid a single point of failure or reliance on a single solution. Consider additional perspectives on financial health besides revenues and expenditures—including land use, zoning, economic development, and demographic trends—so that the local government can generate the revenue needed to provide services planned for, up to and including build-out. Many cities are either built out or are positioned in the economy to be heavily reliant on a single revenue stream. Where those conditions exist, larger reserves may be called for, as well as diversity within a single market—in the case of tourism, for example, high-end resorts combined with economy hotels.

Diversity also refers to creating a diverse set of supporters. Resilient governments regularly reach out to the community so they have many allies in times of need.

Redundancy: Have more than one path of escape or rescue. Reserves are key to redundancy. Start with a policy that prohibits using reserves for recurring expenditures. Also establish reserves for specific purposes; for example, consider separate reserves for economic uncertainty, emergency response, and working capital. This helps protect the integrity of the reserves and prevents them from being diverted to other purposes. Adherence to fiscal policies relating to emergency, contingency, capital, and other recurring reserves is essential to sound fiscal management and preparedness for the future.

Funding policies for reserves should be evaluated carefully, taking local conditions into consideration. Aging infrastructure, recurring natural disasters, reliance on limited sources of elastic revenue, and dependency on development revenue or regional sales are all factors that should be considered. Reserve levels should be based on the needs of the local government, and not necessarily on benchmarks or national standards.

Decentralization: Require that department managers participate in financial strategy planning and budget managing. Centralized systems look strong, but when they fail, the failure is catastrophic. The first step is to require managers to manage the budgets for their departments and to hold them accountable if they fall short.

Beyond this fundamental step, engage managers, staff, and labor groups in the financial strategy. The study of critical issues that may impact the finances of the city is a stimulating opportunity for staff and labor to directly analyze fiscal questions and make recommendations that create buy-in. Labor groups may call for the use of reserves during a fiscal crisis without considering long-term implications for service delivery. Incorporating these groups into the development of reserve policies may lead to better understanding and buy-in.

Decentralization can also result in improved budgeting and can be an indispensable tool for increasing accountability.

Transparency: Make it easier to figure out where a problem may lie. Practice transparency in key areas like organizational goals and objectives, forecast assumptions, and reserve standards. This will help keep everyone informed of the organization’s strategic intent for financial management and will promote valuable discussion when goals, assumptions, or policies no longer appear relevant.

Financial forecast assumptions and actual financial results should be compared with fiscal projections along with an explanation of negative and positive variances from the forecast.

Collaboration: Work together to become stronger. Elected and appointed officials need to collaborate in order to achieve financial resiliency. Strategies for fostering collaboration include connecting long-term financial planning to the service priorities of elected officials and forming advisory committees or work groups to evaluate revenue enhancements, identify cost-saving measures, and prioritize the municipality’s programs and services.

Fail gracefully: Understand that failure happens; make sure a failure won’t make things worse. One of the most critical tasks that must be accomplished in financial planning is the consistent monitoring of both revenue and expenditure trends. To the extent possible, results of negative trends must be identified, and responsive and evasive action must be taken promptly to address any significant variances. Resilient and proactive strategies will invariably beat out the best reactive team because it may be too late for those who choose to react to fiscal crisis.

The key to fixing financial problems is to react to them early and decisively. If there is a failure to react, then the flexibility that has been built into the financial system is significantly reduced.

Flexibility: Be ready to change when plans aren’t working; don’t count on stability. Build capacity among staff and elected officials to diagnose strategic issues through collaborative exercises. Develop financial modeling capabilities like scenario analysis to determine the impact of change strategies, and explore different possible futures.

Foresight: Think and prepare. Long-term planning provides foresight. Conduct regular forecasting to define the financial parameters within which the organization must operate. Match the forecast time horizon to the most pressing financial issues, and use interactive forecasting tools to engage elected officials.(2)

Financial forecasting and modeling scenarios should be considered an art, not a science. Therefore, internal teams should be involved in the forecasting process to provide in-house expertise and diverse perspectives, thus assuring a more realistic, analytical, and judicious approach that takes diverse variables into account.

Another key is to assure that both current and future operating positions are positive. This means that recurring (ongoing) revenues exceed recurring expenditures both now and in the future. A policy statement that requires governments not only to balance the current year budget but also to address potential budgetary deficits in future years will go a long way to assuring sustainability and resilience. The tough choices must be made now in order to avoid more severe choices later.

Benefits

Financial resiliency is about more than surviving financial stress; it is also about continuing to create value for the public and addressing the needs of the community even during an economic downturn. Local governments can realize important benefits from resiliency, including improving their bond ratings (as the bond markets look for safe investments), avoiding layoffs, and making believers out of skeptical elected officials and members of the public.

The key to resiliency is long-term financial planning. A municipality with a long-term financial plan can compare its planning process against the characteristics of a resilient system outlined here to find opportunities for improving its long-term financial health.

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1 Jamais Cascio, “The Next Big Thing: Resilience,” Foreign Policy, May/June 2009.

2 See, for instance, the MuniCast financial models for one example of an interactive forecasting tool.