I got a call recently from a California city interested in consultants that did long-range financial plans (LRFP). I couldn’t remember the last time I had a similar call even though LRFPs had once been the rage. I mumbled something about how our approach was completely different than the historical LRFP process and left it there for the city to decide whether to pursue our approach.
Nevertheless, the call got me thinking about how we used to do LRFPs and how our approach simplified the process. It went like this:
Step #1 – Establish Internal Service Funds to allocate the types of indirect costs that could be purchased in the marketplace. Use the market price as a maximum for the internal service cost. If it exceeds that cost, eliminate the internal service and replace it with a contracted service. The city can now ignore indirect costs as they are part of each line department’s operating budget.
Step #2 – Prepare a cost allocation plan or a simplified percentage overhead to distribute general government to the line departments. Based on the results, the city could establish a standard percentage overhead that it would use as a maximum for the cost of general government. The city can now ignore general government as this known cost is also charged to each line department.
Step #3 – Prepare a cost of services study for fee and potential fee services. Work with staff and the city council to establish the subsidy that these services should receive from general taxes. Treat the whole group of fee services as one tax service similar in nature to the services provided by line departments. The city can now ignore the cost of individual fee services as the group can be treated as a whole.
Step #4 – Expand the coverage of the cost of services study to include all tax services. This is necessary to break out of the organizational model to the program model of local government finance. The city now knows the cost of each tax service provided to the public of which the subsidy to fee services is just one more tax service.
Step #5 – If the city is growing, prepare a development impact analysis so that the cost of future infrastructure required by new development is covered by the developers of that new development. This also identifies any city liability for cost sharing in the necessary infrastructure.
RECAP: At this point, the city has general revenues (mostly taxes and subventions) to match against the full cost of tax services. There will only be four to six significant revenues that will need projection as the rest can be lumped together for trend analysis. Since cities cannot print money, this general revenue total will be the maximum that can be budgeted for all of the tax services (including the fee subsidies) that the city wants to provide. Some cities have gone so far as to allow increases or require decreases to the tax services that are in line with the growth or decline of the general revenues.
Notice how much simpler the financial picture is when it is possible to ignore indirect costs, general overhead and individual fee services. Notice how much simpler it is to forecast general revenues when the city focuses on the major revenues and lumps the others together. Notice how much simpler it is to forecast expenditures when the available revenues determines the level of expenditure.