Role of the Finance Officer in Supporting Fiscal Sustainability
GFOA recommends that finance officers take an active role in their governments' efforts to think and act sustainably.
Sustainability means meeting the needs of the present without compromising the ability of future generations to meet their own needs. The International Council for Local Environmental Initiatives (ICLEI), an international association of local governments for sustainable practices, identifies three interrelated bases of sustainability: environment, social equity, and economic (see Exhibit 1). ICLEI asserts that to act sustainably is to balance the aims of these bases with the need to use resources efficiently.
Acting in a sustainable manner is in the interest of all local governments. However, it is often unclear whether a specific decision or set of decisions can be considered sustainable. This can present a particular challenge when it comes to public finance.
GFOA recommends that finance officers take an active role in their governments' efforts to think and act sustainably. Below are a number of tasks that the finance officer can undertake to support sustainability.
Helping to Define Sustainability. Each government should define sustainability for itself. Some governments may emphasize one of ICLEIs three bases over the others or emphasize particular elements within a base. The objective is to reach a shared understanding of what sustainability means, while providing a definition what is specific enough to apply to a given project, program, or policy. Governments should also clarify whether their definition of sustainability applies only to the organization or to the community that the government serves. Of course, a broader definition will be more challenging to implement and will have different implications for which strategies are selected. The finance officer can contribute to this conversation by highlighting the need to balance the aims of environmental, social, and economic sustainability with the need to use resources efficiently.
In particular, the finance officer should suggest a definition for "financial sustainability," which can support the imperative to use resources efficiently. A starting point for the definition of financial sustainability is a government's ability to manage its finances so it can meet its spending commitments, both now and in the future, and whether it ensures future generations of taxpayers do not face an unmanageable bill for government services provided to the current generation. The finance officer should facilitate a discussion of what it means to be financially sustainable, with the objective of arriving at a set of principles that elected and appointed officials both agree to. These principles serve as the starting point for developing more detailed policies and are the basis for evaluating financial decisions.
Reporting. Once a definition of sustainability has been established, the finance officer should develop reporting methods that encompass environmental, social, and economic concerns. The objective is to help decision-makers better understand the implications of their decisions by developing salient measures of sustainability and demonstrating the impact of decisions on those measures (see Exhibit 2 for examples). Trends and the projected long-term disposition of these measures should be reviewed as part of the planning and budgeting process in order to assess the effectiveness of existing programs and to highlight where greater efforts may be needed.
Exhibit 2 - Examples of Sustainability Measures
Waste: Trends in recycling, refuse, and yard waste. Water: Water consumption Transportation: Public transit ridership Economic
Personal income: Personal income per capita Unemployment: Unemployment rate Competitiveness: Third-party reports that rank the region Social
Safety and security: Crime statistics Education: Degree attainment levels of citizens Health and wellness: Infant mortality & blood lead levels
Analyzing Return on Investment. The finance officer should develop systems to analyze the return on investment (ROI) on projects/programs. This includes mechanisms that articulate less tangible benefits or costs that are difficult to translate into real dollar impacts (e.g., impacts made on measures of environmental, economic, and/or social sustainability), but that still highlights the real-dollar short, medium, and long-term affordability of an investment. The ROI analysis should highlight projects with material intangible benefits or costs. This will help decision-makers come to a more informed choice about the potential investment, based not just on the hard-dollar impact, but also on balancing competing goals.
Importantly, the application of ROI analysis should not be limited to capital projects. It could, for example, be applied to evaluating a tax change or a new fee intended to change certain behaviors on the part of constituents. Hence, the finance officer must both acclimate the organization to applying ROI analysis more broadly and develop ROI tools that are adaptable to different circumstances.
Finally, beyond just calculating an expected ROI, the finance officer should develop a monitoring system to determine if the ROI is actually being achieved. If not, then the program should be modified or cancelled so that its resources can be used more productively elsewhere.
- Promote the consideration of full lifecycle costs in making investment decisions. Full lifecycle costing considers the affordability of an investment over the short, medium, and long term, from initial acquisition to disposal. For example, a more efficient technology may cost more up front, but have a better long-term ROI. Lifecycle costing should be applied to both capital and operating investments.
- Promote preventative investments. The budgeting system should encourage decisions that prevent outcomes that negatively impact sustainability goals. Often, the alternative to a preventative investment is more expensive, after-the-fact mitigation.
- Supplement budgeting with methods to systematically improve efficiency. Waste in business processes often translates to environmental and financial waste. The budget process is not the ideal forum for systematically identifying efficiency opportunities. The finance officer can promote process improvement methods that take place outside of budgeting, but that will ultimately have a positive impact on the budget.
- Create the right incentives. Promote budget policies to encourage departments to invest in efficiency. For example, a policy that rewards departments for reducing energy consumption will provide a better incentive than one that immediately turns the savings over to central control (e.g., allow the department to invest its first year energy savings in a short-term project).
- Promote analysis of intergenerational equity and socio-economic equity in capital investment and financing. Make sure the capital improvement planning process takes into account issues such as balancing investments between different geographic areas of the community and when a capital asset is paid for versus when it is consumed.
- Integrate resiliency into capital project evaluations. Resilient systems reduce the probabilities of failure, the consequences of failure (such as deaths and injuries, physical damage, and negative economic and social effects); and the time for recovery.6 Hence, the objective of a capital planning system should be to maximize an assets resistance to extreme events and minimize the time required for recovery (while, of course, balancing against costs). Resiliency complements sustainability because a resilient asset will be better positioned to serve future generations of constituents than a non-resilient one.
- Regularly update long-range financial plans and forecasts. Long-range financial plans and forecasts are an important tool for ensuring that a governments cost structure and service strategies are economically and financially sustainable and should be updated on a regular basis.
- Board approval date: Tuesday, February 28, 2012