Aligning strategy with finance: by linking long-term financial planning with strategic planning, governments can increase the likelihood that annual spending plans will accurately reflect organizational mission and values.(Solutions)

To further its ongoing mission to promote the National Advisory Council on State and Local Budgeting's recommended budget practices, GFOA's Research and Consulting Center was recently engaged by a small California city to help improve its strategic and long-term financial planning efforts. The city was facing a potentially serious budget crunch, and wanted to take proactive measures before any fiscal imbalance reached crisis proportions. The city had prior experience with long-term financial planning, having engaged a consultant a number of years ago to prepare long-term revenue and expenditure projections.

GFOA and the city agreed to make an important improvement to existing long-term financial planning efforts by adding a strategic planning component. At the time, the city did not have a strategic plan. Combining long-term financial plan with a strategic plan promised a number of benefits:

* The strategic planning effort would serve to identify the city's long-term goals. The financial plan would then be used to align the city's financial resources with those goals.

* Strategic planning would provide input from elected officials into the otherwise staff-driven financial planning process. This input helps ensure that the long-term financial plan is consistent with the community's values.

* Long-term revenue and expenditure projections would be prepared prior to strategic planning, allowing city officials to more intelligently consider overall goals and strategies in light of available resources.

* City officials would be able to generate ideas for closing gaps between revenues and expenditures prior to strategic planning. These ideas could then be more closely aligned with the city's overall goals.

GFOA first developed five-year revenue and expenditure forecasts. GFOA consultants projected revenues through econometric forecasting, which uses the relationship between a given revenue source and variables such as population and regional economic indicators to predict future revenue yield. The expenditure forecasts were based primarily on project staffing changes, as personnel is the city's most important expenditure category. The revenue and expenditure projections were then modified to present a number of scenarios designed to account for more qualitative potentialities. For example, the State of California was considering the discontinuation of an important source of shared revenue. Because this possibility is not reflected in statistical forecasts of revenues and expenditures, GFOA created a scenario to show the impact of this event on the city's financial condition.