In its practice, Urban Futures Incorporated (UFI) has seen where the lack of effective financial policies has resulted in inefficient financial management practices, increased risk, and the misalignment of financial operations with the overall mission of an organization. At its best, finance works quietly in the background, contributing to the overall service delivery operations for a community. But when things go wrong, financial administration failures are painfully visible.
Precipitated by a concern for poor financial and operational management by its former employees, a community services district engaged UFI to evaluate the District’s finances and past financial practices. UFI determined that The District was at substantial risk for fraud, waste, and abuse and faced major challenges associated with its economy, efficiency, and effectiveness. UFI proposed a set of consolidated fiscal policies to establish guidelines for the overall fiscal planning and management of the District. The following polices were developed and adopted by the Board of Directors:
- Budget Adoption and Administration
- Purchasing and Contracting
- Cash Management
- Accounting, Auditing and Financial Reporting
- Risk Management
- Fund Balance
- Capital Asset Management
- Debt Management
- Disposition of Surplus Property
- Fraud, Waste and Abuse
Additionally, UFI was recently engaged by the City of Pomona to update its financial policies to reflect the City’s current goals and amend or add language where appropriate to reflect best practices, institutional controls and financial concepts from the Government Finance Officers Association (GFOA), International City/County Management Association (ICMA), Rating Agencies & Bond Insurers and other industry-leading trade groups and research. Financial policies are a key element of sound fiscal administration. Policies provide the guidance or “rules of the game” that shape the decisions of public managers. When policies are effective, they can preserve or enhance the fiscal health of governments. By contrast, weak or absent policies promote fiscal instability and can also reduce citizen confidence in government.
Both success and failure have their origins largely in the policy environment, hence getting the important policy decisions right has always been and continues to be one of the central roles of effective governance. What can governments do to improve the financial administration of their resources? Most importantly for their financial systems to thrive, governments need to ensure effective financial management practices through the adoption of financial policies. Financial policies are guidelines for operational and strategic decision making related to financial matters. They identify acceptable and unacceptable courses of action, establish parameters in which the government can operate, and provide a standard against which the government’s fiscal performance can be judged. Governments can and should create financial policies to govern a number of functional areas, including:
- Operating budget;
- Revenue and expenditures;
- Capital improvements;
- Debt management;
- Risk management;
- Human resources (e.g., employee compensation, job classifications, organizational review); and
- Accounting, auditing, and financial reporting.
Staff and elected officials are wise to support the design and implementation of financial policies in their jurisdictions. Financial policies can serve to:
- Offer guidance to the new staff and board members unfamiliar with a government’s finances;
- Provide context for management decisions, thereby providing consistency and quality control;
- Strengthen a public organization during times of financial difficulty because guidelines are set to control debt, limit spending, and increase revenues;
- Codify the “rules of engagement” for enhancing the financial health of a public organization;
- Educate elected officials and others and inform them of good financial practice;
- Offer benefits to all constituents by: 1) leading to higher bond ratings, and subsequent lower interest costs, 2) helping provide for contingencies, 3) helping curtail spending, and 4) helping avoid tax increases. The media and other stakeholders may also view a local government’s operations favorably as policies indirectly affect service quality in a positive way.
- Enhance the quality of life for a community – increasing the desirability of the community as a place to live.
Policy Versus Procedure
Sometimes difficulties arise when trying to identify where financial policies end and administrative procedures begin. Generally, if the item under consideration is a management decision, it is not a policy. A cash management policy might be the best example of procedures masquerading as a policy. Cash management procedures often lengthy and contain detailed requirements that govern day-to-day cash handling matters. For instance, a cash management procedural manual might describe how currency received as payment shall be inspected with a counterfeit pen or how checks received shall be processed in the cash receipting system. This is hardly a matter worthy of a governing board’s limited time and should not be included as part of a total policy package presented for their consideration. Some policy components have a procedural nature and are more staff-oriented, while other policy components are more high-level and have a board orientation. Thus, a policy may command an action or decision that is the responsibility of the board or may direct staff to undertake certain activities in support of the policy.
About Urban Futures
What differentiates UFI from its peers is an innovative approach to providing comprehensive services, making UFI a “one-stop shop” for financial solutions. With over 75 years of experience in both local government leadership and private finance, UFI’s Public Management Group brings a dynamic blend of technical and practical approaches to public financial management. UFI’s technical experience in financial modeling and analytics provides unique insights into your revenues, expenses, liabilities, fiscal challenges and strategic opportunities. UFI marries these technical insights with its local government executive experience to formulate practical solutions that work in your policy context and recommendations that can be understood by your Council or Board for informed decision-making. UFI offers financial policy development design and implementation, fiscal administration and fiscal health assessment and advisory services. To learn more about UFI’s service offerings go to https://www.urbanfuturesinc.com/who-we-are/.
 On January 1, 2017, SB 1029 added a requirement to Government Code Section 8855 that all local government issuers shall advance adoption of an effective debt policy.
 With the advent of AB 2853, the requirement to submit investment policies was made optional, although the Legislature still encourages the submittal of investment policies because of the public interest served.
 Shayne Kavanagh and Wright Anderson Williams, Financial Policies: Design and implementation, Government Finance Officers Association, 2004