larry finney, gf&h larry@gfhllp.com highly effective habits of finance officers gfoasc-october,...

Larry Finney, GF&H larry@gfhllp.com

Highly Effective Habits of Highly Effective Habits of Finance OfficersFinance Officers

GFOASC-October, 2011GFOASC-October, 2011

864-232-5204

THE BIG PICTURETHE BIG PICTURE

A finance officer is charged with the responsibility of: Ensuring the ongoing financial viability of the

government (short-term and long-term) through: The effective and efficient use of resources Minimizing risk Compliance with laws and regulations

WE’RE FLYING AT 50,000 FEETWE’RE FLYING AT 50,000 FEET

So how does a finance officer do that? What policies and practices need to be in

place to accomplish that objective? What are outsiders looking for to give them

comfort that the objectives are being accomplished?

WE’RE FLYING AT 50,000 FEETWE’RE FLYING AT 50,000 FEET

Everyone would answer those questions differently

But there are some basic habits that have been consistently seen with successful governments

And some of these basic habits have been missing in some governments that have struggled financially

WE’RE FLYING AT 50,000 FEETWE’RE FLYING AT 50,000 FEET

Many sources used, but two primary ones in addition to our own experience were: Bond world Finance Officers

WE’RE FLYING AT 50,000 FEETWE’RE FLYING AT 50,000 FEET

Many of these habits will seem basic to you, but it is amazing how many people do not do what others of us would consider the basic fundamentals

My goal is to give you some new ideas, remind you of some old ones, and to get you thinking about whether or not you are doing the right things

WE’RE FLYING AT 50,000 FEETWE’RE FLYING AT 50,000 FEET

These are not the one minute manager type habits. We all know we should prepare a to do list at the beginning of day, use MBWA, delegate when it makes sense…

We are talking about what you need to be doing to keep your government financially healthy

WE’RE FLYING AT 50,000 FEETWE’RE FLYING AT 50,000 FEET

The bond world used to just look at the numbers and forecasts; little weight was given to practices and policies

Management practices are becoming more important and gaining more attention regarding the prediction of financial and credit performance

WE’RE FLYING AT 50,000 FEETWE’RE FLYING AT 50,000 FEET

It is easy to look good when the revenue is growing

But your character is shown in the tough times The bond world is now looking to management

policies and practices to better understand how governments may handle the tough times

WE’RE FLYING AT 50,000 FEETWE’RE FLYING AT 50,000 FEET

What the bond world is finding is that successful governments are not abandoning those policies and practices during the tough times, but instead, rely on those policies and practices to help get them through

So here we go…

Habit #1Habit #1

Fund balance reserve policy/working capital reserves

#1-Fund balance policy and #1-Fund balance policy and reservesreserves

Most commonly practiced of the habits This rainy day fund is the first defense

against cash flow shortfalls, unanticipated expenditures and/or reduced revenues

#1-Fund balance policy and #1-Fund balance policy and reserves-the big questionreserves-the big question

What is considered a reasonable or appropriate fund balance?

#1-Fund balance policy and #1-Fund balance policy and reservesreserves

Amount of reasonable fund balance is dependent on several factors, including: Variability of revenues and expenditures Seasonal nature of revenues and expenditures Economic conditions Anticipated future expenditures Political climate Planning for contingencies

#1-Fund balance policy and #1-Fund balance policy and reservesreserves

You must determine what is reasonable for your government, considering all of the factors involved!

Consider committing or assigning funds separately for specific uses rather than one lump sum

#1-Fund balance policy and #1-Fund balance policy and reservesreserves

Fund balance policy Simple and straightforward Minimum balance that management and the

Board think is wise to set aside and not dip into Bond world likes to see something they can

hang their hat on Current GFOA recommendation is minimum of

two months of regular general revenues or expenditures for general fund

#1-Fund balance policy and #1-Fund balance policy and reservesreserves

What about the use of TANs and RANS?

#1-Fund balance policy and #1-Fund balance policy and reserves-TANS, RANSreserves-TANS, RANS

While you would rather not have to use these cash flow instruments, they can be a reasonable method of smoothing out unbalanced cash flows

Be careful though! You don’t want to mask financial problems

by using these instruments Better off looking at cutting costs first

#1-Fund balance and working #1-Fund balance and working capital reservescapital reserves

You are hiding financial problems if: The amount of your TAN or RAN issues from

year-to-year are growing (trend) You regularly issue TANs or RANs in good

economic times

#1-Fund balance and working #1-Fund balance and working capital reservescapital reserves

Make sure you know how your fund balance compares to your cash and investment balances, especially if they are not reasonably close in amount

Educate your Boards and management on what fund balance is and what it is not

Habit #2Habit #2

Cash management and debt analysis policies and procedures

#2-Cash and debt analysis#2-Cash and debt analysis

We are talking about cash and investment, and debt management practices that have the goal of:

Maximizing the net results of your interest income and interest expense

While also ensuring: Safety of principal Proper liquidity Compliance with investment and debt laws, regulations

and covenants

#2-Cash and debt analysis#2-Cash and debt analysis

Cash management policy considerations Legal constraints Risk tolerance (credit, market, interest) Diversification Address the needs of different sources of cash

(operating, bond proceeds, agency) Collateralization Internal controls

Best if this is all be spelled out in writing

#2-Cash and debt analysis#2-Cash and debt analysis

Debt policies Types and methods of financing Legal constraints Controls and procedures for analyzing and

authorizing debt Your political and cultural climate

This should be in writing as well except for the last bullet above

#2-Cash and debt analysis#2-Cash and debt analysis

Monitoring and reporting practices Cash management liquidity tied to both

operating needs and debt maturity Watch interest rates closely Develop report that shows cash and debt

working together to achieve goals Report regularly so no surprises, especially as

interest rates change rapidly

#2-Cash and debt analysis#2-Cash and debt analysis

In summary: Determine what makes sense for your

government regarding amount of outstanding debt, debt service requirements, types of debt, and related cash and investment options.

Develop policies Ensure policies being followed Report results regularly

Habit #3Habit #3

Excellence in debt disclosure practices

#3-Debt Disclosure#3-Debt Disclosure

I am not talking about the disclosure requirements necessary for the issuance of debt; I am assuming you do that already.

I am talking about when your government has no near-term plans to issue debt; do the analysts, bondholders, etc. have access to financial information to help them decide whether to buy, sell, or hold your government’s debt and whether management/council/board knows your debt condition.

#3-Debt Disclosure#3-Debt Disclosure

A lot of debt! As of 2010 It is estimated there are approximately 55,000

issuers in the municipal securities market About 2 million issues outstanding Representing about $2.8 trillion in securities

#3-Debt Disclosure#3-Debt Disclosure

Rule 15c2-12 (SEC 1934 act) is the beginning point (the minimum) Make sure you are familiar with this regulation There are bond attorneys and organizations to

help you with this Written as part of the antifraud provisions of the

federal securities laws

#3-Debt Disclosure#3-Debt Disclosure

Rule 15c2-12 The first problem is some people are still not

doing it and many are not familiar enough with the requirements to know what and when they should disclose information and data

#3-Debt Disclosure#3-Debt Disclosure

Rule 15c2-12 The second problem has arisen over the

last 30 years as most municipal securities bondholders have changed from being institutional investors to individual investors

1983-44% were individual investors By 1992-73% were individual investors Has fluctuated between 65% and 75% since

then

#3-Debt Disclosure#3-Debt Disclosure

Rule 15c2-12 Individual investors have not had access to

the same information on the secondary market as institutional investors and therefore had difficulty deciding when to buy or sell these securities

Therefore, we now have rule 15c2-12 We now have EMMA-make it easier

#3-Debt Disclosure#3-Debt Disclosure

Highlights of Rule 15c2-12 Applies to issuers, underwriters, dealers in the municipal

securities market Requires underwriters of primary offerings of municipal

securities with an aggregate principal amount of $1 million or more to obtain and distribute to their customers the issuers’ official statements for the offerings and to ensure the issuer will provide certain annual financial information and operational data, as well as event notices for certain events to various information repositories

#3-Debt Disclosure#3-Debt Disclosure

Highlights of Rule 15c2-12 The financial information does not have to be

audited (but it should be if possible) The operational data should mirror that in an

official statement There are 11 events that trigger notices There are some exemptions

#3-Debt Disclosure#3-Debt Disclosure

Highlights of Rule 15c2-12 There are eleven events that trigger notices:

Principal and interest payment delinquencies Non-payment related defaults Unscheduled draws on debt service reserves that

reflect financial difficulties Unscheduled draws on credit enhancements that

reflect financial difficulties Substitution of credit or liquidity providers, or their

failure to perform

#3-Debt Disclosure#3-Debt Disclosure

Highlights of Rule 15c2-12 There are eleven events that trigger notices:

Adverse tax opinions or events affecting the tax-exempt status of the security

Modifications to the rights of security holders Bond calls Defeasances Release, substitution or sale of property securing

repayment of securities Rating changes

#3-Debt Disclosure#3-Debt Disclosure

So what would be considered excellence in disclosure? Complying with 15c2-12 even if exempt Additional information other than minimum in

the official statements or the financial statements

Some governments prepare different forms of annual debt disclosure statements

#3-Debt Disclosure#3-Debt Disclosure

Examples of additional information to consider disclosing includes Debt management policies Histories on pledged tax or revenue streams

that back revenue bonds Performance on revenue bond coverage Use of short-term borrowings that occur within a

year, but paid off by year end Information on compliance with covenants

Habit #4Habit #4

Multi-year financial forecasting

#4 Multi-year forecasting#4 Multi-year forecasting

Many governments who do multi-year forecasting well, started because of significant financial stress; forced into it out of necessity

That is when they realized what a beneficial tool it could be-financial difficulties or not

#4 Multi-year forecasting#4 Multi-year forecasting

Advantages Anticipate financial impact of potential problems,

issues…before there is a crisis Allows for time to plan a response and not just react to a

budget crisis Shows citizens, legislators and others that you are not

just focused on today Once the initial set up is completed:

More easily allows for big picture “what if” types of analysis Forecasts can be rolled (as one year is completed, you can add

another year of forecasts)

#4 Multi-year forecasting#4 Multi-year forecasting

Disadvantages Takes time

Involves numerous people Needs to be detailed enough to be meaningful

There is a learning curve The further out you go, the more difficult and

less accurate you tend to be in your measurements and assumptions

Habit #5Habit #5

Rolling cash flow projections

#5-Rolling cash flow #5-Rolling cash flow projectionsprojections Preparing just an accrual/modified accrual

budget is not enough; especially if it is an annual budget your cash flows are not even through out the

year

#5 Rolling cash flow #5 Rolling cash flow projectionsprojections DETERMINE CASH AVAILABLE IN BUSINESS

CYCLE FISCAL YEAR QUARTERLY MONTHLY

DETERMINE POTENTIAL FOR REVENUE FLUCTUATIONS ECONOMY ADDITIONAL FEES AND CHARGES NEW OR LOST REVENUE SOURCES

#5 Rolling cash flow #5 Rolling cash flow projectionsprojections DETERMINE CASH NEEDS IN CYCLE

BUDGET AND SPENDING PRIORITIES PREDETERMINED OBLIGATIONS CYCLICAL EXPENDITURES

NEGOTIABLE?

#5 Rolling cash flow #5 Rolling cash flow projectionsprojections Notice the differences between the budget and

cash flow As a month or quarter is completed, add a month

or quarter so you can always look 12-24 months out and see where you will be

Do for all funds with significant cash, especially if cash in various funds can be shared,

Update your projections like you change your budget For changes not originally contemplated Input actual results after closing a month

Habit #6Habit #6

Regular financial reporting and monitoring

#6-Regular reporting and #6-Regular reporting and monitoringmonitoring

Regular means preferably monthly, but at least quarterly Some will even do a certain level monthly and

then a more detailed level quarterly

#6-Regular reporting and #6-Regular reporting and monitoringmonitoring

Pitfalls It must be detailed enough to be meaningful

Comparisons to prior year and/or budget Truly understand the reasons for the variances

(quantify them) and write a narrative explaining those variances

Are you just doing an annual budget and then dividing by 12 months?

#6-Regular reporting and #6-Regular reporting and monitoringmonitoring

Pitfalls It must be detailed enough to be meaningful

Do you have any significant year end transactions that might be better accrued or deferred throughout the year to present a more accurate picture?

#6-Regular reporting and #6-Regular reporting and monitoringmonitoring

Pitfalls Creating a report that is too detailed or not

detailed enough, depending on your audience The Board does not need to see the same level of detail

as management-keep them focused on the big picture Management needs to see enough detail to do their job

properly Do you have 5-10 ratios and/or performance measures

that can quickly tell you how your government is doing financially?

What about trend information?

#6-Regular reporting and #6-Regular reporting and monitoringmonitoring

Pitfalls Not responding to the results on a timely basis

Why are we doing regular reporting and monitoring? So what should we do?

Ask ourselves what we should change, if anything? What would I recommend to the head person of our government to

do? Examples include:

Reduce future expenditures Transfer monies from one fund to another Investigate why certain revenues are down and respond

accordingly Change general operating or debt service millage…

Habit #7Habit #7

Contingency planning policies

#7-Contingency Planning Policies#7-Contingency Planning Policies

The goal is to avoid surprises, particularly negative ones

Cannot anticipate everything, but can have financial policies and practices that make the surprises much easier to handle

#7-Contingency Planning Policies#7-Contingency Planning Policies

This involves: some thinking, anticipation, and staying up to

speed with potential future changes, whether political or operational

Developing a plan B, C…and communicating those plans

“What if” brainstorming and analysis

#7-Contingency Planning Policies#7-Contingency Planning Policies

What are the events or transactions that could impact the financial condition of your government?

Local politics? State-legislative and otherwise? Federally? Environmentally? Locally with tax revenue? Line breaks if you have utilities?

#7-Contingency Planning Policies#7-Contingency Planning Policies

Some examples include: Local tax collections are down (collection %, mill

value, loss of industry) A referendum to eliminate millage increases

without a referendum vote The state legislature decides they are going to

cut funding by 15% to all state agencies and local governments

#7-Contingency Planning Policies#7-Contingency Planning Policies

Some examples include: Unfunded federal and state mandates The EPA finds environmental problems with a

site you own An act of God demolishes a facility The Board decides to start an expensive new

program without adequate resources DOT is upgrading a bridge and you have to

move a sewer line

#7-Contingency Planning Policies#7-Contingency Planning Policies

What you should ask is, “What are potential contingency plans for these events or transactions?”

It should be more than just trying to have a certain level of fund balance Having action plan ready to go that everyone

understands when something goes wrong; may have to make difficult decisions very quickly

Having good relationships with key outsiders-county, state, federal, key local citizens, local businesses

#7-Contingency Planning Policies#7-Contingency Planning Policies

Designating a certain portion of fund balance for contingencies can help your Council understand that portion of fund balance is to be left alone

The hard work is the strategic planning and thinking necessary to identify the contingencies and how to be ready if they happen

Habit #8Habit #8

Policies regarding noncurrent revenue

#8-Nonrecurring revenue #8-Nonrecurring revenue policypolicy Becoming more important in last ten years

as one-time resources are becoming more prevalent

one-time revenue, especially when unexpected, is hard to save!

#8-Nonrecurring revenue #8-Nonrecurring revenue policypolicy Tobacco funds Certain federal, state or local grants and

contributions Be careful when a significant amount of

delinquent tax revenue is received in one year

#8-Nonrecurring revenue #8-Nonrecurring revenue policypolicy Goal is to have a policy to the effect of

nonrecurring revenue should be used for ongoing operating costs

#8-Nonrecurring revenue #8-Nonrecurring revenue policypolicy WRONG! Any reliance on nonrecurring revenue for

operating costs is discouraged Why? Puts financial stress on the government the

next year-and it can hurt! Biggest challenge can be getting

management and Boards to understand this

#8-Nonrecurring revenue #8-Nonrecurring revenue policypolicy Many times we use nonrecurring revenue

for recurring expenditures thinking that next year our recurring revenue will be higher to cover it…

Don’t let that happen!

#8-Nonrecurring revenue #8-Nonrecurring revenue policypolicy Thoughts:

segregate recurring versus nonrecurring revenues in budget preparation

communicate to your Board how much state or federal funding is recurring versus nonrecurring

Consider comparing nonrecurring revenue versus nonrecurring expenditures

Consider a policy-makes it easier when the issue is raised; you have something to fall back on when the pressure rises!

Habit #9Habit #9

Five year capital improvement plan integrating operating costs of new facilities

#9-Capital improvement plan#9-Capital improvement plan

A capital improvement plan is so common, that not having one is considered a “negative”

Governments generally do an good job of this

#9-Capital improvement plan#9-Capital improvement plan

What is considered more beneficial is to determine operating costs associated with the new capital assets and then integrating those costs into your multi-year forecasting and cash projections

#9-Capital improvement plan#9-Capital improvement plan

Actually, this is an absolute necessity if you are going to not only do multi-year forecasting and cash flow projections, but also rapidly pay debt

#9-Capital improvement plan#9-Capital improvement plan

Involves a lot of people as the key is to be detailed enough to ensure accuracy and completeness. If the plan is understated, it can significantly affect a Government’s financial condition

Don’t forget to account for inflation-use construction inflation numbers, not general CPI

One area we see estimates/budgets significantly under actual is energy costs

Habit #10Habit #10

Rapid Debt Retirement

#10-Rapid debt retirement #10-Rapid debt retirement policiespolicies This is looked upon very favorably by the

bond world Rapid is considered 65% or more of debt

(principal) paid off in no more than 10 years Retiring less than 35% of debt in 10 years is

considered a “weak fiscal practice”

#10-Rapid debt retirement #10-Rapid debt retirement policiespolicies Basic rule #1 is that the life of your debt

should never exceed the useful life of the related asset(s)

It would obviously be better if the life of the debt was significantly less than the asset’s useful life

This is assuming reasonable useful lives are used!

#10-Rapid debt retirement #10-Rapid debt retirement policiespolicies If a government has to continually issue 30 year

debt or extend the maturity of the debt through refinancing (even if it is still within the asset useful life), this is a sign of possible poor financial health

On the other hand, rapid debt retirement provides a lot of flexibility in case of significant unanticipated expenditures or sudden revenue drops

#10-Rapid debt retirement #10-Rapid debt retirement policiespolicies There are many ways a policy could be adopted

that results in rapid debt retirement For example, there is a government that restricts

final maturities on its tax-supported debt to 15 years; the result is that, even through one difficult financial cycle, 89% of its debt was paid off in 12 years

#10-Rapid debt retirement #10-Rapid debt retirement policiespolicies There are many ways to accomplish this:

Establish a policy Practice of issuing short-term debt combined

with long-term debt to “smooth” cash flow and property tax millage

Practice of paying debt off more quickly with excess funds (nonrecurring revenue)

Habit #11Habit #11

Paying Attention to Your Balance Sheet

#11-Balance Sheet#11-Balance Sheet

General focus in government is revenues and expenditures-that is what is budgeted

But can’t ignore the balance sheet If the balance sheet is wrong, it will likely

impact the revenues and expenditures So what should you do?

#11-Balance Sheet#11-Balance Sheet

Know what is in your balance sheet Review the activity monthly as part of

month-end procedures Perform independent analysis

quarterly/annually Determine what should be in each account Calculate what you think the balance should be

and compare to actual balance

#11-Balance Sheet#11-Balance Sheet

Pay particular attention to major accounts at year end Payroll accruals

Many of the balances are not significant But there are always debit balances in the accrual accounts Begs questions about all balance sheet accounts

Insurance accruals Receivables and related allowances

Habit #12Habit #12

Internal Control Reviews

#12-Internal Control Reviews#12-Internal Control Reviews

Too many times, especially in today’s environment where everyone has more to do than time available, this area is ignored.

People come and go, policies and practices change, but rarely do we continually and periodically evaluate the cost/benefit of internal control processes and systems.

#12-Internal Control Reviews#12-Internal Control Reviews

Risk of inadequate internal controls (and therefore fraud) has increased as technology has improved and as productivity expectations have increased

Public more aware of risk of fraud Sarbanes-Oxley has hit governments too

#12-Internal Control Reviews#12-Internal Control Reviews

The question that can be difficult to answer is, “how do I stay current?”

#12-Internal Control Reviews#12-Internal Control Reviews

One option is bring an outside CPA firm in, but that costs $$

Remember, a financial statement audit does not provide an opinion on adequacy of internal controls

#12-Internal Control Reviews#12-Internal Control Reviews

Better options might be: Get an internal finance employee from one area

to do an internal control review for a process with which they are not involved

Good training tool Can help with cross training Can break up monotony of someone’s job through a

special project like this

#12-Internal Control Reviews#12-Internal Control Reviews

Better options might be: Agree with another government that you will

help each other You review their internal control processes and

they review yours You will each learn something Little to no cost other than your time You can get a lot done in one to two days

Habit #13Habit #13

Effective and efficient use of technology

#13-Technology#13-Technology

Not talking about basic hardware and financial software-that is a given

How are you using the internet and other technology that can improve your efficiency and effectiveness in the long-term?

#13-Technology#13-Technology

Using the internet/web sites Software for employee communication

Communicate with employees-forms, policies, personnel and payroll changes

Citizen communication Password protected partitions and public

partitions PDF for documents and putting on web site

#13-Technology#13-Technology

Using the internet/web sites and going more toward paperless Publish and post documents (saves $$)-remember, you

can partition web sites to restrict access to specific areas

Annual audited financial statements Budget Multi-year forecasts Five year capital improvement plan Annual reports Operational documents Agendas and minutes

#13-Technology#13-Technology

Other technology Procurement cards-watch controls here Laser check writing Positive pay, reverse positive pay 100% Direct deposit (even those without bank

accounts) What else?????????

#13-Technology#13-Technology

It may not make sense to do it all, but you need to know what is available so you can make the best decision for your government

Should run return on investment calculations to help make decision If the ROI is not good, it does not mean you do

not do it, but it means there should be some other overriding reasons to do it

KEEP THE FOCUS!KEEP THE FOCUS!

Whether times are good or bad, stay focused-it will pay off.