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Financial Policies

City councilmembers make decisions relating to financial matters on a regular basis. However, only a limited number of cities have adopted formalized financial policies to help make these decisions. What are financial policies? Why should city councilmembers adopt them? What obstacles will need to be overcome? How are financial policies developed? This chapter reviews each of these questions.
 

What Are Financial Policies?


Financial policies are the rules that govern financial decisions in a city. City councilmembers adopt these policies and follow them when making financial decisions about the future of their cities. Once city officials adopt financial policies, most subsequent financial decisions are simplified because the issues have been deliberated during the policy adoption stage.

Cities might adopt financial policies covering the following topics:
  • operating budget and equity (fund balance) reserves
  • capital improvements plan or program (CIP)
  • debt revenue
  • accounting, auditing, and finance reporting
  • purchasing
  • cash and investment.
Questions that city councilmembers need to ask as they work to develop policies are presented below in Table 1.



Many cities have some financial policies even though the elected officials have not formally adopted them. Often these policies result from precedent, and they become standing practices within a city. For example, a city’s property tax rate might not have been changed for a number of years. The city has no written policy that limits increasing the tax rate, yet everyone “just knows” that the position of the city councilmembers is not to raise property taxes. Obviously, an informal policy is at work in that city. It is advantageous for city leaders to document those standing practices into a more formalized policy document to assist staff within the organization as well as the councilmembers which follow their legacy.

Adopting Financial Policies: Considerations
There are a variety of reasons why city councilmembers should adopt financial policies:

1) Financial policies can provide city elected officials with the opportunity to review their present approach to financial management with an overall, long-range perspective. Generally, during budget preparation, city councilmembers spend most of their meeting time reviewing the annual operating budget. And, because of the annual budget process, city officials are generally “annually oriented” in their financial planning. Fortunately, financial policies require city councilmembers to conduct financial planning on a long-range basis, which can only improve a city’s financial management.

2) Financial policies can improve city councilmembers’ credibility and the public’s confidence in them. When citizens are aware that the city council has adopted meaningful financial policies, they feel confident that the councilmembers are providing sound financial management for the city.

3) Financial policies can save time and energy for both the city council and the city’s administrative staff. It has been said that 80 percent of the decisions that city councilmembers make relate in some way to finance (e.g., hiring additional personnel, purchasing new vehicles, evaluating where to locate a new fire station). Therefore, if financial policies are in place, the amount of time at council meetings spent on financial issues can be minimized. Such policies also allow the city’s administration to move ahead with financial matters as it follows the adopted financial policies, rather than wait for decisions from the city council.

4) Formulating financial policies can be educational for city councilmembers. Because most city councilmembers have a heavy workload, discussions of financial issues are sporadic. The process of developing financial policies provides city elected officials the opportunity to become educated on all facets of city financial management.

5) Financial policies can provide continuity for the city and its city council. If financial policies already exist, newly elected officials who are assuming office should not have to make major changes in the financial management of the city. Of course, the fact that financial policies are in place does not mean that the elected officials cannot or should not change the policies. It simply means that existing financial policies promote necessary continuity for city operations.

6) Financial policies can provide a basis for coping with fiscal emergencies. Revenue shortfalls and emergencies requiring unanticipated expenditures can have a severe fiscal impact on a city unless financial plans and policies have been established to handle them. Financial policies are critical for a city to maintain financial solvency.

Obstacles to Overcome
Unfortunately, certain perceptions and some very real situations can become obstacles to city councilmembers when considering developing financial policies. Councilmembers themselves may resist developing long-range financial plans. As stated earlier, because of the annual budget cycle, councilmembers tend to think of financial planning on an annual basis. Also, they may believe that developing a long-range financial plan is not worthwhile because so many things can change over time.

There is also a political dimension. In the process of developing financial policies, many important issues will be discussed at public meetings, and each elected official’s position on specific financial issues will therefore become public knowledge. Some city officials may be reluctant to reveal too much about how they feel about a particular topic (e.g., increasing property taxes).

Finally, the task of developing financial policies is very time-consuming and is therefore perceived as a drawback. It usually takes a number of special meetings or work sessions for the city council to deliberate the policies. Weighing these very real concerns against the benefits of adopting financial policies should make overcoming hesitations more acceptable and certainly possible. The time and effort necessary will be worthwhile for the future financial condition of the city.

How to Develop Financial Policies
City councils must complete various steps before they can adopt financial policies. One of the first steps is to have the city administration begin developing and drafting financial policies. The city administration might present the city council with a work plan for developing financial policies, which would include most of the topics covered in this chapter. For example, the work plan might include
  • the definition of financial policies
  • the purpose and benefits of financial policies
  • a review of the obstacles to developing financial policies
  • the types of financial policies to be considered (with samples for each topical area)
  • the methods of developing financial policies, and
  • strategies for using financial policies.
Once the city council concurs and chooses the areas for policies, the city administration should begin drafting policies consistent with other adopted policies, as necessary. A good way to begin is to review policies adopted by other cities in the state and nation. In addition, sample policies and hands-on training in the financial policy area are available from the Carl Vinson Institute Governmental Training and Education Division.

After the city administration drafts the policies, the city council should devote as many work sessions as necessary to reviewing these policies. This process will be time-consuming but educational for the city council.

The city council might decide to hold a public hearing on the financial policies to allow for citizen input. Finally, the policies should be adopted formally through a resolution or ordinance. All policies can be maintained in a policy book and be reviewed periodically (possibly annually and/or after newly elected city councilmembers take office), but quite often policies are incorporated into the city’s finance ordinance or resolution. See Table 2 for a selection of financial policy areas, issues, and sample policy language.


Summary


The importance of financial policies cannot be overemphasized. Laws provide specific guidance regarding some of the issues that financial policies address. However, city councils are given much latitude regarding the context of the financial policies. The city and its elected officials should make every effort to adopt meaningful financial policies. However, when the policy is adopted, it is critical that both the city administration and city council follow these policies fully.
CONTACT
If you have questions or comments regarding the publication or if you find any technical problems (i.e. broken links, inaccessible pages, etc.) with the resource, please contact Holger Loewendorf at (678) 686-6246.