1. Government Finance Officers Association Shayne Kavanagh
The New Financial Sustainability Framework: A How-To Guide for Changing Governance to Sustain your Community without Breaking your Piggy Bank
Government Finance Officers Association
Shayne Kavanagh
California Auditor-Controller's Conference

2. The Tragedy of the Commons

3. The Tragedy of the Commons

4. The Tragedy of Local Government?

6. Why This Framework? Holistic perspective Forward-looking
Accounting records don’t tell the whole story
Forward-looking
Emphasize the long-term
Makes finance everyone’s business
Everyone is involved in using resources, everyone needs to be involved in sustaining them
It works!
Proven by real governments, experimental evidence, and mother nature!

7. The Case of San Bernardino County

9. Diverse County Largest County in USA Very diverse geographies
Diverse stakeholders

10. INSERT JAIL PIC

11. Severe Dysfunctions County on the wrong end of $104M judgment
Conviction of elected county supervisor and staff for violations of state law

13. Stories of county dysfunction a regular feature in local media
Fragmentation
Five supervisorial districts
Each with a separate admin structure
Duplicate departments across the districts
Fire, human services, etc.
Weak central administration
Stories of county dysfunction a regular feature in local media

14. An Unsustainable Path…
In 2009, $80M deficit rolled into next year (10% of total budget), even while salary and benefit increase approved

15. …A New Path New Chair of Board of Supervisors brings in new CAO
Together, they worked on…
Increasing coherence of county government
Strengthening budgeting and financial planning
Developing a countywide strategic plan with the close collaboration of an array of diverse stakeholders

16. Coherence in Governance
All County Dept Directors (even elected ones) report to CAO
Reduce fragmentation … and stress, instability and inefficiency
Countywide priorities clear
Supervisor’s staffs now focus on communication with constituents

17. Four Key Weaknesses in Budget
No cost projections after bargaining agreements approved
Departments did not provide full lifecycle cost of projects
Not accounting for full cost of services provided to other jurisdictions by counsel, sheriff, and fire dept.
No integrated finance system. No accounting for overhead and maintenance costs.

18. Better Decision-Systems
Full-cost, life-cycle financial planning
Ten-year forecast of revenues and expenditures
Integrated support departments
Better application of overhead costs
More consistent policies applied

19. Better Results Long-term view of labor costs Reform county operations
Negotiated tiered pensions and lower salary steps
Reform county operations
Joint maintenance of parks with local cities
Consolidated fire department
Need-based allocation, not geographic equality

21. County Strategic Plan
What does the County want to be in 20 years and how it will get there?
Highlights everyone’s shared interest
Defines why County should be financially sustainable
Starting point for the community to decide what level of service it wants and how to pay for it
Led to shared vision of management of water resources between previously isolated agencies
Coordinate County & city resources (e.g., Parks)

22. Lessons for Financial Sustainability
GFOA’s new financial sustainably framework has:
6 Leadership Strategies
Inspiring stakeholders to act for the common good
8 Institutional Design Principles
No one-size-fits-all organizational design
We’ll focus on the ones most relevant to this case

23. Leadership strategies:
Convince stakeholders that there can be benefits from collective efforts
Ensure that key participants remain engaged
Build long-term horizons into fiscal planning
Institutional Design Principles:
Well-defined boundaries
Collective choice arrangements
Networked enterprises

24. Convince Stakeholders of Collective Benefits
Experimenter Multiplies the Contribution
Contribute Money to a Common Pool
Money is redistributed evenly

25. Convince Stakeholders of Collective Benefits
Experimenter Multiplies the Contribution
What if someone holds out?
Hold out gains at expense of others

26. Convince Stakeholders of Collective Benefits
No multiplier!
Contribute Money to a Common Pool
Money is redistributed evenly

27. Ensure Key Participants Remain Engaged
If people can opt out (or in), it may encourage more fair play…
…But, if people leave at the first sign of trouble the system will not work.

28. Implications Create an inspiring, collective vision of the future
Provide opportunities for authentic engagement
SBC strategic planning process was broadly inclusive
Build feelings of group loyalty
“Countywide” perspective in planning and budgeting
Set shared goals and recognize interdependencies, like with cities & the county or between county depts.
Counteracted “cheaters”
Pose hard questions to departments with regular overruns
AUTHENTIC ENGAGEMENT
20 different community meetings out in cities. Open community meetings, often a the city halls of the cities.
25 groups of stakeholder or experts, like housing, transportation, education, etc. Create democratic and democratic legitimacy. Housing would include homeless orgs, builders, etc, so mix of all three sectors.
Also, did big survey of community
Created democratic and technical legitimacy.
GROUP LOYALITY
Plan provides guiding framework for entire county
CAO not managing dept operations – concerned with balancing the budget. So, as long as they stay within the budget, managers are left to manage. So, extra scrutiny is applied only where the situation merits it.
There weren’t’ a lot of department heads that were replaced but there were some.

29. Build Long-Term Horizons into Planning
Prisoner’s Dilemma

30. We might assume the prisoners will pursue the self-interested strategy

31. Cooperation further increases when there are multiple rounds of interaction. Selfish behavior increases in final round.

32. Implications Develop strong long-term perspectives for decision-making
SBC developed a ten-year financial forecast model
Help decision-makers deal with uncertainty
Look beyond short-term pressures
Articulate decision-making principles
“Don’t try to be all things to all people”
“Maintain what we have before we build new”
FORECAST MODEL
Show long-term implications of decisions made today. So, forecast responsive to current conditions.
They had more of rolling budgeting process with quarterly adjustment, so elected officials were comfortable with being adaptable to changing conditions

33. Well-Defined Boundaries
The boundaries defined for a decision-system will shape the decisions that are made
How can we better define the boundaries of financial decisions and the rights the individuals who use the resources?

34. Implications Define decision-rights Define temporal boundaries
SBC clarified the board-staff relationship. CAO had right to decide how to manage and administer County services. Board develops strategy and policy
Passed a consolidated budget
Define temporal boundaries
The fiscal year is an arbitrary boundary that encourages unsustainable decision making.
Decision Rights
-Consolidated budget
-Pass updated fee schedules at the same time

35. Collective Choice Arrangements
How can we enhance the participation of those involved in making key decisions about the decision-making system?
When stakeholders are empowered to participate in making and modifying the rules that govern a system, the rules will be more likely to fit the circumstances and be perceived as legitimate

36. Implications Connect financial planning to other processes
Most people won’t be interested in financial planning
Integrate financial sustainability into planning processes they are interested in
SBC connected service plans to an overarching vision for financial sustainability.
Departments long-term expenditure projections must fit within revenue projections
Use public engagement to solve problems
Go beyond the legal requirements
SBC engaged a diverse people in its planning
Connect to planning process
Land use connection is particularly important given the impact of land use choices on financial impact. Important to think through these documents.

37. Networked Enterprises
Public, private, and non-profit organizations may be needed to address collective-action problems at different scales
How can we create system in which units at different scales and across different sectors and levels can work together to preserve local resources?

39. Implications Look for opportunities for inter-sectoral collaboration
SBC worked with SANBAG to convene area local governments to work together on common problems
SBC actively nurtures civic organizations
Grant seeking help, etc.
Build capacity for inter-sectoral collaboration
Different than traditional management
SBC built the capacity for communication and coordination.
Inter-sectoral collaboration
An understanding that accomplishing the goals is everyone’s responsibility and that there are a lot of interdependencies involved, then it fosters and attitude and understanding that going it alone won’t get it done.

40. Where to From Here?
Read the San Bernardino County and other case studies.
Learn more about the leadership strategies and institutional design principles.
Consider joining our pilot group to self-assess your own practices against the financial sustainability framework.

41. Leadership Strategies
Create open communication among all participants.
Help stakeholders to build trustworthy reputations.
Convince stakeholders that there are high benefits from collective efforts.
Ensure that key participants remain engaged.
Build long-time horizons into fiscal planning.
Maintain sanctioning capabilities to reinforce cooperative behavior.

42. Institutional Design Principles
Well-defined boundaries
Proportional equivalence between benefits & costs
Collective choice arrangements
Monitoring
Graduated sanctions and credible rewards
Conflict-resolution mechanisms
Minimal recognition of rights
Nested enterprises.

43. Questions? Shayne Kavanagh, Senior Manager of Research
Government Finance Officers Association