by Sara Carter
With all the negative headlines about local government budgets these days, many people would like to know how to tell if their locality is fiscally well managed or headed for trouble. Are there indicators that can tip us off that finances are deteriorating before the situation spins out of control?
Local budgets can be deciphered, but only if you have a tremendous amount of time and energy. Unfortunately, few citizens do. Even more unfortunately, not all elected officials do either.
Frequently, people will point to a city or county’s Comprehensive Annual Financial Report (CAFR) as a source of information. The CAFR, the product of a locality’s annual required audit, does provide insight into a locality’s financial performance. It tells whether the locality is practicing good financial standards, and it gives valuable data about how much money a locality has and where it is going.
A good outside auditor is a valuable resource to a county’s staff and board of supervisors. Auditors review all the elements required to close out the books for a given year but also provide insight into how finances are trending over time. They act as consultants for staff regarding best practices, and offer suggestions on what could be done better. For rural localities, the auditor’s consulting insights can be even more important than the CAFR itself. The presentation of the annual audit is an opportunity to have one of the most informative discussions of the year. Unfortunately, in too many localities, the CAFR is never presented in public, or presented with no public discussion. That is a lost opportunity.
The CAFR provides only part of what citizens need to know. Another source on your community’s financial well being is its bond rating. Here is the thing, though: Most small communities aren’t even rated. They can follow the best practices of AAA localities, but they won’t get a rating from the big guys.
So, if you want to know whether your community is attractive to lenders, you could listen to the financial analysts who give presentations regarding options for refunding or taking out more debt. Bear in mind, however, that the job of these analysts is to find ways to do these things. So, in order to gain perspective as to whether or not your community is doing well, you should to compare these presentations to those of similar-sized jurisdictions.
There is no one correct answer for how much debt is too much. It depends. How much growth is occurring in the tax base? Will the increase in the base cover a higher debt burden? What is the overall state of the county’s facilities? If you have a high debt load but all new facilities, the maintenance costs will balance out with the debt costs. On the other hand, if you have a relatively high debt burden, and your facilities also have relatively high maintenance costs, you are going to have a nightmare.
Several measures give an idea of how the debt looks. One was highlighted here on Bacon’s Rebellion last week: debt as a percentage of the property tax base. Another is debt as a percentage of the total budget. Yet another is the cost of debt service as a percentage of the locality’s budget, and what percentage of the debt that will be paid off in ten years. Again, none of these are particularly useful without understanding the local conditions and the political will of the community.
Citizens tend to pay attention to only one indicator of fiscal health: the tax rate. If a locality has a “reasonable” rate, and is not raising taxes in a particular year, chances are that citizens will be happy with the locality’s overall situation, even if all other items are a mess. In a year when the rate is being raised, citizens will vociferously complain, even if the reasons for the increase are sound, and the financial practices are all correct.
Now, where the real indicators of financial health can be found is in the county budget. Where is money being spent? How is it being spent? Even those questions require a tremendous amount of knowledge of local conditions.
For example, in Appomattox County, we own a large number of buildings and facilities. There are four schools, an old school used for a variety of purposes, an old courthouse, four voting precincts, two community buildings, a county administration building, a court building, a school board building, a school maintenance shop, and four other buildings housing various departments that serve the public. There are also seven places to take trash, an old landfill, a community park, and an industrial park. The money that is spent to heat, cool and maintain these buildings and facilities is spread throughout the line-item budget. Every facility has a constituency that would like to see it maintained, and likely improved. But there is no real constituency for the fiscal hard choices of eliminating some of these facilities or considering consolidation.
That is the level of complexity in a locality of 15,000 people for just one budget consideration. Then consider other basic services and state mandated programs like the Child Services Act (CSA, previously the Comprehensive Services Act) or storm water. Adding another layer of complexity is assessing how thoughtfully and efficiently your locality is spending money. This may be the most tedious and challenging part of the equation, but it is also the one most likely to be ignored. Both citizens and elected bodies tend to focus on whether the budget balances and whether a tax rate increase will occur.
Really, given the complicated nature of public finance and the competing pulls on local elected bodies, it is a credit to professional staff and auditors that more localities don’t have serious issues. The real challenge for citizens is this: Don’t wait for your locality’s fiscal problems to explode. You’ll have plenty of warning… if you are paying attention.
Sara Carter serves on the Appomattox County Board of Supervisors.