The New Financial Sustainability Framework: A How-To Guide for Changing Governance

1. 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. Holistic perspective • 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! Why This Framework?

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. 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 Fragmentation

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

15. 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 …A New Path

16. 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 Coherence in Governance

17. 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. Four Key Weaknesses in Budget

18. 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 Better Decision-Systems

19. Long-term view of labor costs • 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 Better Results

21. 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) County Strategic Plan

22. 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 Lessons for Financial Sustainability

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. 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. Ensure Key Participants Remain Engaged

28. 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 Implications

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

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. 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” Implications

33. 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? Well-Defined Boundaries

34. Define decision-rights • 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. Implications

35. How can we enhance the participation of those involved in making key decisions about the decision-making system? Collective Choice Arrangements

36. 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 Implications

37. 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? Networked Enterprises

39. 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. Implications

40. 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. Where to From Here?

41. 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. Leadership Strategies

42. 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. Institutional Design Principles

43. Questions? • Shayne Kavanagh, • Senior Manager of Research • Government Finance Officers Association • skavanagh@gfoa.org • 312-578-2276