With all the negative headlines about local government budgets these days, many people would like to know if their locality is doing well fiscally or heading for trouble. Are there indicators that can tell us that finances are deteriorating before the situation spirals out of control?
Local budgets can be deciphered, but only if you have plenty of time and energy. Unfortunately, few citizens do. Even more unfortunately, not all elected officials do so either.
Often people refer to a city or county’s comprehensive annual financial report (CAFR) as a source of information. The CAFR, the product of a locality’s required annual audit, provides an overview of a locality’s financial performance. It indicates whether the locality practices good financial standards and provides valuable data on how much money a locality has and where it is going.
A good external auditor is a valuable resource to a county’s staff and board of supervisors. Auditors look at all the items needed to close the books for a given year, but also provide insight into how finances have changed over time. They act as consultants to staff on best practices and offer suggestions on what could be improved. For rural locations, the auditor’s advice may be even more important than the CAFR itself. The presentation of the annual audit is an opportunity to have one of the most instructive exchanges of the year. Unfortunately, in too many localities, the CAFR is never presented in public, or presented without public discussion. It’s a lost opportunity.
The CAFR provides only part of what citizens need to know. Another source of your community’s financial well-being is its bond ratings. Here’s the thing, though: most small communities aren’t even rated. They may follow best practices from AAA localities, but they won’t be rated by the big guys.
So if you want to know if your community is attractive to lenders, you can listen to financial analysts giving presentations on repayment or deleveraging options. Keep in mind, however, that the job of these analysts is to find ways to do these things. So, in order to know if your community is doing well or not, you need to compare these presentations to those of jurisdictions of similar size.
There is no one right answer for how much debt is too much. It depends. What is the growth of the tax base? Will the increase in the tax base cover a higher debt load? What is the general condition of county facilities? If you have high debt but all new installations are brand new, maintenance costs will balance out with debt costs. On the other hand, if you have relatively high debt and your facilities also have relatively high maintenance costs, you are going to have a nightmare.
Several measures give an idea of the state of the debt. 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 total budget. Yet another is the cost of servicing the debt as a percentage of the locality budget and the percentage of the debt that will be paid off in ten years. Again, none of this is particularly helpful without understanding local conditions and the political will of the community.
Citizens tend to pay attention to a single indicator of fiscal health: the tax rate. If a locality has a “reasonable” rate and does not raise taxes in a given year, chances are that citizens will be happy with the locality’s overall situation, even if everything else is in a mess. In a year when the rate is increased, citizens will complain vehemently, even though the reasons for the increase are valid 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 the money spent? How is it spent? Even these questions require enormous knowledge of local conditions.
For example, in Appomattox County, we have a large number of buildings and facilities. There are four schools, a former school used for various purposes, a former courthouse, four electoral precincts, two community buildings, a county administration building, a courthouse building, a school board building, a maintenance shop school and four other buildings housing various public services. There are also seven places to drop off garbage, an old dump, a community park and an industrial park. The money spent on heating, cooling and maintaining these buildings and facilities is spread across the entire budget. Each installation has a clientele that would like to see it maintained and probably improved. But there’s no real constituency for the tough budget choices of eliminating some of those facilities or considering consolidation.
This is the level of complexity in a locality of 15,000 inhabitants for a single budgetary consideration. Then consider other basic services and state-mandated programs like the Children’s Services Act (CSA, formerly the Comprehensive Services Act) or stormwater. Adding another layer of complexity is assessing how thoughtfully and efficiently your locality spends money. This is perhaps the most tedious and difficult part of the equation, but it’s also the most likely to be overlooked. Citizens and elected bodies tend to focus on balancing the budget and the possibility of a tax rate increase.
Truly, given the complicated nature of public finances and the competing pressures on local elected bodies, it is an honor for professional staff and auditors that more localities do not have serious problems. The real challenge for citizens is this: don’t wait for your local tax problems to explode. You’ll get plenty of warning…if you’re careful.
Sara Carter serves on the Appomattox County Board of Supervisors.