Long-Range Operating Financial Plans
Overview
Government Finance Officers Association (GFOA) recommends that all governments prepare and maintain a long-term financial plan that projects revenues, expenses, financial position, and external factors for all key funds and government operations at least five years into the future. Governments that utilize debt financing and/or utility rate setting should consider a long-term financial plan greater than five years. The plan should be reviewed on an annual basis and updated as needed or as major assumptions change.
The operating budget includes the proposed revenue and expenditure plan for each department over the next fiscal year. The five-year financial plan and Capital Improvement Program (CIP) is a long-term plan developed to demonstrate fiscal sustainability and to plan for the construction and replacement of infrastructure and other capital assets.
The City’s long‐range financial plan is maintained for major funds to include assumptions for revenue sources and operating expenditures over a 15‐year period. The plan is maintained and updated throughout the year as amendments are made or as new revenue sources or programs are known.
The Director of Finance updates the General Fund forecast before the budget is drafted. This is used as a guide as to ensure that revenues are sufficient to meet expenditure needs. Expenditures for future years include known contract increases and factor for inflation. The plan also ensures that the City’s important financial policies, such as reserves, and Council’s strategic goals are met.
Budget Assumptions
The City’s revenue and expenditure budgets are comprised of many unique elements that respond to a variety of external factors such as population growth, development, inflation, and interest rates. The following table reflects the assumptions applied for projecting key revenue sources and expenditure uses.
Vehicle Replacement Program
Separate internal service funds purchase and own all City vehicles. The operating budget includes an estimate of the amount expected for replacements scheduled in the next year.
- Holding periods are set by category of vehicle, typically three to five years.
- Replacements require disposal and do not increase the size of the fleet.
- Increases in vehicle count are approved by Council.
- Unscheduled purchases that are not included in the original budget (additions, early replacements, transfers, etc.), require the approval of City Council.
While fire apparatus replacement expenses are included in the proposed budget, potential lease revenue is not budgeted until financing is requested and approved by City Council.
Capital Improvement Program
Long-term financial planning should be the starting point for capital planning, developing operating budgets, estimating revenue, and other planning processes.
The long‐range financial plan includes planned capital project appropriations over the next five years. It allows the City to ensure that future capital projects meet the City Council’s strategic goals. The plan identifies funding for future projects and the impact to the operating budget once a project is completed.
As projects are identified, departments complete project sheets like the example below, which help Finance program the capital budget and project operating costs.
Best Practices
Beyond the annual budget cycle and multi-year capital plan, governments need to identify long-term financial trends. Long-term financial planning involves projecting revenues, expenses, and key factors that have a financial impact on the organization.
Understanding long-term trends and potential risk factors that may impact overall financial sustainability allows the finance officer to proactively address these issues. Going through a long-term financial planning process allows decision makers to focus on long-term objectives, encourages strategic thinking, and promotes overall awareness for financial literacy in an organization. Long-term financial planning creates commitment and motivation to provide a guide for decision-making.
Long-term financial planning relates to strategic planning, developing financial policies, capital improvement planning, and budgeting, but it is inherently different, as shown in the table below. Each process fulfills a different combination of planning purposes. As such, long-term financial planning is most valuable when accompanied by these other planning processes and often communicated together. (Source: GFOA Best Practices Long-Term Financial Planning)
