Building and Using a Long-Range Financial Model

To deliver services effectively today and into the future, municipalities need the right tools to plan effectively. A long-range financial model is a critical tool that helps develop best and worse case scenarios. These are used to inform timely decisions on matters of financial sustainability that impact their constituents and communities.

This becomes even more critical as municipalities face growing economic uncertainty in a COVID-19 environment. A recent report by RBC Economics estimates municipal budget shortfalls will total almost $12 billion in 2020 as governments deal with lower user fees, rising unemployment and declining property taxes.

Municipalities have always operated in and have needed to adapt to a complex environment. This has been amplified by the unique challenges posed by the pandemic. There is an increased urgency to understand the impacts of potential revenue and cost pressures on municipal finances. This is where an effective financial modeling tool stands out.

Example: Amalgamation

Many districts and counties are dealing with the potential amalgamation or absorption of towns and villages in their region as the viability of smaller communities becomes tenuous and uncertain. The regional government will have to consider a number of complexities to gain clarity on the revenue and cost implications of the amalgamation and how it will affect their overall fiscal framework thereafter.

Leadership will need to evaluate a number of impacts including the entity’s level of debt, condition of assets, liabilities and tax rates. A custom long-range financial model gives you the tools to model the future impacts, outlining details including:

• Finances – How will absorbed operational and capital liabilities affect your budget?
• Assets – How does the town’s / village’s long range capital plan integrate with the regional government’s capital plan?
• Cost structures – Will there be net-new cost burden? Will this affect revenue requirements or require service level adjustments?
• Mill rates / Taxes – Will they increase or decrease; and for who?
• Service levels and delivery – Are all service levels affordable with all other financial implications considered?

The resulting analysis and model will reveal what the overall impact will be to the regional government finances. As well, if you are absorbing more than one town or village, the long-range financial model might result in a scenario that points towards having different tax rates in different parts of the region – a designated urban area, for example – to provide different levels of service within the regional government construct.

Methodology

The key to building a long-range financial model that will work effectively for your organization is starting from the ground up. Building a model with financial data from each department to enable both an enterprise view (all of it together) and more specific detail of the component pieces ensures increased accuracy and reliability of the resulting insights.

Equally important is ensuring the tool is easy to use and readily accepted by administration and council. Building a long-range financial model in a spreadsheet format, such as Microsoft Excel, allows for familiar formats, easy updates to inputs and ease of data manipulation.

This allows both administration and council to focus their time and energy on strategic decision making with something you already have instead of struggling with unfamiliar systems and tools.

The ability to fully utilize the capabilities of a long-range financial model will also hinge on having a clear understanding of not only how to use it but also understanding the underlying assumptions and how it has been customized for your municipality. An experienced advisor will not only help you establish the model, they will also fully explain how it works, where the data is sourced and input, etc. – allowing you to build capacity and independently access all the tool’s functions and value long after your advisor helped you set it up initially.

In Your Hands

A long-range financial model enables a shift in the conversation between administration and council from what can sometimes be positional stances of do “X’ or don’t, to evidence-based scenario analysis and strategic discussions about how key priorities can be achieved. Equipped with better information, councils are equipped to make better decisions that are applicable for both the immediate circumstances and long-term sustainability of the municipality.

Key to its success is working with an experienced advisor that is committed to building your capacity to work independently with the tool once it is in your hands. By the end of the development stage, which usually takes 12 to 18 weeks, your advisor will have demonstrated how the long-range financial model works, how it pulls data to build projections from and how to update your data in the future. You will then be fully equipped to extract all of the functionality and value from it going forward; a tool that illuminates strategic insights and helps you craft strategies to deliver against your priorities.

For more information on how MNP can help, contact:

James Richardson, MBA
Consulting Leader, Alberta Public Sector
780.969.1496
[email protected] 

Brett Vandepol, MBA, PMP
Manager, Consulting Services
416.515.5008
[email protected]