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Strategic Financial Planning for Municipalities

Five ways to plan long-term resources more easily

For many years, municipalities have been faced with major management challenges. With ever-increasing operating costs, as they are called upon to provide more and more services to their citizens (i.e. transportation, road networks, leisure services, etc.), their revenues in the meantime, almost exclusively derived from property taxes, struggle to keep up. As a result, municipalities are often faced with shrinking flexibility.

Not only that, but the situation doesn’t seem likely to improve over the coming years, as upper government echelons seem disinclined to help out with the budgetary imbalance. In this context, careful investment planning is one of the best solutions for municipalities to achieve their development projects.

Significant Investments

Due to this imbalance between the financial needs of municipalities and their inability to pay, a major deficit in infrastructure maintenance has accrued over the last few years. While contributions from upper government echelons have helped to rebalance the budget to a certain extent through the implementation of a municipal infrastructure program, municipalities continue to face major challenges since the federal program nevertheless requires that they pay at least a third of project funding. Naturally, such expenditures can be quite significant for smaller municipalities.

Municipalities are also confronted with other challenges concerning new expenditures. For example, with reference to environmental protection and sustainable development, Quebec’s new Residual Materials Management Policy has set some ambitious objectives for the coming years, including banning the disposal of residual organic materials in technical landfill sites as of 2020. However, major equipment and operating cost investments will be required to achieve these objectives.

With respect to public safety, implementing the risk coverage plan will also require investments and additional resources for certain municipalities.
Like so many other organizations, municipalities are faced with labour shortages and salary competitiveness, in addition to facing major unfunded actuarial liabilities in their employees’ pension plans. In such situations, municipalities often have to grapple with complex management issues where the revenues generated by their property taxes have hit their limit.

So, how can a municipality be sure that it’s providing sufficient services while taking into account taxpayers’ ability to pay? And how can it be sure that it’s implementing the best financial strategies and financing the most advantageous projects while maintaining a reasonable debt level?

Long-term strategic financial planning

Long-term financial strategic planning is definitely the route to take. It allows elected officials and municipal management to develop a shared vision of a municipality’s priorities and issues. This approach also makes it possible to get a clear picture of operating costs, required investments, impact on the municipality’s debt and, incidentally, how its residents should be taxed. This shared vision helps the municipality to be proactive in developing the best tax strategies for its citizens.

Here is brief summary of the five steps necessary for conducting long-term financial planning:

  • Establish financial principles to guide investment decisions;
  • Identify and document all projects and new activities that may affect the municipality’s finances;
  • Define various hypotheses on which to base financial projections;
  • Simulate results based on all projects and new activities to be implemented and then analyze the impact on debt servicing, expenditure progression and taxes;
  • Establish the municipal administration’s financial strategies.

Considering the financial challenges of certain municipalities, this kind of planning can become an indispensable tool. In addition to helping prepare annual budgets, it is completely in line with modern approaches to municipal governance. And especially, beyond the fact that it encourages efficient resource management, it has the advantage of providing transparent management of municipal public finances.

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