March 5, 2014
In its recently released FY2015 budget roadmap report, the Institute for Illinois’ Fiscal Sustainability at the Civic Federation recommended that the State of Illinois publish a five-year financial plan and that the plan be updated annually.
This recommendation follows a best practice of the Government Finance Officers Association (GFOA), which urges every government to use long-term financial planning to align financial capacity with long-term service objectives. According to the GFOA, such long-term planning is particularly crucial as a government recovers from a financial crisis.
Since 2011 Illinois law has required the Governor’s Office of Management and Budget (GOMB) to issue an annual economic and fiscal policy report each January. The report is required to provide budget projections for the next three fiscal years. It also must outline the State’s long-term economic and fiscal policy objectives and its economic and fiscal policy intentions for the next three fiscal years.
The reports issued by GOMB in the last four years have significantly increased publicly available information about the State’s fiscal condition. They have consistently provided useful data on the enacted budget, along with revenue and expenditure projections for the next three years. In the past two years, the reports have also shown year-end General Funds liabilities that are not displayed in the budget, giving a more comprehensive picture of the State’s finances.
However, the reports over time have provided less information about the State’s policy intentions. The report in January 2011, for example, outlined Governor Pat Quinn’s plan to pay down the State’s backlog of bills in two years by selling debt restructuring bonds. (The proposal was not accepted by the General Assembly.)
The latest report, in January 2014, covers a period during which the State faces a dramatic loss of revenue due to the scheduled rollback of income tax rate increases, but it does not address the Governor’s policy intentions. Instead, it shows the financial impact of the rate rollback and the budget deficits and bill backlogs that would be generated if expenditures were permitted to increase to keep government services at FY2014 levels.
According to the GFOA guidelines, a long-term financial plan takes a step beyond financial forecasting and develops strategies to achieve the financial stability necessary to achieve a government’s goals. The long-term financial plan is then implemented and revisited through the annual budget and revised as necessary. A time horizon of at least five years is recommended by the GFOA.
This year, along with the recommended budget for FY2015, the Governor intends to present a five-year financial blueprint for the State. This change was announced in early February, when the Governor disclosed plans to delay his FY2015 budget address from February 19, 2014 to March 26.
Details about the five-year plan have not been made available. Like the three-year projection, a five-year plan will not be subject to constraints that govern the annual budget recommendation.
The GFOA and the National Advisory Council on State and Local Budgeting (NACSLB) both consider long-term financial planning to be a pillar of proper financial management. The NACSLB defines the financial planning process as an assessment of the long-term financial implications of current and proposed policies, programs and assumptions with development of appropriate strategies to achieve the plan’s goals. According to the GFOA, recommended elements of a long-term financial plan include:
- An assessment of problems and opportunities, including an analysis of the financial environment.
- A description of financial policies, service level preferences and financial goals.
- A long-term projection of revenue, expenditure and debt trends.
- Identification of potential challenges to fiscal stability.
- Strategies for achieving and maintaining financial balance.
- Plan monitoring mechanisms, such as a scorecard of key indicators of financial health.
An essential element of the long-term financial planning process is that it be an open and public process. The GFOA recommends that the public and elected officials “should be able to easily learn about the long-term financial prospects of the government and strategies for financial balance.” The long-term plan should either be published separately or incorporated into existing documents, according to the GFOA recommendations.