Author: Financial Management Resource Bureau
The DLS Financial Management Resource Bureau (FMRB) provides tailored consultative services to municipalities across the state. Articles in this series highlight a particular financial management best practice that we frequently recommend.
The adoption of formal financial policies is a best practice that serves many important purposes. Among the most crucial of these is the directive guidance that fiscally prudent policies provide for achieving sound, long-term budgeting practices. Along with a capital improvement plan and long-range forecast, financial policies constitute one of the three key tools that DLS encourages all communities to employ to shape the development of annual budgets that are balanced and sustainable into the future.
At a basic level, a policy constitutes a high-level plan for achieving certain goals within a defined topic area. In municipal government, financial policies can be divided into two broad categories. Fiscal planning policies present a roadmap to guide short- and long-term budget decisions. When they are well-reasoned, such policies help mitigate the risk of developing any structural imbalances while also providing a framework for sustaining and enhancing services. As the other category, financial operations policies promote accountability and enhanced coordination of services by defining procedural objectives and the related responsibilities assigned to applicable municipal officials and employees.
Financial policies should be understood as a foundational component of the government’s larger system of internal controls and are themselves a form of internal control of the directive variety. It is because of this vital function that credit rating agencies such as Moody’s and Standard & Poor’s look favorably upon the presence of strong formalized policies when determining a community’s bond rating, which has a significant impact on the cost of borrowing.
The effort to research, discuss, write, review, and finally adopt policies can seem a daunting task. As a result, many communities, especially smaller towns, have only informal and often unwritten guidelines that might only be passed along in an ad hoc fashion as local officeholders enter and leave municipal service. Such municipalities have a more tenuous hold on institutional knowledge and are also liable to be relatively myopic or disjointed in the pursuit of their goals. Hence, a prime objective for adopting formal, written policies is to serve as an educational tool that can foster long-term consistency and continuity in operational and budgeting practices.
Furthermore, enhanced transparency in fiscal governance can be achieved through policy adoption, and we encourage cities and towns to incorporate fiscal policy text into their budget documents and presentations. While remaining more flexible and easier to modify than bylaws and ordinances, policies should provide instructive guidance to steer officials and employees toward objectives. To assure effectiveness, city and town officials must be thoughtful and proactive in promoting policy awareness within the organization. We also recommend communities to periodically review and revise their policies to address evolving goals and circumstances.
From the financial management reviews and other municipal project work that FMRB has done over the years, the bureau has identified a minimum set of core policies we believe every city or town should adopt to manage the most significant areas of budgetary and operational risk. These are listed in the table below.
FMRB has drafted 30+ policy manuals for cities and towns, each of which incorporates the above topics, as well as others desired by the client community. Any municipality that is conducting research to create or revise a policy manual may access them here.
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Editor: Dan Bertrand
Editorial Board: Marcia Bohinc, Linda Bradley, Sean Cronin, Emily Izzo, Lisa Krzywicki and Tony Rassias
| Date published: | August 17, 2023 |
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