PPT presented in Strengthening Training of Trainers Workshops on The Financial Foundation of Local Government Based on Local Government Financial Management Series of UN-HABITAT during June 4- 15 2007 - Nadi, Fiji

1. Financial Planning For
Local Governments
Strengthening The Financial Foundation
of Local Government
& Training of Trainers Workshops
June 4- 15 2007 Nadi, Fiji
Based on Local Government Financial Management Series- UN-HABITAT
Dr Ravikant Joshi

2. Financial Management for
Local Government
Managing
Operative
Budget
Managing
Capital
Investment
Plan
Citizens’ Participation
Financing of
Operative
Budget
Financing of
Capital
Investment
Plan
Accounting
Performance
Measurement
Procurement
Asset Management
Evaluating Financial
Condition
Financial Policy
Making
Financial Planning
Creating Financial
Framework
Managing Financial Framework
Managing Performance

3. Relationship of FP with other aspects
Financial Planning
Financial Policy Making
Citizens Participation
Evaluating Financial Condition
Operating Budget
Asset Management
Performance Measurement
Accounting Policy
Financing CIP
Capital Investment Plan
Financing Op. Budget
Procurement
PM helps to make FP effective, efficient and accomplishing the goals
Provides framework for financial planning
FP is a Long-term plan for where community going, CP
therefore becomes essential
FP ensures that financial health does not worsen over time
OB is primary method of implementing FP
OB is primary method of implementing FP
CIP is primary method of implementing FP
CIP is primary method of implementing FP
Foundation for accounting, reporting, finance and budgeting system
Important component in FP implementation
FP is the roadmap for procuring Assets

4. “Coordinated comprehensive strategies are developed and
implemented to achieve the financial goals and policies of a
local government”
“Financial Planning”
is a process in which
Local
government
financial
Expectations
Mitigation of
adverse financial
consequences
FINANCIAL PLAN
Local
government
financial
projections
Financial
Forecasting
Economic
Development
Planning

5. Financial Planning
FP involves financial forecasting inherently
Financial Plan is a response to picture
emerging from Financial Forecasting
Financial Forecasting is creation of
projections of future years revenues and
expenditures based on a specific set of policy
and economic assumptions
Multi year FF links OB to long term planning
and also link it to capital programming, debt
planning and economic and community
development planning

6. Financial Planning
❑Financial planning utilizes LG policy and
incentives to stimulate growth and economic
activity in a community
❑Financial planning comprises –
❑Strategic planning
❑Budgeting
❑Financial Projecting
❑Economic development strategies

7. Basic Financial Planning Tools
Strategic
Planning
Budgeting
Financial
Forecasting
Economic
Development
Strategies
Debt
Planning
Capital
Investment
Planning
Trend
Monitoring
Financial Planning means different things to different people
Financial Forecasting does not exist in vacuum

8. Learning
Application
Go to Page No 146, Vol 1
What things come to your
mind when you think of
financial planning and
forecasting in your LG?

9. Budgeting
 Public policy process of allocating scarce resources to achieve a desired
result
 Annual budget allocates revenue to service provision and maintenance
 In the annual budget, the financial forecasting process includes:
⚫ A projection of the current year’s revenues and expenditures to the
end of the fiscal year on which the next year’s budget is based.
⚫ An estimate of the next year’s proposed revenues which should
include a listing of all current and proposed revenue sources, prior
years’ actual revenue collections experience, and the underlying
assumptions on which the revenue estimate is based.
⚫ An estimate of next year’s proposed expenditures by central
government accounting classification, department, program or
other activity.
⚫ A listing of prior years’ actual expenditures.
⚫ And an explanation of the events or conditions that require
changes in operations to comply with changes in law to initiate
new levels of service or to adjust operations to ensure financial
stability or solvency.

10. Capital Investment Plan
 Financial forecasting should be linked to the
capital investment program (CIP)
 Multiyear capital investment plan for short/
long term community development
 LGs should develop a multi-year capital
investment plan for investments and establish
project priorities for funding subsequent years
 Operating budget planning can then rely on
these plans for each subsequent investment
increment
 identifying the future operating costs of newly
constructed facilities

11. Debt Planning
 Determines type and optimum debt needed to
finance CIP
 Typically, there are two components of debt
planning: existing debt service (principal and
interest payments) based on credit financing
that has been incurred and is being paid off
over a specified maturity period; and future
debt service
 The most important assumption, in addition to
the size, date of issuance, maturity date and
structure of the debt, is the overall interest
rate that will be incurred for the new debt.

12. Trend Monitoring
 Uses economic and financial indicators to monitor financial condition
 Various statistics are used and could include:
⚫ Tax base
• Value of real estate per capita
• Number and value of building permits
• Population
• Income tax collections per capita
• Bank deposits
• Collections from largest taxpayers as a percent of total taxes
⚫ Debt Structure
• Debt per capita
• Debt as a percent of LG assets
• Debt service as a percent of total revenues or total annual budget
⚫ Operations
• Total revenues and largest revenue sources
• Property tax collection rates
• Expenditures per capital
• Cash balances/liquidity

13. Strategic Planning
 Systematic process of community anticipating and
planning for financial goals
 It is a technique that is based on organizational
analysis, environmental analysis, and attempts to
identify internal and external factors that will shape an
organization’s future.
 Once certain future conditions are identified, planners
develop a vision statement, mission, goals, objectives,
and strategies to influence and change the
organization 5 to 10 years in the future.
 Once adopted, the strategic plan can serve as a
blueprint for changes to operations and the need for a
different mix or use of resources to achieve LG goals.

14. Learning
Application
Go to Page No 149, Vol 1
What are other linkages of
FP to financial forecasting?
How they are important?

15. Purpose of Financial
Forecasting
 Two purposes
⚫ Quantifies the future impact of current decisions,
programs and policies (impact analysis), and
⚫ Identifies and provides information for analyzing the
revenue and expenditure adjustment options needed
to close the difference between revenues and
expenditure (gap analysis)
 Forecast relies on
⚫ Policy assumption for impact analysis
⚫ Economic assumptions for gap analysis
 Budget is balanced estimates while forecasting tend to
be unbalanced one

16. Citizens and Financial
Forecasting
 Citizens need to understand the
importance of annual budget forecasts
 Include citizens on forecasting
committee or
 Involving various experts from society
to participate in round table
discussions concerning the local,
regional and national economic trends

17. Types of Financial Forecasts
 Short Term
 Medium Term
 Long Term
Short-term Medium-term Long-term
Number
of years
0-1 year 1-5 years 10+ years
Use Operating
budget
Cash
management
Monitor
budget
implementati
on
Budgeting
Policy
analysis
Fiscal impact
of legislation
Identify
financial
trends Capital
investment
programming
Strategic
planning
Physical and
economic
development
planning
Fiscal impact
analysis

18. Learning
Application
Go to Page No 157, Vol 1

19. Resources for Producing
Forecasts
 There are four primary resources
required to produce forecasts:
⚫ Staff with required skills,
⚫ Development time, including quality
and availability of data,
⚫ Data and Information needs
⚫ Computer equipment.

20. Forecasting Roles and
Responsibilities
 Legislative
⚫ includes the governing body and appropriate
committees
 Executive
⚫ includes the CEO
 Finance and management staff
⚫ includes the finance director and staff, the forecast
team, and department directors
 Contributory organizations and utility districts
⚫ contributory organization is a semi-autonomous
legal governmental entity created by the LG
⚫ utility district is a central/province government
operated enterprise that serves a geographic area
with a public service, such as water and sewer or
electricity

21. Methods of Forecasting
 Expert or Best Judgment
 Trend
 Deterministic
 Econometric

22. Comparison of Forecasting
Methods
Method Advantages Disadvantages
Expert or
Best
Judgment
• Produces reasonably
accurate forecasts.
• Relatively low costs.
• Lack of an explicitly stated
technique makes it difficult to
determine what was right or
wrong when analyzing the
forecast methodology.
• Dependence upon a single
individual may hamper LG’s
effectiveness if that person
leaves the organization.
• Likely to prove weak when the
forecast is extended beyond one
year, because of the greater
number of factors that must be
taken into account.

23. Comparison of Forecasting
Methods
Method Advantages Disadvantages
Trend • Simple technique
to use.
• Fairly accurate
predictor of the
next one or two
future years.
• Reliable tool for
revenues and
expenditures not
sensitive to
economic
conditions.
• Inexpensive.
• Does not predict a turning
point in a variable (i.e., it
will continue to project
increases [decreases] in the
variable regardless of what
the economy does because
it is historically based.)
• Not useful in policy
analysis (i.e., to anticipate
economic or demographic
changes in the
community.)

24. Comparison of Forecasting
Methods
Method Advantages Disadvantages
Determini
stic
•Simple to use.
•Accurate for revenue and
expenditure short and medium
forecasts for variables not
subject to changes in economic
conditions.
•Useful for economically
determined variables over long
periods of time because changes
in business cycles tend to cancel
out and averages become more
dependable.
•Accurate and suitable for
forecasting growing areas.
•Inexpensive.
•Relies on fixed relationships
between inputs and activities.
•Uses averages as a major variable
in the forecast, making it less
responsive to changes in the
economy.
•Depends on assumptions usually
based on experience.
•Less likely to accurately forecast
revenues and expenditures in areas
of decline using the deterministic
method

25. Comparison of Forecasting
Methods
Method Advantages Disadvantages
Econome
tric
•Only methodology that lends itself to
projecting revenues or expenditures based
on changes in the economy.
•More accurate than other techniques
because, unlike the best judgment method,
it is based on behavioural relationships that
can be measured and evaluated.
•It (regression technique) is not limited to
forecasting in one direction like trend line
techniques.
•Tests whether a relationship between
variables is, in fact, statistically significant.
•Considers multiple variables in making
projections rather than the single variables
in deterministic techniques.
•More costly.
•Requires a person trained
in economics and statistics
to develop the forecasting
equations.
•Requires considerably
more time for data
collection and input for
regression analysis.
•More complex than the
other alternatives and has
more potential for errors.

26. Learning
Application
Go to Page No 177, Vol 1

27. Benefits of Financial
Forecasting
 Link the LG’s policy with specific financial
plans to achieve a governing body’s long-
range strategic goals
 Develop a picture of the LG’s financial
future and create more time to respond to
adverse events
 Prepare the LG for shifts in responsibility
 Improve the quality of financial decision
making
 Develop alternative decision strategies

28. Obstacles, limitations of
Financial Forecasting
 Political and staff resistance
 Changing LG revenue system
 Lack of development time
 Lack of knowledgeable and skilled
personnel
 Lack of historical data
 Dilemma of circularity
 Importance of assumptions

29. Steps in Financial
Forecasting
 Step1: Define the Purpose
 Step 2: Address Citizen Input/ Technical
Issues
 Step 3: Decide your approach to
Forecasting
 Step 4: Determine Data and Information
Requirements
 Step 5: Determine Resources
 Step 6: Management and Political Support

30. Learning
Application
Go to Page No 189, Vol 1

31. Steps in Financial
Forecasting
 Step 7: Determine length of Financial
Forecast
 Step 8: Evaluate methods of forecasting
based on length of forecast
 Step 9: Decide on approach for Forecasting
Revenues
 Step 10: Decide on approach for
Forecasting Expenditures
 Step 11: Combine Revenue and
Expenditure Forecasts
 Step 12: Understand linkages to other
planning efforts

32. Learning
Application
Go to Page No 192, Vol 1

33. Financial Planning
Thank you
And Happy Learning