Guarding the Public Checkbook
A review of Local Government Dollars and Sense

Reprinted from: The Mayor, Jul/Aug 2001
"Guarding the Public Checkbook"

This is a must-read book that could also be titled “Everything you always wanted to know about your city’s finances, but didn’t know to ask.” Let’s face it: does the average person elected to public office in a small community have the financial skills to oversee the multi-million dollar enterprises that are small cities today? Whether merchant or homemaker, lawyer or community activist, most share a common problem: they have little, if any understanding of public finance. Instead, they rely on their administrators or the auditors. Just as the county supervisors did in Orange County, California when their treasurer’s faulty investment strategy resulted in the loss of over a billion dollars. It was that debacle, says author Len Wood, which prompted him to write this book, although he had been collecting information for the previous ten years in his role as a city manager in two small California communities.

“When the largest local government bankruptcy happened, a lot of people were asking how would they get out of it; I thought the real question was ‘how did they get into it?’’’ says Wood. “What constitutes good oversight?”

Wood admits that early in his career he did the same thing so many managers do: he presented his council with the phone book, i.e., pages and pages of small numbers. Ultimately, he says he evolved into trying to show his council what was important and interpreting the information for them with graphs and simple language. Now, the book he has written follows the same premise: you don’t have to be a fiscal expert to comprehend public finance.

“What is needed is common sense and the ability to probe” he insists. Written in layman’s language, the book covers a multitude of complex issues in a easy-to-read, entertaining style and format. (See budget tip in the supporting documents section of The Mayor at www.smallcities.org). It’s broken down into tips and often has a fascinating true story relevant to the tip. In an interview, Wood summarized some of the financial misconceptions covered in the book.

1. Our Budget is Balanced
The fact that the budget is balanced does not mean that an agency is in satisfactory financial condition. How is the budget balanced? Is it being balanced with reserves, that is, one-time money? The City of Miami masked its deficit for years by using bond money for operations. Make sure that the budget is being balanced by current revenues. Ask staff: Do our on-going revenues exceed our on-going expenditures?

Look at the general fund balance sheet and compare the total requirements; those resources should exceed the requirements. You should be adding to the reserve or maintaining it, not deducting from it. In the book, there is a chart that shows what the general fund balance should be for cities in selected populated ranges.

2. We Received an Unqualified Auditor’s Opinion
A U.S. Senator was flabbergasted to learn that the District of Columbia received an unqualified audit opinion even though it had a massive $700 million deficit. The auditing firm replied that they issued a “clean” opinion because the financial statements were presented properly and “in accordance with generally accepted accounting principles.” Don’t rely solely on the audit opinion; it doesn’t mean that you don’t have a deficit or a financial problem. It must be read in conjunction with the information in financial statements.

If auditors find fraud or a problem, they will let you know but there’s a probability they won’t find it; in fact, many of their contracts exempt them from liability on that issue. What an auditor does is sample financial records and while they use a statistically valid sample, they don’t go through every single document, they take a percentage of transactions. A good question for an elected official is “How large of a sample have you used?”

3. We Need to Delve into the Detail
Micro-management, defined as excessive attention to detail, blurs lines of responsibility. It undermines the organization by demoralizing staff and killing initiative. Whenever the governing body wallows in the detail, a policy making vacuum results. Staff usually winds up filling this vacuum. Avoid the “paper clips and trips” trap. Focus your oversight function by establishing policies and monitoring those policies.

The leadership position is something the elected body has to take while the staff has the responsibility for framing the issues and presenting big picture information such as: What’s been happening to our revenue base? What are the major problems the agency faces? What changes are there in programs? While elected officials might ask about some details of a program, what Wood calls “micro-probes...you get in but you come out right away; you don’t stay down there wallowing in the details.

4. Know the Financial Capability of the Key Players
The shocking revelation that came out after the Orange County bankruptcy was that both the treasurer and the chief administrator had very little financial expertise. The Board of Supervisors obviously assumed the two were well qualified financially. The lesson is that elected officials should know the financial training and skill level of their treasurer, finance officer and chief administrator so that lack of expertise can be buttressed by qualified staff. That has to be discovered in the recruitment and hiring process. It’s ok to hire someone who is not a financial whiz; just make sure someone in the organization has that capability.

5. Do Not Trust Too Much
Elected officials must find balance between micro-managing and complacency. The Orange County Board of Supervisors clearly trusted their treasurer too much. They relied on his past performance and stopped performing elementary oversight. Officials must read and understand the key financial reports and discuss them in public.

6. Elected Officials Must Learn to Ask Meaningful Questions
Orange County Supervisor Bill Steiner honestly admitted that he did not know the type of financial questions to ask. By not knowing what to ask, he became an unwitting accomplice in the Orange County calamity. It is imperative that elected officials learn and practice the art of asking penetrating financial questions. Things that get questioned get a lot of staff attention.

7. Don’t Look to a Tax Increase as a Bailout Method if You Get into Trouble
A huge mistake was almost made when Orange County promoted a sales tax increase as a way out of the mess. Instead of making the tough decisions such as privatization, program reductions and asset sales, the county attempted to take the easy way out. Today, we know that the tax increase was unwise and unnecessary. Undoubtedly, the best advice on avoiding fiscal disaster came from Board of Supervisor’s Chair Thomas Reilly after the County filed bankruptcy. “I wish I would have listened a bit more, questioned a bit more, and trusted just a bit less.”

8. Too Terrible, but Typical Practices in Local Government
A council will adopt a capital improvement program without budgeting any funds for operations and maintenance. And when agencies face cutbacks, they cut back maintenance of the infrastructure first because it’s easier than cutting personnel. Instead cut back programs.