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Best Practices
Beyond the annual budget cycle and multi-year capital plan, governments need to identify long-term financial trends. Long-term financial planning involves projecting revenues, expenses, and key factors that have a financial impact on the organization. Understanding long-term trends and potential risk factors that may impact overall financial sustainability allows the finance officer to proactively address these issues. Going through a long-term financial planning process allows decision makers to focus on long-term objectives, encourages strategic thinking, and promotes overall awareness for financial literacy in an organization. Long-term financial planning creates commitment and motivation to provide a guide for decision-making.
Long-term financial planning relates to strategic planning, developing financial policies, capital improvement planning, and budgeting, but it is inherently different, as shown in the table below. Each process fulfills a different combination of planning purposes. As such, long-term financial planning is most valuable when accompanied by these other planning processes and often communicated together.
GFOA recommends that all governments prepare and maintain a long-term financial plan that projects revenues, expenses, financial position, and external factors for all key funds and government operations at least five years into the future. Governments that utilize debt financing and/or utility rate setting should consider a long-term financial plan greater than five years. The plan should be reviewed on an annual basis and updated as needed or as major assumptions change. Long-term financial planning should be the starting point for capital planning, developing operating budgets, estimating revenue, and other planning processes.
When fully embraced by an organization, long-term financial planning can have many benefits including:
- Creating a long-term outlook into other planning processes like budgeting, capital planning, and revenue forecasting
- Helping to diagnose potential risks and causes of fiscal distress
- Stimulating “big-picture thinking”
- Providing a tool for evaluating long-term compliance with financial policies
- Allowing for pre-emptive action to mitigate forecasted financial distress
- Defining parameters for decision-making
- Communicating long-term financial position to residents and other stakeholders, including rating agencies and bond investors.
- Board approval date: Friday, March 4, 2022
