MRSC has joined with Toni Nelson, Small Cities Specialist, State Auditor's Office, Gayla Gjertsen, Finance Director, City of Tumwater, and Mike Bailey, Finance Director, City of Redmond, to bring you the "Finance Advisor" column. The "Finance Advisor" will feature a new article each month with timely local government finance information and advice you can use.*

Second Quarter Financial Review

June 2006

By Toni Nelson, Small Cities Specialist, State Auditors Office

Here it is June already and time to start preparing second quarter financial reports. Whether you’re a large or small city, state law (RCW 35.33.141 or 35A.33.140) makes it clear you must prepare and present quarterly financials that compare budget appropriations to actual expenditures and to additionally show the remaining unexpended balance. The same format applies to revenues.

The Second quarter review provides an opportunity to evaluate whether or not your current budget is meeting expectations and to prepare for the next budget season. Typically, most cities began their budget process early in the third quarter; state law (RCW 35.33 or 35A.33) sets the date as the second Monday in September.

It is important to take the time to review the reports. This review process provides an excellent opportunity to monitor and evaluate how the budget projections are standing up to actual revenues and expenditures. In the smaller cities this monitoring and review process is a valuable internal control. In larger entities, where formal financial policies require review of financial reports, if these policies are not implemented they serve no purpose.

So when you review quarterly financials what should you look for?

• Are revenues and/or expenditures significantly above or below projections? If they are, why? How are you managing the shortfall or surplus? Do you have policies regarding what you will do if you have a one-time infusion of surplus revenues? For example, you have received an additional $50,000 in sales tax do to a recent construction project in your city. You would not want to build a future budget based on a one-time revenue source. In other words, you wouldn’t want to fund an ongoing program or budget for a new employee based upon a revenue stream that will disappear in 12 months. On the other hand, if you have a severe shortfall, do you have a contingency reserve for such a situation or do you need to evaluate where or what to cut. There are as many solutions as there are scenarios but all require monitoring and an awareness of the issue before you can resolve it.
• Have any of your funds exceeded the budget appropriation for the year? If your reports provide you with line item detail, remember that it’s the bottom line that you’re the most concerned with. For example, the Street Fund budget for 2006 was $750,000. The revenue report shows a combined year to date total of $1.2 million, and the expenditure reports reflect the same amount. Perhaps a grant was received during the first quarter, but the budget amendment had not been presented to the council for approval. In the day-to-day rush of activities in city hall, items such as this can often be overlooked. Review of the quarterly financial reports will help to eliminate these oversights.
• Last but not least, review and monitoring of quarterly financial reports may reveal inconsistencies or problem areas that may require a greater understanding or in-depth review. For example, do expenditures that seem inconsistent with normal operations? Is the allocation for employee overtime costs excessive for this time of year? What about a significant shortfall in revenues that can’t easily be explained. Take the opportunity to ask why. Resolving financial issues early in the fiscal year is better than waiting until the fourth quarter when it could be too late.

A thorough understanding of the reports you review should be considered a part of your role with city hall. Whether you are the staff member who supplies the financial information to the mayor and council, or you are the mayor and or councilmember, a good understanding of the documents you review is essential. If your council has new members, perhaps a workshop session would be beneficial. Quarterly financial report reviews are essential to good internal control and sound financial practices. Monitoring the budget is considered an integral part of performance evaluation and should be a priority in every city large or small.

Toni Nelson is the "Small Cities Specialist" for the Washington State Auditor's Office, providing both on and off site financial training and assistance to smaller cities and towns throughout the state. Ms. Nelson has been working with the Auditors office for 6 years and prior to that was the Clerk/Treasurer for a small town for 9 years. She has co-authored the "Small Cities Manual" a detailed reference guide for new clerk/treasurers on governmental accounting procedures and presents numerous training workshops throughout the state for AWC, WFOA, WMTA, WMCA and local/regional organizations such as EWFOA and SCWMCA. Ms. Nelson is also a member of and conference track coordinator for the WFOA Education Committee.

*The Articles appearing in the "Finance Advisor" column represent the opinions of the authors and do not necessarily reflect those of the Municipal Research & Services Center.