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Member Relations Corner: How is Your Municipality’s Financial Health? 

By Rob Shepherd, NCLM Assistant Director of Business Management and Membership Development Services

If someone asked you what is your municipality’s tax rate or the size of your municipality’s annual general fund budget, you would probably be able to answer them. But, what if someone asked you the amount of your municipality’s unrestricted fund balance or restricted fund balance? The answer is a little more difficult, isn’t it? What if they asked the amount of uncollected debt or the "quick ratio" for your water, sewer, electrical or other utility fund?

If you are a municipal elected official, you and the governing body as a whole have the ultimate responsibility of overseeing your municipality’s finances. Even though your municipality may employ a manager, administrator or clerk, and even though you are required by state law to appoint a finance officer, the governing body still has the ultimate responsibility to oversee and to understand the finances of your municipality.

Being responsible for overseeing and understanding municipal finances and accounting can be challenging. However, there are many resources to assist you.

First and foremost, there is your finance officer or other municipal staff, such as your manager, administrator or clerk. Your finance officer or other members of your municipal staff should be providing the governing body with regular financial reports and should be able to explain your municipality’s financial picture. At a minimum, the governing board should receive financial reports at least once per quarter. It’s important that the governing body, as a whole, clearly sets out expectations of the staff as to how frequently the financial reports are to be provided.

An often overlooked resource is your municipal auditor. State law requires each municipality to conduct an independent audit at the completion of each fiscal year. All too often the auditing process is misunderstood and viewed by many as a perfunctory requirement, and they go through only the motions of the audit process, which includes the auditor’s report to the governing body, the issuance of the "management letter" and the filing of the audit report with the Local Government Commission. Many governing bodies do not realize that the auditor works for the entire governing body and that the auditor can be a great resource to explain the financial picture of the municipality and to offer professional advice throughout the year.

Furthermore, all too often the auditor’s "management letter" is glossed over. Many times governing bodies forget their obligation to respond to the Local Government Commission about any material items contained in the management letter. The management letter identifies any areas of weakness, where efficiencies can be improved, and any concerns with financial management or management cooperation that can be improved. I strongly encourage governing bodies to request that the auditor present the management letter during the presentation of the annual audit. Also, governing board members should not be afraid to ask any questions of the auditor. Keep in mind that the purpose of the annual audit is not to find fraud or embezzlement, as is commonly thought and even if that can be a result. The purpose of the annual audit is to determine whether acceptable accounting practices were used by the municipal staff throughout the year, and to produce annual financial statements that are in keeping with generally accepted accounting principles.

The Local Government Commission staff is another great resource. Not only do they receive and review your municipality’s annual audit each year, they are available to you and your municipal staff to answer questions, provide guidance and give technical assistance. Additionally, the Local Government Commission staff has made information and reports available online that will assist elected and appointed municipal officials in comparing municipal financial data with similar-sized municipalities. These reports and many other resources can be found on the "Local Fiscal Management" section of the NC State Treasurer’s website, or you can contact the LGC staff at (919) 814-4300.

Lastly, the UNC Environmental Finance Center can provide consultative services as well as online resources. The Environmental Finance Center has two free online tools of particular interest, one is their "Financial Health Checkup for Water Utilities" and the other is their "North Carolina Water and Sewer Rates Dashboard". These tools allow for analysis and utility financial check-ups based on local inputs.

Do not hesitate to utilize all of these resources. And, as always, the League staff is readily available to assist you in any way we can.