The Ritual of Financial Analysis and Its Failure

Abstract

Every action a municipality takes has a potential financial impact. This gives rise to the need to perform an appropriate financial evaluation to support the decision-makers. Sometimes the evaluation is explicit, as with the formal analysis provided in an economic study. Other times, implicit assumptions guide the evaluation of how the organization’s actions impact the local economy. Municipalities rely on the accuracy of such analysis and judgments in deciding when and how to deploy the organization. In order to prevent poor decisions, municipalities must have a clear understanding of the financial and economic relationships in which they are engaged. Unfortunately, many catastrophic financial decisions survive municipal review and analysis. In addition, municipal officials often fail to appreciate the need to consider all economic effects, including those effects that are not immediately obvious. This lapse leads them to make decisions without all the relevant facts. This chapter covers how these analytical breakdowns manifest in major financial decisions; the municipal perspective on tax revenues; the unacknowledged cost of municipal monopolies the economic implications of competing with private sector services, including forays into commercial ventures; and defining financial sustainability.