Guiding light: The Guide to Financial Literacy

(Evans School of Public Policy & Governance, June 2016)

When Evans School professor Justin Marlowe and the staff atGoverning magazine first created a financial literacy resource for public officials, they had modest aims.

“If a few more state and local officials were better-versed after reading the ‘Guide to Financial Literacy’ then it was a success,” Marlowe said.

But calling it a success now would undersell its impact. With more than 300,000 copies printed – and many cities using the guides in their employee orientation –the Guide has proven to be a valuable and popular resource.

“The whole guide is predicated on the idea that there are thoughtful people out there who want to learn,” said Marlowe. “They really want to know these things — they just don’t know where to start.” 

The first two volumes of the Guide — “Connecting Money, Policy and Priorities” and “Managing Your Jurisdiction’s Financial Health” — provide leaders with core understandings of public finance concepts as well as strategies and solutions for dealing with financial positions. Cities from coast to coast began adopting the Guide’s tenets – for example, San José uses it to assess its general fund and Lowell, Massachusetts, used it to develop the FAQ section of its budget.

“We did not expect that state and local officials would take the Guide’s analytical framework and translate it into formal work products like performance audits,” Marlowe explained. “I think the framework works well to that effect because it’s robust, even though it was never intended to guide formal, analytical work. Smart public officials made it work, and that’s great.”

With the Guide’s growing popularity in mind and the complex workings of municipal finance a reality, Marlowe has continued the series. The recently released third volume, “Understanding the Risks & Rewards of Public-Private Partnerships,” defines a public-private partnership (called a P3), examines the appropriate role for policymakers, and addresses the pros and cons of the popular financing tool used by state and local governments.

P3s: A Deep Dive

The third volume of the Guide emphasizes that public-private partnerships are mechanisms for financing projects, not funding them. Critics allege and even some supporters admit that the public and officials often consider P3s “free money.” In no uncertain terms, they are not. The Guide describes them as “long-term agreement(s) between a government and the private sector to share the risks and rewards of delivering an essential public service.” Some examples include: an interstate project in Florida; the new civic center in Long Beach, California; and LaGuardia Airport’s rebuilt terminal.

P3s have grown in popularity out of financial necessity. Cities and states have $8-10 trillion in serious infrastructure needs, according to the American Society of Civil Engineers. Combine that fact with many public officials’ belief that “lack of infrastructure investment is their most significant financial problem,” and you can understand the widespread interest in P3s.

Addressing the infrastructure needs is the top reason, but design and technique innovation, the ability to overlap policy goals, and increased spending and borrowing capacity make P3s a permanent addition to policymakers’ toolkits. Whether private contractors only supply the design or expand their work to include building, maintaining, operating, financing, and owning a project, the potential for both sides to benefit is attractive.

Of course, risks go hand-in-hand with rewards, and the drawbacks are numerous. Taxpayers may have higher costs if projects are poorly designed or executed – and in that scenario, elected officials certainly pay the price, too. Even if the projects are well-run, governments might still need to actively monitor and provide enforcement. They usually do not have the resources nor the expertise to do so. And again, P3s are not free money. They are simply a way to combine the public sector’s access to low-cost, tax-exempt financing with the private sector’s expertise and agility.

Maintenance might be the least-recognized yet largest risk faced by public projects. An old adage states that for every dollar spent designing a project, $10 will be spent on building it, and a whopping $100 to maintain it. Public officials can design their contracts intelligently to attempt to alleviate the problem, making payments to the contractors dependent on the asset’s condition. This gives financial incentives to the private partner, which has (unlike governments) the operational and political will to do so.

The beauty of the Guide lies in its ability to identify the numerous risks, and then provide the strategies that can mitigate the potential problems. From performance incentives and deductions that address construction, operations, and management issues, to contract provisions meant to deal with permits, approvals, and even “Acts of God,” the Guide has policymakers covered. 

Marlowe concludes not with mandates but proverbs for policymakers when considering a P3. He complements the proverbs with reminders that these are not hard and fast rules, but simply things to keep in mind – such as “trust is key BUT get the contract correct.” If the popularity and widespread use of the “Financial Guide to Literacy” is any indication, Marlowe is indeed getting it correct.