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Financial Policies: A Best Practice from the Government Finance Officers Association

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The Government Finance Officers Association (GFOA) has been promoting improved financial management within state and local governments since 1906. GFOA represents more than 19,500 finance officers throughout the United States and Canada, including many of the finance directors, treasurers, debt managers, investment officers, budget officers and accountants that work in the finance department of many NACo-represented counties.

GFOA provides training, research papers, consulting, networking opportunities, publications and recognition-award programs to those members, but its most popular and valuable resource is its series of GFOA best practice statements.  These best practices, help governments improve all areas of public finance — accounting, financial reporting, budgeting, capital planning, debt management, financial management, pension and benefit administration, and treasury and investment management.

Best practices, which are available free on GFOA’s website, identify specific policies and procedures that contribute to improved government management. Best practice articles combine policy recommendations, implementation guidance and self-assessment tools. In this way, the GFOA’s best practices can be extremely helpful and valuable for elected officials as well as professional staff. This article highlights several of GFOA’s most popular best practices that should be required reading for any county elected official. 


Financial Policies

Financial policies provide guidelines for financial decision-making and are central to a strategic, long-term approach to financial management. Governments adopt formal financial policies to institutionalize good financial management practices, clarify strategic intent, promote long-term thinking, manage risks and set decision-making boundaries. 

GFOA has a few best practices related to financial policies. In the best practice titled Adopting Financial Policies, GFOA recommends that governments formally adopt financial policies.  GFOA then provides best practices that supplement the main category such as:

  • Capital Planning Policies
  • Debt Management Policy
  • Policy for Retirement Plan Design Options
  • Economic Development Incentive Policies
  • Establishing an Effective Grants Policy, or
  • Establishing an Effective Investment Policy.

Each best practice (available from GFOA’s financial policy resource center at available at provides considerations for each government in developing its own policy or set of financial policies.

Fund Balance Guidelines for the General Fund

Another important policy for every local government is its policy on fund balance.  In its Fund Balance Guidelines for the General Fund best practice, GFOA recommends that governments establish a formal policy on the level of unrestricted funds that should be maintained in the general fund.

The adequacy of an unrestricted fund balance in the general fund should consider each government’s own unique circumstances. Nevertheless, GFOA recommends, at a minimum, that general-purpose governments, regardless of size, maintain unrestricted budgetary fund balances in their general fund of no less than two months of regular general fund operating revenues or regular general fund operating expenditures.


Audit Committees

The public’s attention is also focused on the importance of sound internal controls, reliable financial reports and independent audits. An effective audit committee is crucial for achieving all three.

GFOA’s Audit Committees best practice explains the proper design and operation of audit committees in the public sector.

An audit committee is a practical means for a governing body to provide much needed independent review and oversight of the government’s financial reporting processes, internal controls and independent auditors. An audit committee also provides a forum separate from management in which auditors and other interested parties can candidly discuss concerns. By effectively carrying out its functions and responsibilities, an audit committee helps to ensure that management properly develops and adheres to a sound system of internal controls; that procedures are in place to objectively assess management practices; and that the independent auditors, through their own review, objectively assess the government’s financial reporting practices.

GFOA’s recommends that the governing body of every state and local government should establish an audit committee or its equivalent, and that the audit committee should be formally established by charter, enabling resolution or other appropriate legal means, and made directly responsible for the appointment, compensation, retention, and oversight of the work of any independent accountants engaged for the purpose of preparing or issuing an independent audit report or performing other independent audit, review, or attest services.


Pension Obligation Bonds

Across the United States, it is difficult to discuss fiscal sustainability and financial management without mentioning the challenge many governments face with their pension liability. Pension obligation bonds, commonly known as POBs, come up regularly as a strategy for addressing that liability, however, any government discussing the use of POBs must also understand their considerable risk.

GFOA has a Pension Obligation Bonds advisory (advisories identify specific policies and procedures necessary to minimize a government’s exposure to potential loss in connection with its financial management activities). The advisory explains that these taxable bonds are sometimes issued as part of an overall strategy to fund the unfunded portion of a government’s pension liabilities by creating debt. The use of POBs rests on the assumption that the bond proceeds, when invested with pension assets in higher-yielding asset classes, will be able to achieve a rate of return that is greater than the interest rate owed over the term of the bonds. However, POBs involve considerable investment risk, making this goal very speculative. Failing to achieve the targeted rate of return burdens the issuer with both the debt service requirements of the taxable bonds and the unfunded pension liabilities that remain unmet because the investment portfolio did not perform as anticipated.

GFOA’s advisory on POBs clearly states that GFOA recommends that state and local governments do not issue POBs.

Overall, GFOA has approximately 200 best practice and advisory statements that provide the foundation for many of its products and services and provide guidance for state and local governments.

We encourage all governments to implement these best practices as part of an overall effort to improve financial management. 

If you have any questions on a best practice or are looking for additional information, examples, or implementation guidance, please don’t hesitate to contact GFOA at 312.977.9700 or at

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