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a good risk-management strategy must search results.Though this basic look beyond reserves and consider The combined effect of the spreadsheet does not provide the other tools like insurance, short-term analytical strengths outlined in this financing, or investing in preventive risks a government is subject article, it does have the advantage strategies or strategies to make the to has to be considered of being very easy to use—no math community more resilient. because the combined effect skills needed. Many local govern- A quantitative risk model, like those ments have found this sheet helpful can look very different from for starting GFOA builds, also has the advantage g a conversation about the of being flexible in accommodating each risk in isolation. sufficiency of their reserves. other variables that might influence ■Intermediate.GFOA performed a local government's reserve strategy. a risk analysis for the City of Examples of such variables include: Colorado Springs, Colorado, and ■Ability and Willingness to Cut the Budget in published it as a free report that is available at gfoa.org/ Response to Unexpected Circumstances.Having the ColoradoSprings.The analysis used in the report is quantita- flexibility to reduce budgets midyear provides another tive but not probabilistic.So,the report does not provide source of potential funding to respond to extreme cir- the nuanced analysis described in this article, but some cumstances.A model can show how a willingness to cut governments have copied the method. the budget by some amount before using reserves would ■Advanced.You can obtain the same toolset affect the ability of a government to maintain its desired GFOA uses to perform Monte Carlo risk analysis at level of reserves. ProbabilityManagement.org and start building your own ■Minimum Acceptable Reserves.Many governments models. GFOA will publish more details about how to would find it unacceptable for their reserves to reach zero use this form of analysis in the coming years as more and or anything close to it.A model could therefore be built to more governments gain experience with it. express the probability that reserves would reach a mini mum acceptable amount. For instance,that amount might CONCLUSIONS be the minimum necessary to maintain the government's In conclusion, a local government must carefully think current bond rating. about the risks it faces to find the size of reserves that is right ■Effects of Climate Change.We saw earlier that a quanti- for it.An analysis that considers both the probability and the tative model often relies on historical data to develop the magnitude of the risks your government faces will provide probability and magnitude of extreme events. However, the most complete perspective on risk. This will help your historical data might understate the risk from natural community find balance when it comes to using its limited disasters like floods,wildfires, or hurricanes because resources to provide protection against an uncertain future global climate change may make these events potentially versus providing services today. more frequent and/or severe. A model could provide an Notes option to augment the probability and magnitude sug- 1.Doug Hubbard.The Failure of Risk Management(Wiley,2009). gested by the data. 2.This issue is discussed in more detail in:Sam Savage.The Flaw of Averages(Wiley,2012). YOUR NEXT STEPS 3.Spyros Makridakis,Robin Hogarth,Anil Gaba.Dance with Chance. Oneworld Publications.2009. If you'd like to get started with stress testing your reserves, 4.See ProbabilityManagement.org. GFOA offers three options: ■Basic.GFOA offers a simple, non-quantitative spreadsheet that is available for free at gfoa.org/RiskAnalysisTemplate. SHAYNE KAVANAGH is GFOA's senior research manager. He can You will find the Excel download highly ranked on your be contacted at skavanagh@gfoa.org. 14 Government Finance Review I June 2019