An economic primer for library board members

Citation

Holt, G. (2001), "An economic primer for library board members", The Bottom Line, Vol. 14 No. 4. https://doi.org/10.1108/bl.2001.17014dab.001

An economic primer for library board members

An economic primer for library board members

Keywords: Libraries, Directors, Bookkeeping, Financial control, Managerial power

Library boards in the USA are charged with two major tasks: policy making and financial oversight. Since policy implementation always has a financial implication, almost all board actions have an impact on the library budget.

To provide high-quality financial oversight, board members need to have appropriate information. Often that knowledge is outside the realm of their personal, family and business responsibilities. This column reviews troublesome fiscal issues, where board members need both knowledge and perspective in order to do a good job. The sources for this column are conversations with dozens of directors and trustees from many different-sized institutions. In spite of a lack of formal methodology, I hope that readers will find the column of practical help.

Income responsibilities

The annual compilations of the Public Library Data Service (PLDS) show that library income is highly variable from district to district, even when districts are similar in size and population served. No matter whether the national, state or local economy is rising or falling, some library budgets increase, others are stuck at one level (sometimes for years or decades), while still other districts suffer budget cuts, often for reasons they cannot control. I start this column with income responsibilities, because many boards tend to ignore them. One example: a few years ago, after I talked about this point in a trustee training session, a library trustee yelled at me, "Funding is not my problem! I run the library." A primary role of all responsible library trustees is to make sure that the institutions they govern have adequate funding. Otherwise, board governance consists of robbing one service to pay for another and otherwise making do, as capital investments deteriorate, empty staff positions increase and service quality declines. Board members and not the director are most likely to be able to affect income decisions that provide a bright or bleak future for the institutions they govern.

Budget education

It is a cliché among directors that many individuals "who can't balance their own checkbooks" make library financial decisions far larger and/or more involved than they deal with in their personal or business life. If board members are in any way uncomfortable with institutional financial matters, they ought to insist on getting the instruction they need in order to do a good job. Sometimes staff can provide that instruction; at other times, boards have to look outside the organization. At one point in my directorship in St Louis, my board and I were able to acquire thepro bono services of a certified public accountant (CPA) to help us plan and carry out a significant financial office reorganization. The board needed that education as much as staff. For several months, the pro bono CPA reported on his work at monthly board meetings. With such information, the board became a knowledgeable partner rather than an uninformed adversary in reforming institutional financial policies.

Accounting standards and practices

Operating under public-sector accounting codes, library budgeting and bookkeeping practices often seem mysterious or even absurd to board members not involved previously in public-agency governance. Capital expenditures present a special problem. In the private sector, established accounting guidelines outline practices for how to categorize such expenditures and how to depreciate them. Historically, capital expenditures have been far less clear in the public sector. Hence, there are endless library debates over questions like: Are books a capital or an operating expense? And, if they are a capital expenditure, what is their worth in the years following their purchase? Without the need to account for bottom-line profitability, tax-supported agencies have no reason to run depreciation tables. In the USA, the issue of library accounting standards and practice is especially important just now, because public-sector accounting standards are about to change dramatically. The Government Accounting Standards Board (GASB) has just issued new standards (GASB 34) that require public-sector accounts to become comparable with private-sector accounts. Library board members can obtain information on GASB 34 by visiting the "official" site, www.GASB.ORG, or a site like http://www.apa.state.va.us/GASB34/index.htm Be careful about copyright. Hardly anything is free about GASB 34 information.

Incremental library budgets

State law usually requires that libraries operate on fiscal years with particular beginning and ending dates. Budget cycles have to match the timing of those fiscal years. As a result, board members may find library administrators talking about FY2003 just as FY2002 is getting under way. Throughout the public sector, it generally is true that planning and budget-setting occupy more time than is necessary. In some agencies, planning is a continuing substitute for action. As a public-sector activity, library budgeting tends to be relatively simple. Because libraries offer staff-intensive public services, which occupy a large portion of each budget, annual changes in budget categories tend to be incremental. Only when a budgeting authority grants a large increase is there much room for significant budget innovation. Board members ought to be proactive in inquiring about the relation between budget, services and benefits from those services. It is not micro-management to inquire into these core policy areas. Rather, it is simply sound financial oversight.

Policy role of library financial officer (CFO)

Library financial officers play highly varied institutional roles within their institutions. In smaller libraries the director often serves as CFO, perhaps simplifying financial governance, but making it more difficult to maintain the checks and balances required for clean financial audits. In some states, CEOs and CFOs share a divided authority, as outlined under state law, even though the CFO reports to the CEO. Amid such issues, it is important for board members to recognize how directors create and watch over their budgets. In too many libraries, the CFO is treated as the alligator in the moat. The alligator rises to the surface and snaps at all the organizational denizens over most fiscal actions. Staff then regard the CFO and the finance office staff as uncooperative at best, or downright evil at worst. Before boards get sucked into such discussions, they need to know how the library director has positioned the CFO in library policy making and in library budget containment. Sometimes the CFO is a significant policy maker. Sometimes the CFO is only the head of the important administrative unit that provides financial service to the organization in the same way as the maintenance and custodial departments. These differing legal and functional roles require the library board, charged by law with fiscal oversight, to know about the role the CFO plays in the organization and the work style in which that role is played. If board members are knowledgeable about the formal and functional interactions between their director and their financial officer, they will strengthen their ability to govern.

Board power and powerlessness

Most new library board members find that their financial power is surprisingly limited. The annual salary cost-of-living advance may be determined by prior management-union agreements or by long-term institutional practice. In addition, there are generally severe limits on the investment of public funds. In St Louis, for example, we must invest all our public funds in "fully collateralized securities" – i.e. certificates of deposit and other securities, for which every dollar invested has an equal value backing it. Such securities are extremely safe, yet provide a minimal return on investment. There also are political realities: even though circumstances have changed, promises made by the library in its last tax referendum still have to be kept. One example: as the population of one area unexpectedly declines while another increases, does the library have an obligation to close or reduce service at that branch and expand or build a new branch in another growing area? In this example and dozens of other situations, board budgeting is political in the sense that governance has a primary function of allocating resources on the basis of a governing body's understanding of demand for services. Those who can't or won't adapt to that reality will have a tough time serving on a library board.

Percent of budget spent for compensation

A critical budget item is the percent of total operating income spent on salaries and benefits. As a rule of thumb, a 50 percent compensation/benefits share is Spartan. A 60 percent share is efficient. A 70 percent share should sound a warning signal. An 80 percent share means that expenditures in other operating areas (collections, equipment, maintenance, etc.) probably are being held down in order to pay staff. This issue is especially pressing for smaller libraries, which tend to spend a larger percentage on salaries than larger ones. What is the appropriate balance between the staff compensation line and the electronic and paper materials acquisition line, for example? Do the size of the collections and the size and number of facilities merit the proposed staffing? Nothing is harder to manage than staff costs and no management task is more critical to a library's continuing success. Every library board ought to inquire about them, and the board collectively should work with the library director to decide the appropriateness of the compensation line within the total operating budget.

Financial hot buttons

There are as many budgetary hot buttons as there are different economic and political circumstances and personal views of different board members. Since reporters seeking to advance their ratings often look first into public travel budgets, libraries need to carefully control and monitor this expense category. Competitive bidding and the share of contracts awarded to disadvantaged business enterprise (DBE) are never easy to handle. Professional fees are another hot button. Legal fees cause problems for some libraries; public relations and marketing consultants cause even more. Staff welfare, no matter how small the amount, is subject both to misinterpretation and to politically motivated audits. Meanwhile, executive compensation, no matter how large or small, is a stew that quickly reaches boiling point, no matter the sparseness or generosity of salary and benefits. Boards need to recognize that the job market for library professionals has tightened, and the compensation packages for library directors at all levels have tended to rise and to grow more sophisticated. If the board has questions in this area, the services of an executive-compensation consultant often can provide appropriate information.

The issues presented in this economic primer are hardly definitive. Every board ought to take the time occasionally to ask themselves how well they comprehend and carry out their fiscal-oversight role. Most directors and CFOs want to help their board members understand the financial decisions that administrators face on a day-to-day basis. Both my institution's positive experience with a pro bono CPA consultant and our more recent opportunity to work on an applied research project with a public-sector economist lead me to recommend the possibility of securing free or paid financial advice from experts in their fields. Especially in troubled times, such advice can be critical. Most importantly, if directors and their boards manage to be team members on fiscal matters, with each playing an appropriate legal and functional role, libraries will have a better chance at high quality financial operations.

Glen HoltExecutive Director of the St Louis Public Library,St Louis, Missouri, USA