For most local governments, the baseline projection will reveal an underlying structural deficit, even if the current year budget is balanced. This is because recurring expenditures, which are largely driven by employee compensation and benefits (often linked closely to healthcare inflation), tend to grow faster than economically sensitive revenues.
To help address this common challenge – and to help close any gap – developing a list of quantified initiatives to reduce expenditures or increase revenues over the long-term is recommended.
- On the revenue side, you can review opportunities such as whether your fees and user charges are appropriately recovering your costs of service delivery? Does your tax structure and policy reflect your current economy? Are all of your tax incentive programs still generating a sufficient return? Do your collection and enforcement rates compare favorably to comparable communities?
- On the expenditure side, you can evaluate how current programs and services align with mandates and mission. Can programs be better prioritized with creative approaches to contain cost growth? Are there more efficient or cost-effective alternatives for delivering services?
- Outside of operational initiatives, you can also look into workforce strategy, since personnel costs are typically the largest component of spending for labor-intensive local governments. How are you approaching pension and healthcare benefits? Can creative strategies such as gain sharing and reward programs better target cash compensation? What level of headcount can you sustain, and can schedule changes or smarter work practices enable you to streamline how you staff?
- Finally, local governments can work with their financial advisors to explore options related to capital financing and debt management. Are there upcoming refunding opportunities that could lower debt service costs? How much debt can you afford and what is the estimated impact of more or less additional debt on your projected credit rating?
The best approach is often a balanced one with initiatives from each of the categories described above. As an example, the City of Pittsburgh, Pennsylvania has used multi-year financial planning, enforced and supported by Commonwealth financial oversight, to progress from junk bond status and 400-plus layoffs in 2003 to an A+ credit rating with minimal real estate tax increases and a stable work force in 2017.
On the revenue side, the City and its State-appointed overseer used multi-year projections to successfully make the case to State lawmakers for changing the types of taxes City government levies so it relies on a more diverse set of revenues that grow year to year without tax increases The City regularly reviews and updates its fees and service charges with the understanding that every dollar that is not collected from those sources has to be recouped through higher tax revenues or spending cuts.
On the expenditure side, the City government “got out of the business” in some areas by shifting emergency 911 dispatch to the County government and outsourcing fleet maintenance. In other cases, the City used a managed competition process to give its employees the opportunity to compete against would-be private vendors and show that they were the best available option for animal control and trash collection.
Moderate wage growth was coupled with a more affordable cost sharing structure for employee health insurance. The City recently shifted to self-insurance, again based on a multi-year analysis of how its costs would change with that move. And the City went on a strict debt diet, staying out of the capital markets for years until its credit rating and budgetary position recovered, which then allowed the City to borrow money at a more favorable interest rate later.
Author: Daniel Berger
Date: August 2017