Fiscal Sustainability in a Recession

Have we learned anything from past recessions? Learn from Jim Ley's 36 years of public service experience about how to uphold fiscal sustainability in a crisis.

ARTICLE | May 21, 2020
by Jim Ley

In 1998 a black swan descended upon the economy, devastating financial and real estate markets. That was the beginning of my sixth recession while serving in local government. Now we find ourselves immersed in a self-imposed crisis, once again devastating local budgets just as they had emerged from the Great Recession. 

Are we learning anything?

In my 36 years of public service I often heard one thing but experienced another. The common paean today, as then, was we need to preserve our home rule. Yet a prevalent financial practice has been and is to constantly seek out federal and state largesse, along with all the strings that restricted home rule. The seductiveness of federalism often caused us to accept limitations on our desire to maintain an independent identity. It is shameful to me as a professional that so few local governments that demand respect for their home rule, in turn undermine it by not demonstrating the responsibility to stand alone fiscally, including the ability to weather crisis. Seeking bailouts should be a last resort. 

As I moved through the ranks of management and as I interacted with my peers I was shocked by the fiscal illiteracy and complacency attached to process. To most the budget was a process whereby the Manager produced a budget that was critiqued by the Board.  It was something to do every year, it was often a homage to the status quo and there were few if any conversations regarding budget drivers. I also found that, other than trend lines, most Managers didn’t have a clue about how their tax base worked and what formative and erosive factors influenced their tax base.  Many told me that, at least as to property taxes, it was just too risky to cross the policy energy beams that were budget (service levels) and growth management. 

I would posit that you cannot answer the three questions put forth by this principle until several things happen to address the above. 

1) Model your tax base - First, ask yourself if you possess the tools and staff to model your tax base?  After that, as part of the budget conversation, involve your Board in understanding what you are learning. This may even require getting involved in messy community relationship things like zoning.  Over time I came to expect that my CFO was as much a part of the staff review of large land use projects, going so far as to insert into staff reports econometric models of likely revenue impact that would be produced from changing the tax base by approving or denying a project. 

2) Make your Board do their job - Change your budget preparation from a process to a conversation that focuses on not only the strategic drivers (pension costs, health care, etc) but also how your community is changing and what does that mean for level of service. This requires that a budget “process” be designed around conversations about roles, developing a common understanding of what success looks like and a willingness to challenge sacred cows to name a few. 

3) Systems - it is important have a system that is not only a budget system but one that clearly articulates and tracks against outcome. There are, unfortunately but a few of them out there. But they do exist. 

4)  Reserves, reserves, reserves - If you have not have a  reserve policy that guides your budget building objective, I posit that you cannot become sustainable. And it is one thing to have a reserve policy and quite another to build reserves. I haven’t been allocated enough words to explore this in detail, but suffice it to say that this is a top end strategic component that should be foremost in your budget conversations with your Board. Saving for a future challenge often carries little import to a council member looking at next year’s election Through our conversations we not only fully funded our enterprise and general revenue reserves over three years or so, we created a true rainy day fund Called the Economic Downturn Reserve (the name clearly defined the strategy). For eight years after the 2008 recession, this reserve permitted the County Commission to sustain services with only minor level of service adjustments without tax rate increases. 

A final thought. Home Rule is a goal and responsibility.  Financially, it is in fact a heady responsibility that can only truly be achieved through a strategy focused on sustaining one's community in bad as well as good times. 

 

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