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MRSC has joined with Tracey Dunlap, Director of Finance & Administration at the City of Kirkland, Mike Bailey, Finance Director, City of Redmond, and Glenn Olson, Deputy County Administrator, Clark County, to bring you the "Finance Advisor" column. The "Finance Advisor" will feature a new article each month with timely local government finance information and advice you can use.*
Practical Ideas on Financial Sustainability
August 2010
By Mike Bailey, Finance Director, City of Redmond
Over the past few months, Tracey and Glenn have focused this column on assessing how to find our way forward in the midst of “The New Normal” (a phrase coined to describe the most significant drop in state and local revenues since the Great Depression). Many of us are working hard on preparing budgets (either annual or biannual) for the next budget term and this led me to ponder some practical ideas on financial sustainability. The context of the down (but slowly recovering) economy and growing public awareness regarding governmental budgets and public revenues makes financial sustainability even more daunting. Therefore, my objective with this article is to build on the great work by Tracey and Glenn (you can read their articles in MRSC's Finance Advisor Archive) with some pragmatic steps that you can use as you contemplate your next budget (and beyond).
Your Starting Place
In our city hall, we were discussing how budgets tend to either be revenue based or expenditure based. Of course both are necessary, but where do you start? For instance developing a long range financial forecast will illustrate the tension between these two. Revenues tend to be forecasted to grow at lower rates than expenses (as Glenn aptly pointed out in his last column). Therefore, a long range forecast will illustrate a growing gap between the two. The key question becomes “how do you close that gap for the foreseeable future?” This is the primary reason for such a forecast (to understand this gap and begin to develop strategies to address it). (See GFOA's recommended practice on long range financial forecasting)
If you start with revenues — your task will be to see how much service (and how many of the expenses associated with providing that service) your revenue base will support. This is the approach featured in the “Budgeting for Outcomes” model which is gaining in popularity (Washington State called this “Priorities of Government” when Governor Locke used this approach in 2002). Authors Osborne and Hutchinson set the guideposts for this approach in their book, “The Price of Government” (2004). Only after you determine how much service the existing revenue model can afford do you consider seeking additional revenues to “buy more service.” This approach makes it clear which services the new revenues are buying back and gives policy makers an informed choice in this regard.
If you start with expenses — you focus on sustaining current services and service models. The model will illustrate what it will cost in future years to support the existing organization and its operational approach. As stated earlier, these costs will rise faster than revenues, so the challenge inherent in this approach is to close this gap. Again, Glenn described this well in his last column (so I won't repeat it here). This is by far the more common approach. However, given the severely constrained revenues and the rising concern with the cost of public services among the electorate, this approach is coming under some criticism. Governments using this approach are accused of not seeking efficiencies, alternatives or other ways to reduce expenses before they attempt to close the gap with increased revenues (higher taxes, fees, etc). While this criticism may (at times) be unfair, it may be helpful to point to the lack of clear communication about the steps taken by the local government before it seeks to close the gap through higher revenues (Tracey's communication point from her last column).
The “New Normal”
The revenues in most our governments literally dropped over the past few years. For many of us, 2009 revenue was less than 2008 revenue (and 2010 may be less than 2009 or even 2008 in some cases). This was largely a one-time event, but this certainly makes using revenue trends difficult for forecasting the future. Another complication in this “new normal” is that citizens and businesses are behaving differently than they have in the past. Having seen their net worth deteriorate (either in the house values, stock market, jobs or in other ways) consumers and businesses are both being more conservative with their spending. This translates to lower public revenues in a variety of ways (less sales tax, less business tax, less development, lower tourism related revenues, etc.). So we are left to wonder what the new trend lines in the future might look like if we cannot rely on past behaviors as a guide.
All of this suggests that an open dialog about:
- Anticipated revenues and how they are evolving (i.e. revenue forecasts in existing budgets have often proven overly optimistic)
- Actions taken to seek efficiencies and reduce costs while maintaining service levels
- choices for maintaining services (both revenue choices and new service model choices — such as regionalism, privatization and others)
- A prioritization of services (i.e. which are less important and will be curtailed if revenues do not exist to support them)
- The marginal cost of the retaining the less important services and choices for attaining the revenue to do so should the policy makers make such a decision
- Strategic efforts to provide public services in the future given a changing revenue picture (i.e. long range financial planning)
The best hope for addressing the “New Normal” successfully is a collaborative approach and teamwork of both policy and administrative branches of your local government. Here are a few practical ideas for your collaborative discussions:
- Establish a set schedule for this discussion for as long as the economic challenges are complicating your budget. For instance we have gone to a monthly review of the budget with the council's finance committee and a quarterly review of the budget with the full council.
- Share information openly among yourselves, your employees and your community.
- Make sure the information you share is presented in non-technical terms.
- Consider setting up a special section of your web page or newsletter to focus on these issues in this unique time.
- Make sure you have the right type of discussions. These aren't just another business item on your already crowded agenda. You may need a special workshop or a quarterly briefing on these issues where information can be shared and a good discussion can occur.
As Glenn observes, the challenges of attaining a structurally balanced budget is daunting — especially now. The call to public service is to accept this challenge and to engage the public and their elected officials about how best to serve the community within the resources that they are willing to provide. The opportunity to challenge the status quo, find new ways to provide service, test old assumptions is always best when it is clear that something has to change. As Paul Posner points out in his article, The Deficit Inferno, “A fiscal crisis can force a very healthy reexamination of programs, priorities and operations. While often too painful to address in normal times, inefficient work rules, program designs and benefit formulas can be reformed.”
My advice (in this Finance Advisor column) is to take advantage of this opportunity to make sure that we are serving the public in the best way we can and with the types of services that they value. Only then will they have the information they need to know if they should buy back those services on the bubble as you ask them for additional revenue authority at the ballot box.
Mike Bailey is currently the Finance Director for the city of Redmond. Previously he worked as Administrator of Finance and Information Services for the city of Renton and as the Director of Finance for the city of Lynnwood. Mr. Bailey also served as president of the Washington Finance Officers Association and is the Vice Chair of the GFOA Budget Committee. An experienced CPA and GFOA budget reviewer, Mr. Bailey co-founded the annual Budget and Fiscal Management Workshops held each summer. Mr. Bailey conducts numerous workshops and has authored various articles on local government finance, including Effective Budgeting in Washington State Cities published by the Association of Washington Cities.
Tracey Dunlap, P.E. is the Director of Finance & Administration at the City of Kirkland. Prior to joining Kirkland in 2006, she was a principal and shareholder in FCS Group, a regional financial and management consulting firm (14 years). An industrial engineer registered in the state of Washington, she has worked with jurisdictions throughout the Northwest to develop and implement cost recovery and fee strategies, set utility rates, and improve organizational efficiency and effectiveness. Tracey's experience also includes working for a large defense contractor (5 years) and a major financial institution (3 years). She has presented on a wide array of topics for organizations including WFOA, APWA, APA, WABO, and AWC.
Glenn Olson is the Deputy County Administrator for Clark County. He has been in Clark County since 1997, serving in various leadership positions during his tenure there. Previously Mr. Olson served 15 years in the Governors Office of Financial Management overseeing budget forecasts. Mr. Olson chaired the Washington State Public Works Board for Governor Locke. Currently he is the gubernatorial appointee representing local governments on the Select Committee for Pension Policy and on the Law Enforcement Officers and Fire Fighters Plan 2 (LEOFF2) Board, and he is the president of the Washington County Administrators Association.
*The Articles appearing in the "Finance Advisor" column represent the opinions of the authors and do not necessarily reflect those of the Municipal Research & Services Center.