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Budgeting During Periods of Economic Instability


December 4, 2015 by Stan Finkelstein
Category: Budgets and Budgeting , Finance Advisor

Budgeting During Periods of Economic Instability

Having just experienced the most prolonged recession since the Great Depression, governmental leaders are well aware of the impact of the economic cycle on their jurisdiction’s fiscal well-being. As county and city legislative bodies approach the task of crafting a budget for the next fiscal year, they are compelled to address a number of critical issues: what will the economy look like in 2016; will inflation increase the costs of employee health care and the costs of services; will there be revenue growth, stagnation, or decline; what unmet needs can no longer be deferred; which capital needs must be addressed; and, are there citizen service demands that must be responded to?

While the perception is that overall the economy is improving and has almost returned to its prerecession levels, the reality is that not all local governments have benefitted from the recovery. Furthermore, given the limitations of county and city revenue sources, and the withering state support for local governments, many jurisdictions have been unable to sustain previous service levels, and make the necessary investments in their infrastructure.

It is the intent of this discussion to provide some suggestions as to how to address the 2016 and successive budgets in a fashion that assures the citizenry of stability in the provision of public services as well as in those infrastructure systems that they rely on daily. That guidance will be in the form of budgetary rules. These rules are not intended to be prescriptive, but rather factors that should be considered as budgets are developed and adopted. It should be recognized that a budget is a contract that imposes taxes and charges on the residential and business citizenry in exchange for a defined level of services as indicated by the proposed expenditures. Elected officials are deemed to be the stewards of the public’s well-being.

Seven Rules of Prudent Fiscal Management

Rule One - Be Mindful of the Local Economy: Develop an understanding of the current nature of the local economy and the possible changes in local economic conditions that could arise during the upcoming fiscal period. Understand how each of those possible economic changes could impact each of the major revenue sources relied upon by the jurisdiction. Revenue forecasts are not absolutes. They are predictions based on the best available information. In forecasting revenues finance officers should strive to realistically anticipate the most likely economic conditions, and should not be overly conservative to guard against the potential of a mid-year economic shift. Unassigned cash balances and budget stabilization funds are the means to address unforeseen circumstances and not the intentional underestimation of revenues.

Rule Two - Focus on the Community’s Priorities: In considering and adopting the budget, elected officials must understand the priorities of the jurisdiction, the difference between mandatory and discretionary services, the areas where services should be enhanced or contracted should revenue flows warrant such budget modifications, and the budgetary impacts of endeavoring to achieve the long-term vision for the county or city. It is important that elected officials recognize that budgeting is a dynamic process. That may necessitate mid-year modifications of the then current budget as well as development of a five-ten year budget plan that endeavors to allocate resources to meet that long-term vision. Concurrently, it must be recognized that over time citizen expectations change and the citizenry’s service priorities are not static.

Rule Three - Economic Conditions Impact Revenues: Manage resources so as to overcome the dips during economic declines and the growth during upswings. Don’t lose sight of the impact of inflation on the cost of services. In many counties and cities there is the tendency when times are good to enhance existing services and address new service demands, without questioning whether those increased expenditures can be sustained during periods of stability or decline. Extraordinary revenues arising from an unsustainable economic peaks should be managed in such a way as to avoid increasing services, and set aside to address nonrecurring costs and the need to augment revenues during periods of decline. Good budget management suggests that such excess revenues be used to defray the costs of one-time capital improvements, establish or add to a budget stabilization fund, or for minor enhancement of unassigned beginning cash balances.

Rule Four - Manage Starting and Ending General Fund Cash Balances: All General Fund funds need to be strategically managed, starting with unassigned ending cash balances. Starting and ending cash balances recognize that revenue accruals and expenditures are not synchronized. Major revenue sources, such as the property tax and sales tax distributions occur at distinct times during the year, while expenditures are more evenly spaced throughout the year. Starting cash balances are able to bridge this lack of synchronization. The Governmental Accounting Standards Board recommends that counties and cities maintain an unassigned ending cash balance equal to at least two months of expenditures. Excess ending cash balances should be allocated to restricted or assigned uses, such as a budget stabilization (“rainy day”) fund, to a capital fund, to one-time expenditures, or even to a non-General Fund purpose, such as to addressing post retirement LEOFF 1 medical costs. Excessive ending/beginning cash balances can become a “target” for desired ongoing expenditures.

Rule Five - Budget Monitoring: In the case of county governments, the legislative body should receive periodic revenue and expenditure reports at least monthly and should be actively engaged in the oversight of the budget throughout the year. In the case of cities, the council should appoint a finance committee that similarly undertakes periodic budgetary reviews as well as assisting in the crafting of the forthcoming year’s budget. In the absence of such a committee, the council as a whole should receive revenue and expenditure reports at least bi-monthly, as well as recommendations for mid-year fine tuning of the budget. For both counties and cities, such budget reports can serve as an early warning mechanism for either revenue shortfalls/excesses as well as expenditure imbalances.

Rule Six - Budgeting Includes Capital: Many local officials tend to focus on the delivery of ongoing services and neglect the need for the ongoing maintenance, improvement and reinvestment of their basic capital assets. It is only when there are “excess” monies available that funds are allocated for vital capital expenditures. There is a tendency to fail to recognize that a well maintained infrastructure investment program will result in lower ongoing maintenance and repair costs as well as avoiding “system failures”. Every county or city budget process should determine what the necessary annual expenditure for capital should be and then budget accordingly. During periods of economic decline the actual budgeting of capital funds can be marginally reduced, only if during periods of revenue growth the proportion is increased.

Rule Seven - Develop a Critical Path: It is strongly recommended that every government should develop a strategic plan that establishes the jurisdiction’s mission statement; defines the “community’s” vision for the future, and establishes objectives and goals. That plan should be for the following five to fifteen year period, and commit the legislative body to allocate resources to achieve the vision. That vision must be based on a broad outreach process that incorporates the citizenry’s desires as well as being realistic in the context of the competing needs of the jurisdiction and the resources available to meet both mandatory and visionary needs. The strategic plan must also be dynamic, subject to periodic reviews and modifications.

Conclusion

As many local officials will acknowledge, budgeting is an art and not a precise science. Budgets are forecasts that endeavor to predict both revenues and expenditures for a future period of time. Budget management requires elected officials to have a working knowledge of those factors that impact both revenue flows and expenditures, including inflation. Capital assets, utility systems, roadways, public buildings, parks, and the like are critical to the delivery of services and shouldn’t be ignored in the allocation of resources. A failing water or sewer system, a bridge that is structurally obsolete or unsafe, or an unusable park are generally more detrimental to the community’s perception of its elected officials than a delay in accessing the county or city’s website or in filling of a vacancy in the jurisdiction’s clerk’s office.

While the above rules are not designed to address the fiscal problems arising from economic swings, nor to assist those counties and cities characterized by an inadequate revenue base, they are intended as guidance for elected officials to better manage their fiscal responsibilities, to do a better job as stewards of the publics’ resources.


MRSC is a private nonprofit organization serving local governments in Washington State. Eligible government agencies in Washington State may use our free, one-on-one Ask MRSC service to get answers to legal, policy, or financial questions.

About Stan Finkelstein

Stan Finkelstein writes for MRSC as a Council/ Commission Advisor.

Stan is currently Chair of the Public Works Trust Board. He served for 12 years as an Adjunct Faculty Member with Seattle University's Institute for Public Service, and he also served as the Executive Director for the Association of Washington Cities from 1990 to 2009.

The views expressed in Advisor columns represent the opinions of the author and do not necessarily reflect those of MRSC.

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