As the COVID-19 pandemic plays out, municipalities must begin to consider the expected effects of the crisis and begin to plan to address them immediately. The crisis is already having an impact on municipal finance and services, and that is expected to continue as cities and towns slowly begin to reopen in the coming weeks, so the time to plan is now.
Cities and towns have readied themselves for the past several weeks on possible ramifications of the widespread disruption caused by COVID-19—such as possible closure of small businesses in their area, loss of jobs in the retail sector, lower tax revenues coming in, larger numbers of possible foreclosures due to the shutdown, job losses, delayed municipal improvement projects, and potential cuts to state and federal funding. This is why having a plan to address these challenges is so imperative.
A study performed by the U.S. Government Accountability Office (GAO) presented to Congress in December 2019 concluded that state and local government will need to take actions annually in reducing expenditures or raising revenues in order to achieve fiscal balance. The study suggests that if no change in the level of expenditures take place, revenues would need to increase by 4.2% each year to achieve fiscal balance. Alternatively, if no change in revenues takes place, noninterest expenditures (debt) would need to decrease by 3.2% annually in order to achieve fiscal balance and total expenditure reductions required would be 20.7%. The study suggests a combination of expenditure reductions and revenue increases would most likely have to be taken in order to eliminate the fiscal gap.
It is important to emphasize that this study and its conclusions were formulated prior to the COVID-19 pandemic in the United States, and thus did not project a loss of current revenue levels in both the short term and long term that will be caused by the pandemic. In light of these dramatic changes caused by the crisis, both short-term and long-term measures will prove beneficial to municipalities as they adjust for the future.
Municipalities should start by developing a cash-flow model on both a historical as well as a projected future period outlook—the latter of which should provide at least a 12-month rolling period in order to project where and when your entity will be most vulnerable to cash shortages. Once this is done, it’s time to begin developing short-term and long-term budget scenarios providing options and impacts in order to educate legislative bodies as well as the public, as well as assessing the current pipeline of planned projects and determining a priority list.
Cities and towns should consider alternative short-term financing options in order to cover the liquidity gap that is likely to occur. The state of the municipality’s general fund unassigned fund balance and stabilization funds (if present) prior to the crisis will impact this decision greatly; those communities that are well funded may be able to manage the impact without having to look to short-term debt options, but others may have no choice. Available options include tax anticipation notes, bond anticipation notes, revenue anticipation notes, grant anticipation notes, short-term direct placement debt, bank lines of credit and interest-bearing warrants.
Municipalities should also monitor federal and state relief initiatives that may come available to local governments in the short term.
For the longer term, municipalities should evaluate existing programs and services to determine a hierarchy of necessity or value. Specifically, they need to determine which are essential programs/services, which are worthwhile program/services, and which are non-essential programs/services.
For worthwhile programs, city and town officials should document the attributes that support that classification, with reasons why or how that program/service could improve the community in the short term and/or long term.
For non-essential programs, they need to document the attributes as to why the program is either not productive or not sustainable. This will be of great assistance if it is necessary to cut the program; the economic reasons will have been vetted in advance and the public will have the opportunity to provide input to the process.
What we all are currently witnessing, and what municipalities are experiencing first-hand, is a fluid and ever-changing situation. But for governments at all levels, those that plan now for the financial impact of this crisis and implement the strategies quickly and efficiently will help ensure the continued delivery of vital services to their communities.