Balancing the Budget in Bad Times: Reducing Costs and Enhancing Revenues in the Next 12-18 Months.

• Author: Kavanagh, Shayne C.
• Position: COVID-19 SPECIAL SECTION: FISCAL FIRST AID

The June 2020 issue of Government Finance Review featured resources for local governments navigating the economic crisis resulting from the COVID-19 pandemic. These included an overview of retrenchment techniques and opportunities to access more cash ["Cash is King"]--early steps in GFOA's 12 steps to recover from financial distress.

This article takes a close look at Near-Term Treatments, which build on the concepts introduced in the first four steps of the recovery process. Near-Term Treatments are the next level of treatment for the ensuing 12 to 18 months. They might be enough to resolve minor cases of financial distress. For severe cases, the Near-Term Treatments buy time for extensive changes, such as those suggested in Step 8, Long-Term Treatments. (1)

A Decision-Making Environment for Near-Term Treatments

The leaders of the financial recovery process can create a decision-making environment that encourages clear thinking and wise choices about Near-Term Treatments.

First, set up a "culture of frugality." Everyone needs to understand that every dollar counts during severe financial distress, including expenditures and revenues. When they understand that, they will understand why Near-Term Treatments are necessary. When they understand why, they are likely to support it or even volunteer ideas for balancing the budget.

Start by announcing that being frugal is more important now than ever. Leaders need to show this, so that everyone sees that the culture change is serious. During the 2008 Great Recession, the mayor of one city went so far as to start mowing the grass in front of city hall himself to cut back on contracted maintenance costs! Of course, not every local government leader can or should start doing the yard work, but the mayor's actions showed that he took the city's spending seriously. There are other, less dramatic ways local government leaders could send the same message. As the mayor's actions imply, the message will be best received if people can see that leadership is taking the same bitter medicine that they are asking others to take. Below are examples of actions leadership could take.

Many of these will not generate huge savings, but they can be symbols that show that leadership is taking the situation seriously and expects everyone else to do the same.

* Agree to look at all programs and areas for cost savings and be clear that there are no "sacred cows."

* Delay or cancel noncritical projects, purchases, or contracts. If these are projects or purchases that leadership was enthusiastic about, it sends an even more powerful message.

* Delay or cancel programs or events that are low priority or are no longer right for times of fiscal distress [e.g., office holiday parties or golf outings],

* Cut back on office equipment, especially the kind that might be seen as "perks," like desktop printers when electronic documents are available or when and where shared printers are practical. Don't exempt leadership positions from these frugalities.

* Delay or end the replacement of vehicles where this won't lead to increases in maintenance costs beyond the available savings. Don't exempt vehicles used by management staff or elected officials.

* Publicly acknowledge and celebrate people in the organization who find ways to cut costs in responsible and constructive ways.

However, culture change can't stop there. Emphasizing simplistic frugality could lead to penny-wise and pound-foolish decision-making. Hence, a complement to frugality is valuing results over inputs and outputs. For example, improving public safety [a result] should be valued over the number of police officers [an input] or the number of patrols [an output]. If inputs and outputs are the definition of "success," then success will become difficult, if not impossible, in an environment of reduced resources. If results are the definition of success, then people can still succeed by finding creative and cost-effective ways to reach the result.

An emphasis on results can also support a second part of the decision-making environment: a willingness to spend money to save money. Sometimes it is necessary to spend money to spur cost-saving innovation. Examples of worthy expenditures could include labor-saving technology, bringing in outside technical expertise where staff members are missing a valuable skill, and using a consultant to validate financial position and condition to increase credibility and build the case to act. Leaders should put in place ways to make sure value is received for the money spent. This could include milestone or performance-based payments or gain-sharing arrangements with the vendor. It is equally important to have tools that apply to internal staff who often must create value in conjunction with the outside vendor. For example, buying new technology does not ensure greater efficiency. Staff must learn how to use new technology and include it in work processes.

Leadership can frame others' perceptions. How the situation is defined is crucial.

After creating a culture of frugality and a willingness to spend money to save money, the next piece of the decision-making environment is how the financial crisis is framed. There are two basic ways a crisis could be framed: one is productive, and one is destructive. A "siege" or "bunker" mentality is destructive because it promotes conformity as people "hunker down" and try to preserve the status quo. This stifles innovation that will be needed to navigate the recovery process. The other frame is to see a crisis as an opportunity. A crisis produces "game-changing" events that can be used to break free of constraining past practices and habits. Traditional examples associated with a financial crisis include revenue losses or a bond rating downgrade. The COVID-19 pandemic creates new game-changing events, including the need to develop new emergency management processes, the need to work remotely, and the need to develop new and efficient electronic processes to replace paper-based ones, and the opportunity for local governments to provide leadership to their communities.

Leadership can frame others' perceptions. How the situation is defined is crucial. Sharing information helps avoid rigid reactions and may keep leaders and the organization open to solutions. How information is shared is crucial to how it impacts the decision-making environment. Often, information shared during a financial crisis is not pleasant. GFOA's research suggests a three-part rule for how to share bad news while maintaining the trust of the audience and optimizing their ability to act:

* Be prompt. This maximizes the time that decision-makers have to act on the information. This also preempts misinformation. It is harder to correct misinformation once it is out than to inoculate your audience against it by getting to them first. Promptness is supported by the transparency of financial information.

* Be straight. Don't sugarcoat or go gloom and doom. If the audience believes they are being manipulated, leadership will lose credibility. People will take their cues from the ability of the organization's leadership to portray reality.

* Provide solutions. Be honest about what is achievable. Give a limited number of credible and achievable options for how to address the problem. Research shows that too many options paralyze decision-making. And providing only one option gives no room for people to contribute to the discussion [other than rejecting the option].

Finally, the decision-making environment must ensure that the steps taken to reach a balanced budget in the short term are consistent with building a strong financial foundation for the community over the long term. Many short-term budget-balancing techniques have long-term consequences. If the local government over-relies on these types of solutions, it could find that it must endure lower grade but persistent financial stress after the crisis has passed. This is not conducive to making the community the best place it can be for its citizens or for making the local government resilient against future problems. A good example is delaying maintenance on capital assets. This increases future maintenance costs, may shorten the asset's life, and may reduce benefit the public receives from the asset today. Incorporate long-term planning and forecasting (3) into your recovery effort to make sure your Near-Term Treatments attempts don't cripple your organization in the long run.

A Two-Part Management System for Using Near-Term Treatments

Putting management controls and practices in place will help you get the most out of using Near-Term Treatments. Good management does this by creating accountability for getting results and by managing the financial situation so that the organization has time and flexibility to apply Near-Term Treatments on its own terms.

The first part of the two-part management system is to secure financial position. Certain cost-cutting tactics like a short-term hiring freeze, reducing travel, or delaying payments to vendors can help stabilize financial position in the short term. (4) However, certain management techniques can help make sure the local government is consistently stable. The second part is to be data-driven and results-oriented. This complements the advice we gave earlier to emphasize results in the decision-making environment. The management system brings this ideal into reality. Exhibit 1 summarizes the subcomponents of these two parts. We will assess them in detail.

EXHIBIT 1 Summary of the Two-Part Management System Securing Financial Position * Cash flow forecasting and monitoring * Control system * Identify sources of liquidity Be Data-Driven and Results-Oriented * Make managers manage * Give timely, accurate, and understandable information about spending * Help departments manage unexpected and unavoidable spending * A budget should be formulated in a way that is data-driven and results-oriented *...