Fiscal first aid.

• Author: Kavanagh, Shayne

With indicators of housing market performance plumbing depths that haven't been seen in years, soaring energy and commodity costs, and slowed economic growth, many local governments are feeling financial pressure. In this environment, minor structural imbalances that were manageable in the past may now manifest as a financial crisis. The purpose of this article is to outline strategies and tactics for "fiscal first aid"--stabilizing the financial condition in preparation for more in-depth rehabilitation. However, this article will not be just of use to those in financial crisis. Governments with a stable position can review these concepts to practice preventative care and head off a crisis before it occurs.

GETTING STARTED

A diagnosis must be made before applying basic treatment. Not only does this ensure that the right treatment is prescribed, it also convinces the patient of the need for action, including permanent "lifestyle" changes.

Distinguish between structural and cyclical deficits. A financial crunch owing to a fundamental mismatch between income and outflows requires a very different approach from one that arises out of a temporary downturn in revenues. Temporary downturns that are reasonably anticipated to last less than two to three years could be weathered by using reserves, putting a freeze on hiring, or deferring capital or maintenance spending, for example. If these practices are stopped and remedial action is taken when revenues come back, then the harmful side effects will be minimized. However, using these same tactics to deal with a structural deficit can actually worsen the problem. Using reserves puts off the day of financial reckoning, and the eventual required solutions will be that much more drastic and painful. Hiring freezes place greater pressure on staff, perhaps causing turnover amongst the most capable--especially if there is no expectation that staffing levels will return to normal in the foreseeable future. Deferring infrastructure spending ultimately harms the economic vitality of the community and the very tax base that supports the government.

Help decision makers visualize the problem. Modern spreadsheet software offers interactive and visually appealing ways to present financial data. Interactive presentations can be used to show anticipated future financial positions under different growth scenarios (see "Long-Term Financial Forecasting for Local Governments" on page 60 in this issue). If, for instance, the forecast shows a budget deficit even under improved economic conditions, then the case for action becomes that much more compelling.

Finding anecdotal ways to relate the scope and nature of the problem to people's daily lives also helps clarify why action is needed and further stakeholders' understanding of the issues. For example, relating debt to mortgage and car payments or to buying groceries on credit can help elected officials and the public feel more able to support the actions needed to fix a structural decline or make an adjustment during a cyclical shortfall.

Get benchmark data. Comparative data on factors such as employees per capita, overtime spending ratios, benefit costs, claims costs, etc., can reveal areas of over-expenditure. Per capita and per employee analyses provide excellent perspective and help employees and elected officials adjust their expectations and understanding of what is realistic. Just as importantly, benchmarking data provides tangible proof of the need to change.

Understand what tough times mean for citizens. In a financial downturn, it is not just government that feels pressure. Citizens cannot afford new or increased taxes, while certain services like public safety or health and human services become ever more costly. Further, certain segments of the population may be particularly vulnerable and even less able to bear tax increases or service cuts than others. A fiscal first aid strategy must be hatched with full knowledge of how the proposed course of action will affect the citizenry. Not only...