Getting past the quick fix: on the road to financial resiliency.

• Author: Knutson, Kevin
• Position: Report

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The fiscal imbalance between revenues and commitments is growing as the impact of falling property values, high unemployment, and weak consumer confidence erodes local taxes. In addition, pressure from federal and state budget-reduction strategies also affects local revenues and expenditures. Projected decreases in revenue for 2012 represent the sixth straight year-to-year decline. Many organizations addressed this fundamental shift with strategies designed to address short-term declines, but some of the things agencies normally do to weather typical downturns--deferring maintenance, reducing funding for liabilities, and spending reserves--have made a recovery even more difficult.

Deferring maintenance and investments in infrastructure increases future costs while creating a higher risk for potential failure of critical transportation and utility systems. According to the Congressional Budget Office, 75 percent of U.S. infrastructure spending comes from state and local government.

And while the dire prediction of massive municipal defaults was overstated, pledged revenues are failing to cover some revenue bonds and debt service is taking up an increasing percentage of overall expenditures for many local governments. Existing debt loads will remain a major problem in balancing budgets, contributing to the need for fundamental change.

Achieving financial sustainability will require organizations to go beyond short-term strategies, to begin rebuilding capital programs, funding liabilities, and replenishing reserves. Other external impediments, such as compliance, collective bargaining, and the undercurrent of anti-tax and anti-government sentiment will make it even more difficult to solve these problems.

As William Eggers, Robert Campbell, and Joel Bellman have pointed out in "Red Ink Rising: Navigating the Perils of Public Debt," addressing all these issues simultaneously "will be a challenge to the entire democratic governance model, requiring systemic, structural changes to bend the government's cost curve down as well as courage and persistence on the part of political leaders and citizens." (1)

FIRST, STABILITY

Many organizations are still struggling to fix budgetary structural imbalances, trying to establish affordable service levels they can fund over the long term. (Tools such as the GFOA's Fiscal First Aid site, at www.gfoa.org, help by identifying ways of addressing problems and stabilizing finances.) Even so, almost all jurisdictions have made some progress toward financial recovery--recognizing the scope of the problem...