Managing budgetary pressure during economic downturns.

• Author: Proctor, Allen J.
• Position: Forum

The economic recession is creating difficult budget problems for governments throughout the United States. As tax revenue growth stagnates, many governments will face significant budget pressures over the next few years. Except for those governments that still have large fund balances, the prospect of depressed revenue growth for the next several years means that governments must find ways to do business differently if they are to keep their budgets in balance.

The most important factor that will single out the governments that will successfully weather the next several years is the capacity to adopt and adhere to a program of actively anticipating budget problems and responding in the early stages. For a finance officer, this policy would support comprehensive risk analysis (i.e., What are the problems that might be expected to emerge?) and contingency planning (i.e., How will the government respond should the problems materialize?). Such a program would make it possible to routinely set aside appropriate reserves for delinquent taxes, adverse judgments and disallowances, extraordinary spending needs, etc. It also would establish a routine timetable for revising revenue and expenditure estimates and responding to those revisions with new tax and spending plans. Without such a program, budget problems are unlikely to be recognized until they come to a head, and responses are unlikely to be formulated and approved until cash is literally running out and a crisis is at hand.

Six Steps for Maintaining Budgetary Balance and Service Stability

Unfortunately, finance officers often are given their strongest mandate after a crisis has begun. Once that occurs, finance officers need to simultaneously implement six steps designed to enhance the ability to maintain budget balance and to begin a process of restoring stability to government policymaking and service delivery. The six steps are as follows:

1. Disrupt purchasing and hiring,

2. Establish and maintain close monitoring of revenues and spending,

3. Determine whether stopgap financing is needed until budget actions reach full savings potential,

4. Utilize the media to build public awareness of the crisis,

5. Initiate analysis of why the problem became a crisis and how this can be avoided in the future, and

6. Consider requesting state oversight or intervention.

These steps are designed to achieve three purposes. First, establish control of the current situation so as not to become a passive victim of economic developments. Second, expect to encounter problems and try to anticipate where they will occur and how to respond promptly. Third, make sure the fix includes rehabilitation so that budget planning and control mechanisms will be stronger when the next set of problems emerges.

Disrupt Purchasing and Hiring. In a crisis, the foremost priority must be to stop, or at least slow, the momentum of spending. Even when budget problems are well known, bureaucracies exhibit the human tendency to maintain the status quo, continuing to handle purchasing, hiring, and contracting in routine ways. This routine must be interrupted. Although the obvious objective is to make permanent changes in appropriations and spending policy, the first step must be to prevent the fiscal problem from needlessly worsening.

Spending is most effectively disrupted through immediate freezes on hiring and purchasing. The purpose of such freezes is to buy time until analysis and decision making is completed so that permanent spending changes can be implemented. At that time, freezes should be lifted.

Any freeze must have exceptions, and the determination of exceptions is the most important decision to be made. Personnel turnover always occurs; finance officers should know in what departments and titles to expect turnover and what the dollar value of leaving those positions vacant will be. In addition, a...