Planning for a financial crisis.

• Author: Bertolini, Phil

Some governments are able to respond nimbly when changes are needed, while others struggle in the face of adversity, sinking deeper into financial distress with each successive crisis. Leaders who are dealing with financial stress sometimes make decisions that are less than optimal. They fail to consider a broad array of potential solutions because of immediate emotional pressures. Being resilient under conditions of financial stress requires making smart decisions that address short-term needs without making the long-term situation worse.

Most governments have faced financial stresses in the past and will do so again in the future. Before the next financial crisis hits, governments should consider developing a financial crisis policy, including a library of strategies that could be employed to deal with a financial crisis.

DEVELOPING A POLICY

Governments usually have evacuation or sheltering plans in place for emergencies such as fires, tornadoes, and earthquakes. These plans provide clear advance direction such as where to go and what to do, depending on the nature of the emergency. The plans might designate certain people as area leaders during an emergency, giving them special authority and responsibility for a limited time. There are periodic drills to practice for an automatic, predictable, and organized response.

Why not use a similar approach in the event of a financial emergency? Having a financial crisis policy in place before the actual crisis can achieve benefits similar to those of a disaster policy. The basics for a sound financial emergency policy are outlined below.

Define "Financial Emergency." Governments often fail to take action when confronted with a financial emergency because the leaders are unaware of the magnitude of the situation or are slow to accept the facts. A pre-determined definition of financial emergency, combined with routine self-assessments of financial health, (1) can save valuable time during a crisis--time that can then be used to better cope with the financial emergency.

Deciding what constitutes a financial emergency in advance will provide clarity as to when a financial emergency policy should be invoked. Indications of crisis might include:

* Recurring operating deficits.

* A dependence on one-time sources of revenues to balance ongoing operations (such as selling assets).

* Fund balance or cash levels that fall below a pre-defined threshold.

* The inability to make timely payments to creditors.

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