Stress Tests: Building Budgeting Resilience in an Ever-Changing World.

• Author: Ryan-Feldman, Jack
• Position: BUDGET STRESS TEST

In an unpredictable world, how do you ensure your budget can withstand unexpected crisis? Enter the budget stress test. This process reveals vulnerabilities in revenue streams and how flexibility in expenditures can help to develop more resilience.

Local government professionals have long known that they operate in an increasingly volatile, unpredictable, complex, and ambiguous world. This is not a new concept, but the health and economic crisis brought on by the COVID-19 pandemic has been an important reminder. Local governments need to respond by making sure they're accounting for this reality in their budgeting process and long-term financial plans.

Long-term decisions in an unpredictable world

Local governments make decisions every day that have a long-term impact on their communities--and these decisions are difficult enough, given the challenges each community faces. Communities deal with changes to the size or demographic composition of their population, changes to the composition of local business, and mandates from state legislatures, all of which create challenges on the revenue side of the ledger. Long-term obligations such as debt and collective bargaining agreements coupled with the new and increasing demand for government services challenge governments from the expense side.

But that's not all. The environment of the community itself also changes at a fast clip.

All models are wrong, but some are useful

Given all the changes governments face, it's easy to see why someone would think there's no point in creating a long-term financial plan, as it will become obsolete in the next 12 months. Creating that plan takes a lot of time and effort. What's the point? Well, we need to remember what long-term plans and models are for. A long-term financial plan is not a map; it's a compass that allows decision-makers to see where they are headed and if they've strayed from the path [as in the government's strategies and plans]. If the government has strayed, a long-term financial plan won't provide directions back to the path, but it does give the government an idea of how far away it is. So, yes, governments need to have a baseline long-term financial plan that shows the organization's structural balance and trajectory, assuming two percent annual inflation in revenues and expenses. But you shouldn't stop there--the model is only somewhat useful at this juncture.

One way to acknowledge the volatile, unpredictable, complex, and ambiguous...