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May 2009 · Volume 91 · Number 4
Managing Government in Hard Times: Prudent Options for Balancing Public BudgetsPublic officials in communities across the nation have to balance their respective budgets, keep tax increases to a minimum, and make every effort to maintain existing public services. Particular fiscal problems can be state specific, but at this difficult time in our nation's history, all local officials must cope with these difficult issues. Local government officials can make good use of lessons learned from the past. There is no need to reinvent the wheel when it comes to balancing public budgets in hard times. The national pressure for cutback management began in the state of California a generation ago. At the time, I was both working for the city of Oakland, California, and preparing my doctoral dissertation. For my dissertation I chose the subject of coping with Proposition 13 because I had been assisting in developing the city's budget in response to the revenue reduction imposed by this citizens' mandate. The practices I learned from this experience, plus my other budget reduction experience that has been gained from serving in communities on both coasts of the United States since then, are reflected in this article. Over the years, numerous budget development processes have projected, enhanced, and protected revenues; guided department managers and elected officials; and worked to ensure that public services were reduced only marginally, with the goal of balancing the annual budget in the most positive way possible. Strategies, measures, tactics, and programs useful for today's public officials—both elected and appointed—are noted below. The purpose of presenting these options is to ensure that budget reduction practices and adoption processes are prudent yet optimize the use of existing revenue sources and make every effort to minimize the reduction of public services to citizens being served. No new public services. During difficult financial times, there must be a policy of no new public services. No additional services should be added to the budget unless they are cost covering from a revenue standpoint. This means that, if user fees and charges cover the cost of providing the service, then it can be approved. If not, consideration of the service must be postponed until subsequent fiscal years. This is a fact of life when revenues are limited. Implement a hiring freeze. One of the most obvious ways to save money is to impose an organization-wide hiring freeze. During these difficult financial times, elected officials early in the budgetary process should officially approve a hiring freeze. This creates immediate savings in salaries, fringe benefits, and other budget line items used in the provision of public services. Everyone should know that the elected officials are taking such action to avoid or at least minimize layoffs of employees and reductions of services later in the budget development process. Form a union-management cost-savings committee. To balance public budgets, it is a positive measure to involve major stakeholders such as public unions in the process. The local government manager should meet with union representatives as appropriate (usually one member from each union) and ask for their cooperation in reviewing expenses and operations and in jointly recommending ways to save funds and avoid employee layoffs if at all possible. Asking elected officials for approval to form such a committee should have a positive effect because a message is being sent to citizens that both management and unions are involved in reducing the budget. Update user fees and charges. Reevaluating the user-fee structure seems self-evident, but few cities and counties routinely update their user fees and charges for public services. Although the private sector updates prices annually because of increased costs, governments seldom perform this task with any regularity. User fees and charges should be updated to reflect the actual cost of providing the services rendered to the public. It is also appropriate to provide discounts or free-use periods to selected citizens subject to the approval of their elected representatives. Check existing enterprise funds. The national trend is to create enterprise funds in which the user fees and charges generated by the service make it cost covering. These funds are appropriate when only the users of a specific service benefit from its provision (sewer, water, arenas, stadiums, museums, golf courses, parking, and the list goes on). As budgets increase for such services, the user fees and charges should increase also, to ensure that the revenues cover the entire cost of providing the service. If discounts are approved for certain groups, user fees and charges must be increased for other citizens who use the service in order to offset this revenue loss. Create other enterprise funds. After you check your existing enterprise funds, also review your government's public services to see whether other services should be set up in this manner. Sewer and water services have long been cost covering from a revenue standpoint, but other public services must be considered for enterprise fund status when they do not benefit the entire community. If a public service benefits only certain citizens, then those users should pay for the cost of the service. Funding for golf courses, arenas, stadiums, zoos, and museums is headed in this direction. Use one-time revenues wisely. It is not usually fiscally prudent to use one-time revenues or budgetary savings to fund future operating expenses. The only sound financial practice is to use one-time revenues or budget savings to fund one-time expenses, both operating and capital, as appropriate and subject to the approval of elected officials. Using one-time revenues and budget savings to finance operating expenses merely exacerbates an organization's fiscal problems in the future. Always seek available operational grants. Make sure that the staff is informed and knowledgeable about all existing grants from other levels and types of governments as well as appropriate nonprofit foundations. Every public agency should attempt to take advantage of all external funding sources for which it may qualify, including grants made available from nonprofit foundations. Most public libraries have reference books that list both regional and national nonprofit organizations and the programs for which they provide funding. Optimize the use of available infrastructure grants. The federal government has made these grants available in the past under different administrations. When city and county managers know these funds are available, they should have their elected officials approve a projects list and start preparing plans and specifications to fast-track major projects that qualify for this funding. It is common for a local government to spend money up front to obtain engineering services in order to have important projects shovel ready when the grant funds become available. These project-related costs are often reimbursed subsequently by such grant programs. Take measures to accommodate the truly needy. Elected officials and their staffs should not forget that, when public services are reduced and user fees and charges are increased, special consideration should be given to truly needy citizens. Special provisions, as defined and approved by elected officials, should be made for these residents. Modest user fees and charges, along with discounted charges that can include free use during low-utilization periods, are entirely appropriate during difficult financial times. Consider employee work furloughs. The use of employee layoffs to balance a public budget should be a last resort. Efforts should be made to work with employee unions to avoid layoffs. One of the options available to save public funds and balance budgets is to have an employee work furlough. This requires selected employees to take time off for a number of days, up to a few weeks, typically staggered throughout the fiscal year, to reduce costs and minimize disruptions to public services. Elected officials usually favor this option because public services are not reduced substantially. Avoid employee layoffs. Several options are available to save money, balance budgets, and avoid employee layoffs. Management and union representatives can agree to open labor negotiations to discuss various cost reduction and expense deferral options. Because governments basically deliver services, most of which are provided by people, public budgets are driven by salaries and fringe-benefit costs. All of these expenses can be reduced or deferred to avoid employee layoffs and severe service reductions. This is an appropriate option for major budget reductions. Follow prudent bonding practices. The staff should recommend, and elected officials should approve, fiscally responsible bonding practices for all bond-funded public projects. Revenue bonds can be used to finance those projects with a solid revenue stream. General obligation bonds are typically used to finance public improvements and land acquisitions when no, or minimal, revenues are generated by these projects. General obligation bonds are backed by the full faith and credit of the issuing government and have lower interest rates than revenue bonds. Public officials should also have established cost-limit policies for capital projects, land acquisitions, and major equipment purchases to qualify for bond financing. Also, some states provide bonding services to their local governments, which serves to aggregate purchases and thus provide lower interest rates for a bond issue. Provide timely budget information to everyone. When reducing a public budget, make it a point to pursue all financial options to reduce operating costs and generate additional revenues. This means that all available operational and fiscal options should be listed and presented to elected officials for their review and consideration. It is entirely appropriate to start such budget review practices early during the fiscal year. This means that city and county managers should have their staffs prepare revenue projections early to allow time to work with department managers and employee unions to explore all service reduction, revenue enhancement, cost reduction, and expense deferral options. Direct department heads to look for accrued savings. Early in a difficult fiscal year, a directive should be sent to all department managers asking them to review their approved budgets with the goal of holding down expenses, including employee-related expenses such as overtime as well as those operating expenses that can be reduced immediately without negatively impacting public services. Everyone should be told that this effort is being made to increase budgetary savings to offset the projected deficit for the coming fiscal year and to minimize possible future service reductions and employee layoffs. Consider early retirement programs. Everyone agrees that senior employees cost more than entry-level employees. To the extent that an early-retirement program, such as a small pension incentive, can be offered to encourage senior employees to retire, it will save any public agency considerable funds in the future. New employees for most jobs start at the entry level, saving salary and fringe-benefit expenses. The hiring of new employees can also be deferred, if necessary. Early-retirement programs are considered a favorable expense reduction option by public unions and their employees. Implement prudent financial policies. More public agencies should be approving prudent financial and budgetary policies, especially during these difficult economic times. This is a public and official way to give direction to all employees. Many local governments wait until there is a budgetary or financial problem before adopting financial policies. Because of this, such policies sometimes tend to be problem-specific. Now is the time to proactively adopt sound fiscal policies. By doing this, public officials will give permanent direction to their staffs and mitigate the impact of future financial difficulties during the coming years. When such policies are established by elected officials, and approved publicly, they stay in place until they are changed by majority vote at a future public meeting. Review existing funds for appropriateness. Periodically, when the annual audit takes place, the auditor and top management and financial staff should be requested to review all of the organization's funds, and their balances, for appropriateness. Some funds may have been established for a purpose that has been changed by subsequent circumstances or legislation. The size of all existing funds should also be reviewed to ensure that the funds do not exceed the level desired when they were established. Any changes to existing funds, or their levels of funding, should be reviewed with elected officials and must be changed at a public meeting as a part of the budgetary process. Any excess fund balances, or funds no longer needed, can be transferred to the general fund to offset a potential financial deficit. Rank public service levels. One of the greatest problems in reducing any budget is the highly political question of the relative value of various public services. Public services may be categorized into four service levels: Level 1 comprises essential public services, which should not be reduced under any circumstances. Basic minimal levels of police, fire, health, and public works services fall into this category. Level 2 comprises those programs that are highly desirable, but not absolutely essential. Level 3 comprises the nice-but-not-necessary services that have significant value but do not provide essential or necessary services to the public. Level 4 services can be described as the first-to-go programs because they are not essential and serve only a small portion of the community. The criteria used to rank public services should be determined by elected officials as they consider budget reduction options. Evaluate the impact of service-level reductions. To properly assess proposed service reductions, their relative impact on prevailing services must be determined. Many program reductions, because of existing personnel vacancies, may have no substantial impact on services; however, other service reductions may have a measurable impact. Four stages of service reductions can be used for this purpose: Stage 1 reductions would reduce a substantial portion of a program or eliminate the program entirely. Stage 2 reductions would reduce a sizable portion of a program but would not affect basic services. Stage 3 reductions would reduce only a small portion of a program and not affect essential public services. Stage 4 reductions would have little or no impact on prevailing public services. Management can recommend such criteria, but elected officials determine the final rankings. Prepare public service impact statements. Last but not least, before final decisions are made on reducing a government's budget, citizens should be informed of the impact that a monetary decrease has on the services selected for possible reduction. Each budget reduction proposed should come with a public service impact statement. This information should be provided with the list of proposed budget reductions given to elected officials. The statement should also be made available to citizens at the public hearings and meetings held on budget reductions. If time permits, signs should be prepared and placed at those public facilities where services might be reduced. Public officials have an ethical obligation to properly inform the public of the operational impact of their financial and budgetary decisions. There is no doubt that these are difficult financial times for local public officials who represent the citizens and manage their organizations. All of these financial, budgetary, and operational choices are difficult to make, but they are a sign of the times. The sorting and prioritizing of public programs, and the rational reduction of government spending, form the most pressing challenge facing public officials today. Analyzing the political and administrative choices implemented by other local governments over the years will facilitate the use of orderly and sound options by today's public officials as they balance their communities' budgets. These suggested guidelines are offered with the intention of providing insight and clarity to this arduous process. Budget reduction and revenue enhancement strategies that reflect responsibility, not only to the beneficiaries of public services but also to those who must foot the bill, must ultimately prevail. Welcome to the difficult world of sorting out the relative value of public services and making sound financial and budgetary decisions so that public budgets are balanced to meet available revenues! |
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