While we all hope that the public safety and health concerns from the COVID-19 pandemic will soon lessen with the success of multiple vaccines, cities will continue to face a much longer financial crisis from the loss in revenue.
This will have serious impacts on budgets and require coordinated action. As leaders in Washington, DC, work to develop strategies to stimulate the economy, provide resources to help local governments through this difficult time, and limit the lasting damage from this crisis, all local governments must also take action at a local level.
To help local governments deal with the tenuous financial situation, the Government Finance Officers Association (GFOA) has developed the program, Fiscal First Aid: Recovering from Financial Distress. This program was actually created more than 10 years ago to help local governments manage the 2008 Great Recession. At the core of a local government’s response to a crisis is the role of the finance officer. The finance officer plays a vital role in shaping, leading, and executing a local government’s path through a financial crisis, and even creating the possibility that reforms taken during the crisis will allow the government to emerge more secure and stable than before. In this article, we will describe fiscal first aid in further detail, and highlight the actions that finance officers, working with their city managers, can and should be taking now as part of an overall approach to leading through a financial crisis.
What Is Fiscal First Aid?
Fiscal first aid refers to retrenchment tactics that can be used by finance officers to stabilize financial condition. It is the process of recognizing, arresting, and reversing a pattern of financial decline. This stability builds stakeholder confidence in the recovery process and buys time to develop and enact more comprehensive financial recovery strategies. At the core of fiscal first aid are the three stages of recovery:
In the bridging stage, the government must get through the immediate crisis and create breathing room to make more sustainable reforms. Bridging includes:
• Forming a team to lead the recovery.
• Slowing the flow of money out the door.
• Implementing a cash flow forecasting tool.
Many governments faced with this stage in Spring 2020 when the pandemic forced an economic shutdown causing mass uncertainty.
In the reform stage, the government balances the budget without making things worse in the long-run. Reform includes:
• Diagnosing causes of financial distress.
• Applying low-risk treatments.
• Considering higher-risk treatments, if needed.
• Exploring ideas for bigger reform.
While it has been approximately a year since the pandemic began to really take hold in the United States, many governments still find themselves in this state—with significant budget cuts being very much a real possibility.
In the transform stage, the government comes back better, stronger, and more resilient than before. Transform includes:
• Increasing adaptability.
• Becoming resistant to future crises.
• Building a strong financial foundation and thriving community for the long run.
As with many of the lessons from this pandemic, the transform stage requires that governments learn from this experience and work to implement sustainable changes.
In addition to these three stages, fiscal first aid also consists of a 12-step process to help go through the stages of recovery. These steps provide various resources, tools, case studies, and more information to help progress through the different steps of the financial recovery process.
Here are five of the most critical actions for local governments:
Recognize the Crisis
Governments facing a financial crisis need to recognize that a real problem exists. At the core of this is making a rapid determination of the problem. The finance officer should quickly assess the problem and its severity and communicate with other leaders in the organization. An assessment of the problem must be informed by an understanding of how to make decisions under uncertainty. A generic set of questions to consider when determining the problem are:
• Where do our revenues stand and what can we expect for the next six months to a year?
• Are our expenditures within budget? How much can we rein them in? What are the most importance causes of revenue decreases or expenditure problems?
• What are reasonable expectations for future growth?
• What size imbalance are we facing? Which funds are experiencing distress? How long can the revenue decline be expected to last?
• Which programs will be most affected by the crisis?
Core Recovery Team
Similar to any other emergency, governments need to assemble a core recovery team. In putting the team together, the finance officer should:
• Look for successful models already in place in your organization.
• Identify potential participants and key departments that will either be disproportionately impacted by the crisis or those best positioned to provide assistance.
• Consider the role elected officials will have on the team.
• Make sure day-to-day operations are covered.
• Consider the need for personnel replacement.
• Consider the need for legal advice.
After the team is assembled, the finance officer can begin defining what the tasks are for the recovery team. Some of the tasks that should be defined include:
• Recognizing the needed change and ensuring that everyone involved understands the urgency of the situation.
• Providing leadership throughout the recovery process.
• Developing “champions” outside of the team.
• Providing guidance to other teams within the organization.
• Evaluating strategies and carrying them forward.
Next, governments need to consider the short-term treatments to address immediate budget challenges and solutions that can be implemented quickly to provide some immediate stabilization and a sense that the situation is under control. This buys time for a methodical approach to financial recovery. While many governments may have faced immediate budget challenges in mid-2020, others may not see financial impacts until much later due to lag in revenue. Generic treatments are applied based on the finance officer’s understanding of the situation rather than on detailed analysis. Although generic treatments are safe to apply with minimal up-front diagnosis, they are only a short-term pain reliever.
Examples of actions that finance officers can take in the short term are outlined in GFOA’s report, “Cash is King.”1 This report outlines short-term strategies to slow the flow of money out the door and keep the budget balanced. These short-term strategies are:
Reduce Personnel Costs
This is the biggest area of expense for most governments, so a serious retrenchment effort will have to address personnel costs. This might include:
• Short-term hiring freeze.
• Eliminating vacant positions.
• Reassessing personnel equipment needs.
Reduce Capital Spending
Capital assets are often very costly, so even a modest reduction in spending could result in significant savings. This might include:
• Reducing the scope of capital asset investments.
• Deferring certain capital asset purchases.
• Improving capital project management.
Reduce Material or Contractor Costs
Though not as significant as personnel or capital, many governments can find savings in existing contracts that may not be as painful to cut. This might include:
• Reexamining maintenance and replacement standards.
• Reducing paper costs.
• Eliminating low- or no-value tasks.
Create More Advantageous Inflow and Outflows of Cash
These techniques won’t balance your budget, but can help better manage the incidence of expenditures and revenues during the year. This might include:
• Better utilization of inventory.
• Delaying payments to vendors.
• Looking for areas of consistent surplus in prior budgets.
Get New Resources
Governments should also explore possibilities for new resources, even if those opportunities are limited.
• Redesignating general fund reserves.
• Implementing new or revised fees where appropriate.
While the short-term treatments can help reduce budget stress temporarily, long-term treatments will be required for many governments facing any significant shortfall. Here are some of the strategies that finance officers can implement to positively impact their local government’s long-term financial position.
Control Employee Benefits Costs
This includes containing employee health care costs as well as reforming pensions. There are a number of strategies that local governments can use to contain health care costs,2 including self-insurance3 and high-deductible health plans. In addition, pension liabilities are essentially a form of “bad debt” that hobbles a local government’s ability to provide the community’s desired mix of tax and services. Local governments can take steps to address this problem.4
Budgeting is difficult even without a financial crisis. However, many governments rely on traditional or incremental forms of budgeting that take last year’s budget and adjust to form next year’s budget. This form of budgeting is appropriate for maintaining the status quo, but impedes major reforms necessary to fully make a transformation. Better budgeting involves reaching out to the community, defining priorities, inventorying current programs, identifying what services are more effective at producing results, and having discussions that will inevitably involve choices on which programs to cut.
Transform Government Services
As part of improving the budget process, governments find they may also need to transform the services they are providing. In fact, many have found that they can both achieve better outcomes and reduce the cost of government by:
• Stopping or reducing lower priority services.
• Shifting from remediation to prevention.
• Improving and/or simplifying work processes.
• Overcoming the limits of local government fragmentation.5
Promote More Financially Savvy Community Development
Government should evaluate their use of economic development incentives. Empirical research suggests that more than 75 percent of new jobs in an area would have been created locally without an added incentive. Improving community development also means choosing financially suitable land use patterns. Land-use planning decisions are usually made without regard to the long-term financial impacts on the local government budget. Therefore, local government should develop a capacity to analyze the true financial impacts of land use decisions.
Manage the Recovery Process
Finally, the finance officer should be one of the individuals responsible for managing the recovery process. To do so, they should use tools and techniques to ensure that the recovery proves manageable and sustainable. The finance officer should think of the recovery process as a portfolio of projects. The main elements of this approach are:
Financial recovery requires finance officers to make the necessary changes in organizational performance to pull out of decline. Good management is needed to keep the recovery process on track. One thing a finance officer can do is assign a recovery manager to manage the portfolio of recovery projects. This will help align the recovery tasks and activities with the overarching goals of the recovery. It also ensures that resources are balanced across the work effort.
Project Management Plan
A finance officer should use a project plan to manage activities within your recovery plan. A good project management plan is a collection of sub-plans that address scope, execution, and stakeholder management. These are the sub-plans we believe are most critical for managing financial recovery projects:
• Scope Plan.
• Requirements Plan.
• Stakeholder Engagement Plan.
• Resource Plan.
• Communications Plan.
• Risk Management Plan.
Project Portfolio Management
A finance officer should consider using a project portfolio to manage all of the projects associated with fiscal first aid. A portfolio is used to align projects to strategic initiatives. This approach helps ensure that every project is relevant to the recovery plan, that every element of the plan is being moved forward, and that portfolio management practices are applied across all projects.
Good communication is essential to managing the fiscal crisis. The finance officer should remember to:
• Establish a clear chain of command for managing tasks and activities.
• Control rumors and misinformation.
• Be as transparent as possible.
• Set up and manage remote work and teams.
Project Management Techniques
Finance officers should learn and implement some project management discipline components. The following are some examples of tools and techniques that finance officers can implement:
• User stories.
• User cases.
• Kanban boards.
• Scrum meetings.
• Effective meeting management.
A local government’s success in responding to and getting through a financial crisis depends upon many things. Of utmost importance is the role in which a local government’s finance officer plays in the response and recovery, both in the short term and long term. Having a leader in the finance office provides the city manager with an ally, a peer, and a partner to help weather a crisis and work on building a more thriving community.
Produced in partnership with the Government Finance Officers Association.
SHAYNE KAVANAGH is the senior manager of research for GFOA and has been a leader in developing the practice and technique of long-term financial planning and policies for local government.
Endnotes and Resources