Three Principles and a Sim: Guidance for Cutback Budgeting in the Covid-19 Recession

Remember these three basic principles as you evaluate appropriate cutback budgeting measures for your local government.

Jun 1, 2020 | BLOG POST

by Kurt Thurmaier, distinguished engagement professor and chair, Department of Public Administration and director, School of Public & Global Affairs, Northern Illinois University, and ICMA member

Research by public budgeting scholars about the past few recessions suggests managers should remember three basic principles as they evaluate appropriate cutback budgeting measures.

Strategic plans and priorities are made for cutback management periods.

What are the city's priorities and how do you protect them as revenues drop? The governing body’s policy agenda and top priorities should frame discussions and guide decisions.

If one priority is the major streets improvement plan and the other is the crime prevention program, it is important to protect them in a cutback environment. Managers need to avoid the political instinct for across-the-board cuts, “sharing the pain.” We should remind citizens, department heads, and city councils by asking the question: Why are we treating our top priorities the same way as services that are nice but not essential? 

It's raining again!

Rainy day funds are created for the first- and second-year revenue shortfalls, such as the COVID-19 pandemic period. The duration of the last 11 recessions between 1945 and 2001 is about 10 months. The Great Recession lasted a bit longer. It's important to not panic. We don't know how long this Covid-19 recession will last, but knowing the average length helps us plan. It's going to be pouring down rain for the next few quarters and we will need to respond to that. But rainy days will end and the regular budget season will go on again.

Key point: If you have a fund balance reserve that you built for a rainy day, now is the time to use it. Why take drastic cuts early in a recession period when you don't know how long it will last beyond the 10-month average? The federal response to previous recessions has never pumped trillions of dollars into the economy so fast! The key is framing the discussion for elected officials and the public that the council had the discipline to build the fund balance—and now they should use a disciplined approach to spend it in the short term—the rest of this fiscal year for example, and some for the next. 

TANSTAAFL

It's important to remember: There Ain't No Such Thing As A Free Lunch. Resist the political pressure to defer important capital maintenance projects. It might be reasonable to delay a new building project or construction of a new pedestrian bridge over a busy highway. But research has shown that deferring critical maintenance or road work has long-term negative impacts on community infrastructure and it often raises the overall cost of the project. So if one of the council's strategic priorities is major roadway maintenance and construction, consider that interest rates on bonds are incredibly low now; the Federal Reserve is practically giving away money. Borrowing for a capital project now at these rates, and putting that money to use in your community by paying construction workers and road builders, is good money management and good economic recovery policy.  

Consider a simulation tool for internal discussions and/or citizen engagement.

I am using a budget balancing simulation software, Balancing Act, to highlight these principles in my MPA budgeting course. I have modeled the River City cutback budgeting tradeoffs on the Dubuque, Iowa, budget. (Dubuque uses the software for citizen engagement.) River City had a fund balance that's $2.4 million higher than their 20% fund balance policy minimum. Then Covid-19 hits, revenues drop at least $2.4 million in the fourth quarter of the current fiscal year, and another $4.2 expected in the next fiscal year. What are the options for balancing the budget? 

The simulation lets participants choose:

  • How much of the fund balance they want to use.
  • How much to cut in street repairs. (Recall that this decision violates a top council priority.)
  • How many vacant police and fire positions to fill or leave vacant. (Recall that filling police positions to increase crime prevention is a top council priority.)
  • How much to raise property taxes. It is stable this year but its decline will lag a year.

Simulations like Balancing Act help citizens understand cutback budgeting politics, the nuances that matter to each community. They are likely to pay attention to internal and external factors. They can be reminded of TANSTAAFL when they select options with important consequences.

Simulations can also be used internally with department heads needing to select reductions for themselves as well as other departments. TANSTAAFL quickly rings true for those who face the long-term consequences of cutback decisions.

There are really two broad approaches to cut-back budgeting. A political approach focuses on spreading the pain equally to minimize political conflicts: We will all share the pain together. The management approach focuses on strategic plans and priorities and as a guiding decision tool. Managers focus on long-term perspectives that avoid deep cuts to capital maintenance that result in long-term harms to the community and the budget. Needless to say, as an MPA department chair, I recommend the management approach—with a big ear to the ground for the political pressures and nuances that we know constrain these difficult choices.

  • Be strategic, protect priorities.
  • Don't drain the rainy day pail in the first year, but don’t hesitate to use a good bit for the short term.
  • Avoid deferring capital maintenance projects that will raise overall costs in the long run. Instead, consider borrowing today at incredibly inexpensive interest rates and put money in your local economy while you repair critical infrastructure.

The actual FY2021 budget adopted by Dubuque can be found on the city website.


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