As local governments navigate operations in the COVID-19 landscape, they’re faced with uncertainty on all fronts. Sources of revenue for municipalities — things such as property taxes, state revenue-sharing, and utility service charges that have been relatively stable in recent years — are now or may soon be declining. These declining revenues, coupled with increasing COVID-19-related expenditures, will likely have negative effects on fund balance, net position, and working capital. In order to navigate this economic minefield, municipalities need a financial plan and the tools to track progress and to project the financial impact as situations change and decisions need to be made.
The economic impact of COVID-19 on your municipality
COVID-19 has already impacted revenues and cash flows for local governments. The ongoing pandemic and eventual recovery will magnify cash flow concerns and budget challenges. Municipalities that have a significant commercial base may see water and sewer usage remain at significantly lower levels as some temporary business closures become permanent. Revenues from charges for services, business permits, and court fines and fees may also remain significantly lower compared to pre-pandemic levels. Finally, the cashflow from the revenue local governments do receive may be further delayed because of extended deadlines for income or payroll taxes and distressed residents and business owners prioritizing which bills to pay first.
Looking further out, pension and other postemployment contribution requirements may increase due to declines in fiduciary net position and the long-term rate-of-return assumption impacts. Capital spending may need to be deferred or reevaluated.
For many municipalities, this is a crossroads. Will you steer your community toward stability or further distress?
As we learned during the Great Recession, the best way to analyze and react to these revenue declines is a solid financial plan. During the Great Recession, communities that used a long-term model or adopted a multiyear budget were able to better predict the cumulative impact on operations earlier. This allowed these communities to implement a more measured response to the crisis. Incremental improvements early on had compounding benefits year over year, which reduced the severity of the subsequent cuts.
Although the current COVID-19 situation is dramatically different from the previous economic downturn, communities can use these same tools. A multiyear financial plan will allow municipal leaders to see where their municipality is headed financially and to calculate the changes necessary to stay financially stable. Absent these tools, municipalities run the risk of steering their community over a proverbial financial cliff.
Long-term planning as a decision-making tool
For years, governments have developed long-range plans to analyze significant initiatives, both capital and operational, the funding of legacy costs, and swings in significant revenues. For both short-term and long-term fixes, structural levers can be pulled to help balance your budget and ensure sustainable decision-making. Some revenues can be enhanced, even in times of crisis, but the rubber will hit the road as you consider your expenses. What do we keep? What do we reduce? And, what is the financial impact — to cashflow and to fund balance or net position — of each of these decisions?
A long-term financial planning model will allow you to run different scenarios — possible detrimental impacts to revenues and your compensating cost containment strategies — before deciding the best course of action for your municipality. Your model should be a “living document” that can be revised as new information becomes available, old assumptions are proven true or abandoned, and new assumptions are formulated. The model’s results will assist with educating the various stakeholders and help build consensus for the difficult decisions that lie ahead.
Bottom line, modeling will provide a comprehensive picture of your finances today and into the future as you revamp your budget and work to regain financial stability through a very uncertain and tumultuous time.
As you begin to think about your community’s financial outlook and the necessary changes that will need to be implemented, it might seem overwhelming. Really, the most difficult part is just getting started. If you need assistance, please contact us. We’ll be happy to help.
