Fiscal Discipline

State and local governments face a less predictable (and more precarious) future than ever before, and must adopt a more aggressive approach to managing their fiscal resources.

Responsible fiscal stewardship is a hallmark of far-sighted civic leadership. No public or nonprofit entity, no matter how well-funded, is immune to economic downturns or global crises. Even the most resilient of financing structures can crumble under the combined pressures of tax erosion, financial market volatility and cost escalation. Worse, the failure to anticipate such events, and take assertive preventive measures, can increase the risk of default and trigger unforeseen political repercussions.  

State and local governments cannot afford to wait for disquieting news about tax revenues or financial markets, or defer tough decisions about operating inefficiencies. The smart move, regardless of political ideology, is to take measured, yet bold action to ensure long-term financial wellbeing. By taking such action now, public officials can demonstrate precisely the kind of foresight and leadership demanded by taxpayers, and respected by credit markets. But, what steps should be taken?

State and local governments manage multiple fund types, including the general fund, special revenue funds, capital projects funds and enterprise funds. While some funds require special treatment, officials should continually track the following indicators of poor financial performance:

  • Operating revenues – the stagnation of taxes, fees and other operating revenues, especially when they fail to keep pace with escalating operating costs from year to year;
  • Operating costs – the steady escalation of operating costs (especially when due to staffing increases, salary increases, higher pension plan costs or other factors that are difficult to reverse);
  • Net operating income – a steady deterioration of the surplus of operating revenues over expenses (changes in fund balance), especially when coupled with non-operating income, is a troubling sign;
  • Operating ratio – this ratio (net operating income divided by expenses) offers a useful indicator of fiscal performance and should exceed the current fiscal and operating ratios by at least 75 points;
  • Debt service coverage ratio – the ratio of annual pledged revenues to annual debt service requirements should remain well above the ratio set forth in the bond indentures (these ratios typically vary by bond and fund type);
  • Unrestricted net assets – declining net assets, especially the depletion of cash and other unrestricted assets over successive years, jeopardizes an entity’s liquidity and poses a serious threat to its long-term financial viability

Ultimately, if unabated, a serious decline in fiscal performance could trigger more draconian remedial actions, significantly weakening a governing board’s authority over its day-to-day operations (see the City of Detroit).

When confronting its fiscal future, every governmental entity has two stark choices: 1) watch and wait (until fiscal trends play out or abate) or 2) take action now to reverse those fiscal trends. Only the second option assures public officials of retaining full control over their operational destiny.

Leaders often ask what actions should be taken to restore fiscal health. While these measures vary by situation, any fiscal recovery program will likely encompass the following basic steps:

  • Project organization - establish a citizens committee, supported by a special project team of top managers and professional advisors, to undertake a complete financial assessment of the enterprise;
  • Analysis- conduct a thorough assessment of all organizational units, programs, services and resources, with a particular focus on major cost drivers (e.g., personnel, facilities, equipment deployment, program duplication, service delivery redundancies, business process inefficiencies and technology upgrade opportunities);
  • Strategy review identify and evaluate alternative strategies (e.g., rightsizing and technology), discuss with stakeholders and forge a consensus for action;
  • Blueprint development- formulate a detailed fiscal recovery blueprint (action plan) for restoring fiscal viability, including a broad array of measures for aligning revenues and costs, restructuring operations, attaining a suitable operating margin, restructuring debt and ensuring access to credit markets;
  • Blueprint approval- submit the proposed fiscal blueprint to the governing body, preferably as a comprehensive, all-or-nothing package (e.g., the military base closure program), present the net benefits and obtain its approval;  
  • Blueprint launch- with attendant publicity, implement the approved blueprint in a way that catalyzes the synergism of the various measures (e.g., improving operational efficiency before restructuring rates; and
  • Future controls- institute a performance management system, improve payroll controls, tighten accounts payable process, strengthen audit program, institute a sunset review process for challenging nonessential programs and establish a permanent performance unit to supervise a productivity reporting system and promote improvement.

Fiscal recovery demands a disciplined blueprint for improving the bottom line. And alternative strategies should be evaluated using objective criteria, such as: legislative alignment (e.g., laws and policy priorities), operational agility (e.g., service efficiency and effectiveness), fiscal agility (e.g., grants, reserves and other resources) and community impact (e.g., job and business creation).

It doesn’t really matter what the blueprint looks like or how glossy its cover is. But, every blueprint should follow the facts without fail. If it does nothing else, it should challenge the sacred cows. It should focus on tough issues and high-cost services (e.g., police, fire, roads and social services) even if doing so proves painful. Possible blueprint strategies are highlighted in the table below.

 

Imperative

Potential Fiscal Blueprint Strategies

Entrepreneurial culture
  • Create cross-agency intergovernmental compacts & funding streams
  • Pursue promising joint venture opportunities (e.g., public works & parks)
  • Pursue suitable public-private partnerships (e.g., parking facilities)
  • Encourage competition by public agencies (make services more competitive)
  • Outsource suitable services (e.g., road repair, vehicle maintenance & parking)

Revamped operations

  • Merge redundant programs & eliminate unnecessary services & functions
  • Streamline regulations or eliminate unnecessary or inefficient regulatory controls
  • Refine or re-engineer inefficient business processes
  • Improve use & management of new technology
  • Modernize budget, accounting, personnel & procurement systems
  • Consolidate similar contracts & lease-purchase agreements
  • Reduce or dispose of excess facilities & vehicles & reduce fleet management costs
  • Reduce other costs (e.g., energy & risk management)

Reorganized human resources
  • Consolidate administrative functions, processes & positions
  • Consolidate other organizational units performing similar roles
  • Eliminate organizational layers, expand spans of control & reduce supervisors
  • Realign or redeploy staff & eliminate other nonessential positions
  • Identify, cross-train & empower high-performance managers & employees
  • Develop pay-for-performance program
  • Increase use of part-time, temporary personnel for peak loads & backlogs
  • Adopt expedited discipline process & discharge under-performing employees
  • Eliminate wasteful personnel costs (e.g., overtime & absenteeism)
  • Develop feasible early retirement program
  • Supplement resources using volunteers & misdemeanor offenders
  • Reduce unnecessary employee benefit costs

Restructured & well-managed revenues
  • Exploit revenue enhancement opportunities (e.g., mission-aligned grants)
  • Re-align revenues as needed to recover associated operating costs
  • Recalibrate user fees (e.g., permit, sanitation, parks & recreation fees)
  • Institute market-based revenues (e.g., parking rates & property assessments)
  • Modernize cash management practices (e.g., lock box services)
  • Improve collections (e.g., business license audits & delinquency penalties)
  • Explore new revenue sources (e.g., street lighting fees, facility leases, invoice ads)
  • Raise short-term capital (e.g., liquidate inventories)
  • Raise new long-term capital (debt restructuring)

Finally, every government should implement its strategies using a detailed work plan and relentlessly publicize its fiscal turnaround efforts.  For instance, it should articulate the case for change and announce the blueprint’s net annual fiscal benefitsbefore, during and after implementation.  It should consider using a diverse and dedicated citizens committee to help create a constituency for change.

Taxpayers and citizens are well aware of the risks of doing nothing. They recognize that all public institutions face daunting fiscal challenges and economic uncertainties, and that governing is about making choices. They realize that, in challenging times, elected officials must do more with less and make tough decisions today to avert catastrophic results in the future.  Only by acting boldly and making short-term sacrifices can civic leaders preserve government for meeting future challenges.