How Did We Get in This Mess?
Len Wood is President of Len Wood & Associates, a leading training and consulting firm, to local governments, that specializes in public management, budgeting and financial issues. He will be hosting his session “Budgeting and Financial Management: Essential Skills for Local Elected Officials” on Thursday, November 20, from 9:00am-12:00pm at the Congress of Cities in Austin.
Fiscal crises do not occur overnight—they are built upon by poor decisions and lack of effective action. In many cases, it can take several years before the consequence of an ill-advised action fully matures to the point that it adversely impacts the financial status of a city. For example, a previous city council may boost pension benefits to an unsustainable level or undertake a huge capital improvements program without providing for ongoing maintenance expenses. That council receives a lot of nice accolades for their actions but conveniently leaves the fiscal outfall to a future council.
The scenario is played out over and over. After one or more elections, a new council is in place and one day they receive the distressing news that the city has a financial problem. The reaction is one of shock and annoyance —“Our actions didn’t cause this. Why should we have to raise taxes or cut back programs for a problem we didn’t create?”
Even though it involves unpopular steps, such as raising taxes or cutting programs, some elected bodies “roll up their sleeves” and tackle the problem head-on. They know that to delay action will only make remedies harsher. Some, however, decide to defer dealing with the problem or ignore it entirely. Band-Aid measures are then taken, getting them through the fiscal year but then, exacerbating the problem. Typical actions include failure to truly balance the budget, using one-time monies for ongoing programs and not providing adequate funding for new programs. The workshop will cover several more ineffective stopgap measures.
Among other topics, the workshop covers four states of fiscal condition that can give you an idea of where your city is, in terms of fiscal vulnerability. These states are:
This is the stability point. Finances are in satisfactory condition with on-going revenues exceeding ongoing expenditures. The government is solvent, cash flow is sufficient, reserves are stable or growing and basic services are being met. The agency takes whatever actions are needed, no matter how painful, to maintain equilibrium. They not only deal with current problems, they anticipate future ones. Most local governments have been in equilibrium for their entire existence. Fiscal prudence is the norm.
An event, or a combination of events, takes place that disrupts the equilibrium. It can be external, such as a major industry closing or a natural disaster wiping out the retail base. The problem may also be self-inflicted, such as agreeing to an increase in salary or retirement benefits without an actuarial and accurate cost benefit analysis. Suddenly, the elected body faces a dilemma. To deal with it head on, may offend strong constituencies, such as unions, homeowners or businesses and industries. To not directly deal with the fiscal problem permits it to worsen. Temporary measures, such as relying upon reserves to get through the fiscal year, offer the easy out. These one-time solutions exacerbate financial problems and the easy out is addictive. Expediency is the norm.
The agency has not been able to reestablish equilibrium and the problem continues to grow. Temporary remedies, such as using fund balance or borrowing money, have all been exhausted and are no longer viable options. The governing body must now consider drastic remedies, such as severely cutting budgets or substantially raising taxes. Agencies that defer action and continue to hope for the magic bullet gravitate to the next state. Denial and finger pointing are the norms.
This is the state where, virtually, all control over the situation has been lost. The only alternatives are bankruptcy, government dissolution or relinquishment of control to the state or other body. The sad part is that when an external party is brought in, they implement the same actions that the governmental body found too painful to act upon. No nonsense and prudent decision making becomes the norm.
A questionnaire will be provided at the workshop to help determine your city’s fiscal state. Len Wood’s book, Local Government Dollars & Sense: 225 Financial Tips on Guarding the Public Checkbook, will also be provided to participants of the workshop.