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Balancing Local Budgets In Times of Crisis

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.

By Theodore Arapis
May 13, 2020

Once COVID-19 became a pandemic, fiscal stress began to build for all levels of government—federal, state and local. For cities, counties and school districts, their revenue structure will determine their stress. Those raising most revenue from real estate taxes will experience less pressure as property tax bills typically reflect non-recessionary assessments. But budget holes for those local governments with reliance on local sales and income taxes, which fall sharply during recessions, will be severe. And with most local governments ineligible to apply for the Coronavirus Aid, Relief and Economy Security (CARES) Act, as they have populations less than 500,000, these holes will only get bigger.  

More federal aid is needed for local governments, but this as of now seems unlikely. So, without federal aid, how can local governments mitigate fiscal gaps and keep their budgets balanced?

A common response to fiscal pressure is cutback management. It involves a range of actions, from across-the-board cuts and hiring freezes to renegotiating long-term contracts, furloughs and layoffs. While cutback management triggers cuts in organizational costs and activities, local governments could limit its impact on service provision through more cooperation with nonprofits and volunteering groups. In Baltimore for instance, nonprofit groups run the city’s recreation centers, while in Camas, Washington, volunteers help with the park’s department office operations, park maintenance and special events.

While popular, cutback management is not the only option. Local governments also build fiscal savings in their Unassigned Fund Balance. Unlike other fund balance classifications, the unassigned is a true rainy-day fund which can be used for emergencies.

Additional rainy-day funds could emerge from the Assigned Fund Balance as well. Although it consists of money intended for specific projects, like capital or pet projects, a council vote could lift the constraints. All ongoing projects should therefore be reassessed, and those found least critical postponed.

Rainy day funds, however, should be used with caution and by no means get exhausted as a second wave of the virus next year is likely.

Transferring resources from profitable non-governmental funds could provide further relief. Many municipalities operate their own utilities, such as electric, water and sewer, parking authority and airports. If these activities generate surpluses, excess funds could be used to cover budget holes. While still a revolving loan; the fund that borrowed money must repay them back. Interfund transfers come with the benefit of no extra loan issuance costs or strict repayment plans. But to avoid creating a fiscal illusion—taxpayers developing false assumptions about government cost—municipalities should be transparent with their interfund transfers disclosing in their financial statements the exact amount and purpose of each transfer.

Some might consider issuing new debt, but that should be their last resort. Issuing debt to cover short-term expenses transfers the burden of repayment to the future. This is unfair to future generations, or in public finance terms a violation of intergenerational equity. Instead, local governments should explore renegotiating their debt with their creditors. With interests rates low, refinancing debt or extending its maturity to lower payments, negotiating a reduction in interest payments or even freezing payments for the next several months are some options to consider.

This is not the first time local governments face a fiscal challenge. Stressed revenues and increasing service demand were also concerns raised in the Great Recession of 2008. This time though, the disruption is happening faster and affecting all economic sectors and levels of government. While budget holes are forming, local governments are not yet bankrupt. Quarantined from federal aid, they must think creatively to balance their budgets.

Author: Theodore Arapis is an Associate Professor of Public Administration at Villanova University where he teaches Financial Management, Budgeting, and Statistics. His research interests lie on state and local financial management, the practice of budgeting, rainy-day fund accumulation and fiscal transparency. He can be reached at [email protected].

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