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Financial Resilience: The Principles Cities Are Using To Prepare for Climate Change and Cyberterrorism Can Help Them Manage Financial Uncertainty

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

By Andrew Kleine
January 28, 2022

Oxford defines “resilience” as “the capacity to recover quickly from difficulties; toughness.” In 2013, the Rockefeller Foundation launched its 100 Resilient Cities program with the goal of making cities better able to withstand acute shocks such as natural disasters and terrorist attacks; plan for the effects of climate change; and address chronic social stresses, including poverty and racism, that amplify the negative impacts of unforeseen or uncontrollable events.

100 Resilient Cities ended after only six years, but it inspired cities and other local governments around the world to become more proactive about managing the risks they face and take a holistic approach to disaster preparation, response and recovery. Many have added a Chief Resilience Officer (CRO) to their C-Suite, acknowledging that organizational silos are barriers to effective resiliency planning and action.

In a world where climate change is making fires and floods ever more frequent and ransomware attacks have crippled cities, it’s not surprising that resilience has become synonymous with these kinds of eventualities.

That said, it’s time for local leaders to apply the principles of resilience to other challenges, starting with government finances.

For too long, conventional wisdom about preparing for the financial fallout of recessions and emergencies has been limited to building up a few months of reserves, or “rainy day funds.” Just as CROs are thinking beyond having sandbags on hand in case of a flood, CFOs should be finding more ways to get “tough” against threats to the balance sheet. They can start with these four strategies:

Plan for multiple futures. A comprehensive long-term financial plan is the foundation for financial resilience. The plan should include at least three plausible economic scenarios, enabling leaders to prepare for, or better yet prevent, the worst. Baltimore’s ten-year plan outlined more than 100 initiatives to eliminate a structural budget deficit, increase capital investment, lower taxes, reduce unfunded liabilities and grow reserves.

The Baltimore plan shows that financial resilience can be strengthened in some unexpected ways, like using more conservative pension funding assumptions, fixing infrastructure that could fail and creating headroom to raise tax rates if necessary.

Match your rainy-day fund with the forecast. The Government Finance Officers Association (GFOA)—whose rule of thumb is that local governments should hold a minimum two months’ operating revenue in reserve—advocates that specific reserve levels be based on each jurisdiction’s unique risk profile. GFOA’s case study on Colorado Springs, CO is an example of how to factor the local economy, infrastructure conditions, vulnerability to extreme weather events and other considerations, into determining a reserve target. Providence, RI has connected its reserve planning to equity, using advanced probability analysis to ensure it can protect its most vulnerable residents from service cuts in a downturn.

The list of risks faced by local governments continues to grow. Just a few years ago, civil unrest, cyberattack and pandemic were not on the radar of most public officials. The reality of these threats should help CFOs initiate critical conversations with leadership about how much risk is tolerable and how to manage uncertainty.

Rethink your revenues. Each recession impacts the economy in its own way. The Great Recession started with plummeting housing values and spread from there. The COVID-19 recession was caused by a pandemic that forced businesses to shut down and put millions out of work.

How a local government weathers an economic shock depends greatly on how it raises revenue. As with personal investing, a diverse portfolio is an effective way to mitigate downside risk. Cities and counties that rely too heavily on economically sensitive or industry-specific taxes, such as from retail sales, casinos and hotels, are the least resilient in the long run.

Don’t confuse revenue diversification with having a large number of revenue sources. What’s important is that no single source dominates the portfolio and your revenue mix correlates to different parts of the economy, so they don’t all go down together.

In addition to diversifying their revenue sources, governments can adopt policies that prevent overreliance on volatile revenues. One example is to divert “excess” revenue (over and above a set threshold) from a volatile tax or fee to reserves, capital, debt service or another one-time use. Another is to structure a tax to moderate volatility. Maryland’s property tax system phases in assessment growth over three years and limits annual growth for individual properties, in effect “storing up” value for down years.

Bring everyone to the tabletop. Financial resiliency planning should be more than a paper exercise in the finance department. In the same way they prepare for responding to natural disasters and terrorist attacks, local governments should simulate what they would do in the event of revenue loss. GFOA’s Fiscal First Aid Resource Center presents a 12-step financial recovery program, covering immediate and long-term strategies. The purpose of a tabletop exercise is for local governments to adapt these strategies, and develop others, for their own economic and fiscal scenarios.

Every part of government plays a role in financial resilience. Operating departments can find efficiencies to increase resource flexibility, policymakers can decide how to prioritize and target services when money is tight and HR professionals can incorporate contingency planning into labor relations. The entire team can brainstorm ways to better leverage government assets to reduce costs, generate revenue and share risk.

The resilience movement started by Rockefeller has, in the words of former 100 Resilient Cities president Michael Berkowitz, made cities around the world “more forward-looking, inclusive, integrated and risk-aware” in addressing environmental and terrorist threats. Local governments would be wise to replicate this approach in planning for their financial future.

Author: Andrew Kleine is Senior Director–Government & Public Sector at Ernst & Young LLP. He is the author of City on the Line: How Baltimore Transformed Its Budget to Beat the Great Recession and Deliver Outcomes (Rowman & Littlefield) and received the 2016 National Public Service Award from the ASPA and NAPA. His Twitter handle is @awkleine.

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