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Questions From the Edge: The End of the American Rescue Plan Act Is Not Far Off. Is Your Local Government Ready?

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

By Andrew Kleine
May 26, 2023

When the first tranche of American Rescue Plan Act (ARPA) fiscal relief funding was sent to local governments in June 2021, the Government Finance Officers Association (GFOA) issued this guidance: “Use of ARPA funds to cover operating deficits caused by COVID-19 should be considered temporary and additional budget restraint may be necessary to achieve/maintain structural balance in future budgets.”

Nearly two years—and a second tranche—later, many local governments have ignored the GFOA’s advice and continue to rely on ARPA dollars to make ends meet. The operating deficits they are covering at this point were not caused by COVID-19. They predate the pandemic, and ARPA’s generous revenue loss provisions allow counties, cities and towns to defer tough budget choices until the clock runs out on December 31, 2024.

I started writing about the ARPA fiscal cliff back when it seemed a distant concern. Now, it is little more than 18 months away. Local leaders still have time to wean themselves off ARPA dependency and make progress toward fiscal sustainability. They can start by asking themselves these questions:

Are we using ARPA funds to reduce future operating costs?

One of the “deadly sins” of public finance is balancing the budget with one-time fixes. One-time revenue, like ARPA relief funds, is best used for one-time investments that save money in the long run, such as capital projects, debt prepayment and pension contributions.

The federal Fiscal 2023 Omnibus Appropriations Act expanded the types of capital projects eligible for ARPA relief funds. Local governments can now use up to $10 million or 30 percent of their allocation (whichever is greater) for transportation infrastructure and Community Development Block Grant projects.

Neglected roads, bridges and water mains are huge liabilities that don’t show up on the balance sheet. Preventive maintenance today will avoid costly repair and replacement that can cripple your finances.

Could we save money through competition?

Many local governments are struggling to deliver services due to record vacancies. Now may be the right time to test the market and find out if the private sector can more cost-effectively collect trash, run health clinics, sweep streets, account for payables and receivables, etc.

Vacancies may enable local governments to reassign employees displaced by outsourcing, minimizing disruption. Local governments can also follow the Indianapolis example of allowing labor unions to bid for contracted services and using gainsharing to reward employees for improving productivity.

Can we better leverage our assets?

Last year, I wrote a series of columns in this space called “Getting your Assets in Gear.” The gist of those columns was that with a little creativity, local governments can unlock value from a wide array of assets, from real estate to tree waste.

For this column, I will highlight three possibilities:

  1. Remote work means underutilized office space. Local governments may be able to consolidate their employees into fewer buildings and sell or lease the excess.
  2. With parking demand down, probably forever, garages and lots can be repurposed, providing one-time proceeds and ongoing property tax revenue.
  3. The emerging market for carbon credits is enabling local governments to cash in on planting and preserving trees.

Are we giving away too much in tax incentives?

Tax credits can be an important tool for making housing and economic development projects work. The trick for local governments is to design and target tax incentive programs in a way that achieves the goals without siphoning off much needed revenue.

The EY organization did a study of Baltimore’s tax credit programs and found that in some cases they are not benefiting the neighborhoods most in need of development, can be overlapping and may provide larger tax breaks than necessary to achieve program goals.

Are we recovering the full cost of our services?

Local governments charge user fees for a variety of services, including solid waste, building permits, recreational programming and street lighting. My experience as a budget director and consultant has taught me that fees don’t always reflect the full cost of service delivery. 

Local governments are wise to review the cost of delivering fee-based services. Activity-based costing is a good method for measuring the time employees spend on service delivery and accounting for all other inputs. It is not uncommon for fees to fall short of covering overhead expenses, central services, certain benefits and inflation.

A good fee policy requires service costs to be reviewed regularly and fees to be adjusted for inflation annually. Where fees need to be reduced for lower-income residents, the policy can provide for scholarships or sliding scales that limit revenue impact.

Are our pension and health plans fair to both employer and employees?

Local governments are under pressure to increase pay so that they can recruit and retain talented employees. In benchmarking their pay and benefits against the private sector, and even other public sector employers, local governments may find room to shift costs from pension and health plans to cash compensation.

A key pension metric is income replacement at retirement. If full pension plus Social Security and deferred compensation (or reasonable personal savings) exceed 70 percent of salary, changes to the benefit multiplier, employee contribution or other plan elements may make sense.

Health plans can not be one-size-fits-all. Younger employees may prefer a high-deductible plan with a health savings account, which is lower cost for them and the employer.

Can we go big with bots?

We are on the cusp of an artificial intelligence revolution. Local governments can look for ways to use this technology to streamline business processes. More and more routine functions, such as reviewing permit applications and responding to information requests, can be handled by bots, reducing the need to fill vacant positions and potentially serving customers better and faster.

For local governments fast approaching the ARPA fiscal cliff, the time is now to ask some tough questions and take steps to bring their budgets into structural balance.

Author: Andrew Kleine is Senior Director – Government & Public Sector at EY-Parthenon, 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, 2018) and has served as Baltimore’s budget director. Email [email protected], and connect on LinkedIn at www.linkedin.com/in/andrew-kleine-1370 and Twitter @awkleine. The views reflected in this article are the views of the author and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.

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