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Four years after the recession, four municipal governments (Jefferson County, and the cities of Stockton, San Bernardino, and Detroit) have filed for Chapter 9 bankruptcy. All were forced to seek protections from creditors due to their financial insolvency, while developing and negotiating plans for adjusting debt or obligations. The consequences, as we’ve witnessed, can be severe.
Since the Great Depression in 1929, the U.S. has entered a recession roughly every four to six years. These downturns don’t necessarily follow a fixed schedule, but the frequency of occurrence suggests a certain predictability – if not inevitability – about them.. In fact, since the Great Recession hit in late-2007, and the extended bull market investors have since enjoyed, one could argue that another cooling period is not far off in the future.
During an economic downturn, a series of actions – including but not limited to, housing and stock market weakness, unemployment rate increases, and declines in Gross Domestic Product (GDP) — create a triggering effect on government revenues. In combination, they weaken the local economy and the tax base on which the public sector relies to fund programs and services.
These financial struggles were not simply a result of revenue shortfalls caused by the crushing recession or Sacramento’s raid on redevelopment funds. In each case, costs to operate government escalated dramatically. Among the drivers: pension and healthcare costs for retirees, lucrative labor agreements, and big spending on public works infrastructure. It was a perfect storm – a deteriorating economic environment coupled with gross financial mismanagement and negligence by stakeholders that ultimately manifested itself in the form of too much debt.
The Importance of Developing Fiscal Policy
Government depends on its fiduciary to ensure that operations are sustainable and a good control environment is established. With those requirements comes a well-defined series of objectives, including the need to develop standards, processes, and structure; to promote high integrity; and to retain competent employees for its mission.
Goals serve as the architectural framework for good fiscal policy. Once in place, they effectively represent the form used by government to accomplish its mission. They serve as guideposts for developing the specific administrative and council policies that enable government to effectively function
In numerous workshops and panel discussions I’ve had the privilege of sharing with Michael Busch, CEO of municipal advisory and management consulting firm Urban Futures, Inc., we spend a lot of time talking about the hallmarks of good fiscal policy. Following are some of the best practices that we encourage cities and public agencies to adopt in order to put them on a sure-footed path to sustainability.
Operational Efficiencies
- To implement internal operating efficiencies wherever possible.
- To utilize private contractors when the same or higher level of service can be obtained at lower total cost.
- To staff each department according to adopted service levels, and to utilize consultants and temporary help instead of hiring staff for special projects or peak workload periods.
- To develop agreements with the other public agencies, including the school district to combine certain operations and provide program assistance where appropriate.
- To enter into joint operating arrangements with other agencies so as to provide services more cost effectively.
Voter Approved Revenues
- To utilize revenues derived from voter approved measures such as a Utility Users Tax (UUT) and a potential Sales Tax increase to fund programs and services important to the community.
- To establish appropriate rates and assessments to best manage and operate enterprise operations and capital maintenance needs.
Reserves
- To set a goal equal to 25% of the General Fund operating expenses in a reserve account by annually committing the funds necessary to achieve this objective.
Infrastructure
- To provide sufficient routine maintenance each year to avoid a deferred maintenance backlog.
Employee Development
- To attract and retain competent employees by providing a professional work environment, safe working conditions, adequate training opportunities, and competitive salaries as finances may allow.
Economic Development
- To aggressively pursue new developments and businesses that add to the City’s economic base, particularly those that generate sales tax and property tax revenue.
- To promote a mix of businesses that contributes to a balanced community.
- To develop programs to enhance and retain existing business.
New Services
- To add new services only when a need has been identified and a funding source developed.
- To allocate CDBG funds and other discretionary grants to programs with the greatest benefit to the community.
Construction of New Facilities
- To plan for new facilities only if construction and maintenance costs will not adversely impact the operating budget.
Fiscal Management
- To maximize revenues by utilizing grants from other agencies to the fullest extent possible.
- To charge fees for services that reflect the true cost of providing such services and to review fee schedules on a regular basis.
- To fully account for the cost of enterprise operations to avoid any subsidy by the General Fund, and to charge Enterprise Funds their fair share of the cost of City support services.
- To maintain accurate accounting records to keep the city manager and council informed of the City’s financial condition at all times.
- To prepare and maintain a rolling 5-year financial forecast for all major funds including: General Fund, Enterprise Funds and Recreation.
Take away
A comprehensive fiscal policy serves as the blueprint to build financial stability – and sustainability. Once adopted and utilized, it becomes an essential strategic planning tool to ensure the City is financially able to meet its immediate and long-term needs.
There’s one other major benefit to establishing the plan – one you won’t find on a balance sheet: stronger relationships between the stakeholders involved. As anyone who works in public finance can attest, that equity can be invaluable when it comes to good governance.
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