Carefully Targeted Cuts Can Help With Managing Covid-19’s Hit to Budgets

The public health emergency and financial impact in every sector of the U.S. economy from Covid-19 will be felt for years to come. Given the high degree of economic uncertainty, many local governments are turning to budget cuts.

According to a National Association of Counties survey, 71% of counties have cut or delayed capital investments during the pandemic. And 68% have cut or delayed county services. National League of Cities survey findings reported in December show that 71% of cities expected their financial conditions would worsen, and 28% indicated their condition would remain significantly impacted, without further federal aid.  Meanwhile, cities and counties have made workforce cuts, including hiring freezes, wage holds, layoffs, furloughs, reduced hours or forced early retirements.

Although the federal government provided $150 billion in aid to state and local governments through a program known as the Coronavirus Relief Fund, much of that didn’t go directly to local governments. While the potential for additional aid exists, it’s not guaranteed. The uncertainty around federal aid combined with the inability to know when a return to “normal” will occur and the need to maintain basic levels of service has made budget decision making for local government leaders difficult.

Financial officers are trained to be conservative in times of uncertainty. But there are several considerations they should take into account as they make future budget decisions.

Understand Your Revenue Streams

States, counties and cities have several funding streams and the impact from the pandemic on each of them is very different. Funding for state and local government general operations primarily comes from property, income and general sales taxes. When the economy slows, income and sales taxes typically take a more immediate hit than property taxes, which tend to lag behind. In addition to those revenue sources, states and localities rely on a range of more specific funding streams that are also important. These can include user fees, targeted sales taxes on goods like gasoline, sin taxes on things like gambling and alcohol and intergovernmental grants. These specific funding sources are usually restricted and don’t fund general municipal operations. Still, these sources may need a specialized assessment on their viability going forward. Using gas taxes as an example, state and locals might need to readjust expected gasoline usage if residents are driving less. Depending on the circumstances with these revenue streams, generic cuts across the board could be unwarranted. That’s why understanding how the conditions that surround each stream and how it might fluctuate is key to determining how to adjust the budget.

In Michigan, we observed trends from the last two recessions prior to the Covid-19 pandemic. According to the non-partisan public policy research firm Citizens Research Council of Michigan, property tax revenues in the state remained resilient during both the 2001 and 2009 recessions—partly because the annual assessment rolls for Michigan municipalities’ property tax valuations include sales data over a rolling 24-month period.  During the most recent economic upheaval, the changes in property tax valuations were negligible and Wayne County didn’t see a reduction in fiscal 2020 property tax revenue in its general fund. Because we correctly predicted the stability of our largest revenue stream, we didn’t have to discontinue any discretionary services to the public, like supporting Meals on Wheels for our county seniors.

Cut Iteratively Where Possible.

In an uncertain economic climate, it’s prudent to identify all functions that can go “dark” for a short period of time—about eight to ten weeks. You can do this by developing a functional inventory from every department. Once you’ve inventoried those functions, separate out the employees and contracts needed to support those operations. Then determine what you can pause—as in temporary furloughs and cancellation of contract orders. This should be done in a rolling fashion. Our strategy at Wayne County was to be as agile as possible. For example, we saved more money from a temporary hiring freeze and furloughs versus layoffs. Although we resisted the urge to cancel long-term contracts, we did review all open purchase orders to confirm necessity. This ensured contractual goods and services would continue to flow to citizens without a blind cut to local small businesses.

Do NOT Compromise Your Future. 

The two largest projects currently underway for Wayne County are a comprehensive enterprise resource planning software upgrade to manage our day-to-day finance and accounting needs and the construction of our new criminal justice complex. At no point did the county reconsider these projects or even delay their implementation to make cuts. Instead, the funding remained intact and the county continues to make these investments.

Consider an alternative approach with deferred maintenance. According to an infrastructure report from the National League of Cities, an estimated $1.3 trillion is needed to address deferred maintenance in water, wastewater and storm water systems across the nation. Delaying or not addressing critical infrastructure needs can result in future problems that can put citizens’ health and safety at risk. Not to mention cause additional stress on budgets in the event of a disaster.  As a former chief financial officer in Flint, Michigan, I can attest to the damages of deferred maintenance on critical systems and infrastructure.

While we are all faced with unique circumstances to keep our governments financially sound, we should all seek to embrace a comprehensive strategy that enables us to manage the current crisis without sacrificing our future.