How Local Governments Navigate Covid-19 Budget Shortfalls

While we’re deep in the midst of the Covid-19 crisis, most cities across the country are preparing their fiscal year 2020-2021 budgets. This is an especially challenging task in light of the negative fiscal impacts of the pandemic and future unknowns.

The good news is that cities may have access to untapped revenue that is available now and could help offset anticipated budget shortfalls related to the current economic downturn.

As the CEO of a company that has helped local governments serve their communities for more than 40 years, my team and I have assisted jurisdictions in obtaining millions of dollars of funding and new tax revenue. We’ve learned that the process to do this starts with greater accountability and insight into available data and funding programs, as well as taking a proactive approach to maximizing tax compliance.

Here are some tips for cities to consider:

1. Focus on alternative funding

The latest Covid-19 funding packages gave over $150 billion in relief to state and local governments, but future funding remains in doubt, forcing smaller local governments that have received only a small portion of the existing money to wait and see what other legislation, if any, may be passed that will help them. In the meantime, these jurisdictions should consider focusing on identifying, applying and knowing how to implement grant funding that may be available to them. This could mean partnering with a grant writing agency to help identify and apply for grants.

Similarly, the economic development department within a local government should be proactive in understanding what small business grants and alternative funding is available to their community during this crisis. Governments can give guidance to their local businesses applying for these funds. Businesses thriving means greater tax revenue for governments and their communities.

2. Automate processes

Automating the administration of tax revenue collection often allows governments to receive revenue from tax dollars more quickly and therefore make business decisions faster. Additionally, some jurisdictions may benefit by redeploying staff during these difficult economic times to highly critical priorities. For example, consider hiring a third-party vendor that can administer tax revenues on your behalf, thereby supplementing your current staffing levels with automated and outsourced revenue collection and administration functions. This provides the opportunity to utilize your current staff for other high priority projects. The reduced labor expenses, increased turnaround time of revenue recognition and elimination of costs such as bank-administered lockboxes, banking fees and postage fees for collecting tax payments means a jurisdiction saves more money than it spends through this approach.

3. Conduct a business license discovery and recovery review

It’s important to evaluate all businesses operating in a jurisdiction to determine whether they are licensed and perform the operations they claim. Tracking active small businesses, which tend to quickly open and close, has always been challenging. Home-based businesses, contractors working across multiple municipalities, and new types of rental income activities complicate the issue even more. Consider utilizing third-party data analysis to identify these businesses that are non-compliant and leverage this opportunity to capture lost revenue that many local governments are not collecting. This process offers local leaders an alternative to implementing difficult and unpopular tax increases, giving them a powerful and practical tool for funding improvements to navigate budget shortfalls.

4. Identify and address patterns of fees and tax noncompliance

Once you’ve maximized your business compliance, then make sure they’re paying accurate fees and taxes. A city’s revenue comes from multiple sources, including taxes on sales and use, utilities, tobacco, alcohol, permitting, property taxes, hotels, rental properties, gasoline and more. Identifying areas of noncompliance in your local ordinances, regulations, statutes or laws could lead to various streams of “lost revenue.” Every compliance issue affects your community’s resources. For example, are you able to ensure that all businesses are paying their fair share of taxes? Can you identify and bring into compliance those that are underreporting their tax obligations?

5. Upgrade software

Consider updating your data and analytical tools, which can help to streamline internal processes and help to reduce operational costs. An example of this would be allowing business owners to apply for and renew licenses online. Not only do updated processes ensure payments to governments come in more steadily, but this also prepares government offices to be more responsive to their constituents during a time of crisis.

6. Improve revenue forecasting during turmoil

It’s important to take a conservative approach to revenue forecasting in the short-term. Covid-19 will most likely affect the next two to three quarters, since many of these budgets were already set. We are advising our clients to be prepared to adjust their budgets multiple times, as they are increasingly able to forecast and plan as the economy recovers. A great resource includes a paper entitled Budgeting in a Sea of Unknowns by Fran David that lays out factors governments need to consider in their budgeting process, such as additional services needed for the pandemic, housing and commercial real estate market impact and what sectors will need the most assistance in recovery.