Municipal budgeting amid COVID-19: Tactics to prioritize spending and cuts

Among the uncertainty surrounding the impact of the COVID-19 pandemic, one thing is nearly certain: Local governments are likely to face a changing financial picture due to decreased sales tax, income tax, and other revenues. As a result, municipalities will need to make difficult decisions about how to prioritize spending and cuts to balance their budgets.

Both short-term and long-term fixes, structural levers can be pulled to help balance your budget and ensure sustainable decision-making. The actions below can help you think through which approaches and tactics will work best for your organization. 

Municipalities will need to make difficult decisions about how to prioritize spending and cuts to balance their budgets.

Actions to address short-term COVID-19 impacts on your municipal budget

Delay or reprioritize projects

Your capital improvement plan (CIP) may call for street replacement in a neighborhood, an upgrade to your permitting system, and a facility expansion, but if you haven’t reached the contracting phase yet, consider holding off until the economy picks up again. For projects already underway, evaluate whether you can modify their scope and approach.

Leverage loan programs and borrow money

Through the CARES Act, states will be offering loans to assist local governments with cash flow challenges. Consider taking advantage of this program and others that might be forthcoming. Also consider borrowing for capital projects that were originally budgeted on a pay-as-you-go basis.

Reduce discretionary spending

In an emergency, you need to prioritize “have-to-do” expenses over “nice-to-do” expenses. Expenses such as travel and training may not have as great an impact on your budget as the tactics above, but they can demonstrate to your constituents and policymakers that the municipality is focusing solely on essential services.

Use your fund balance

If you’re fortunate to have a healthy fund balance, now may be the time to use it. Keep in mind this is only a temporary fix, but it’s appropriate to use to address a short-term issue, such as a temporary reduction in income tax revenues.

Furlough employees and/or implement a hiring freeze

Furloughing staff is a common tactic, especially for services that depend upon the business cycle, such as building inspection. For example, if development in your city has slowed, you have less need for inspectors. Alternately or in addition, you can postpone filling empty positions in the short term.

Actions to address structural COVID-19 impacts on your municipal budget

Set department targets

This is one of the more common tactics we see — give each department a target reduction of, say, 10%, and implement those reductions. This is a way to share the burden equally, but you also need to prioritize targets and reductions according to how they impact your municipality’s strategic goals.

Restructure debt

The cost of borrowing is lower than it’s ever been, and you have an opportunity to reduce interest payments by restructuring your debt. Contact your bond attorney to discuss your situation and how this might work for your municipality.

The cost of borrowing is lower than it’s ever been, and you have an opportunity to reduce interest payments by restructuring your debt.

Offer early retirements

This is another common tactic because it can be relatively painless to implement. However, it effectively punishes departments that happen to have an older workforce. To avoid negative impacts, you’ll need to do this in conjunction with workforce rightsizing (see below).  Also, consider the impact this will have on your pension funding.

Rightsize your workforce

Look at your management-to-staff ratios and your department reporting relationships. Do this both before examining other position reductions as well as after.

Reduce position expenses — both wages and fringes

Consider renegotiating or mandating employee contributions to healthcare and retirement costs, reducing scheduled salary increases, or even reducing salaries. Also consider revisiting healthcare offerings, since it may be possible to repackage plans in a more cost-effective way and provide similar benefits. Note that union contracts may hamper your ability to implement this tactic. Discuss with your labor attorney before making any changes.

It may be possible to repackage plans in a more cost-effective way and provide similar benefits.

Update cost allocation models

Your general fund may be incurring costs that benefit other funds, departments, programs, or related entities and that could be allocated accordingly. Revisiting how you allocate costs can help you better evaluate each service independently and make better decisions.

Eliminate programs or services

Nonmandated or nonessential programs are a natural target for cutbacks; however, discretionary programs are often funded because of political influence. Defunding them may remind you why they exist in the first place.

Separately, many programs are seasonal in nature and scaling back offerings can aid in trimming back seasonal workforce.

Improve process efficiencies

Redeploying existing underused tools or looking at new technologies like robotic process automation can help you provide services at lower overall cost. Departments may be using highly manual processes, and these are time-consuming. Evaluating processes and adding automation can help scale back overtime hours or reduce the number of FTEs needed. In addition, check with vendors you already use, such as banks and payroll companies — they may have technology and service offerings to help your departments operate more efficiently.

Check with vendors you already use, such as banks and payroll companies — they may have technology and service offerings to help your departments operate more efficiently.

Outsourcing

In the long run, it may be more cost-effective to outsource various internal or external-facing services to a either a private company or another municipality.  There may be economies of scale your municipality cannot achieve on its own given your size. Financially, the biggest impact from this decision may be seen with your pension and OPEB obligations.

Enhance revenue

Have you updated your fees recently? Are you capturing all allowable costs for the various services you offer? Are there fees you could institute but haven’t yet? Also consider adding new fee-based services.  Your neighboring communities are feeling budgetary pain, too — can you sell some of your excess capacity to them by providing services for a fee? Finance, technology, building department, public works, and public safety are often great candidates.

Bring balance to your municipal budgeting

As you assess the COVID-19 impact on your municipal budget in the weeks and months ahead, keep these additional ideas and strategies in mind:

Understand the serviceability of mandates

Based on law or charter, units of government have mandated services, but your municipality has some discretion over the level of service you provide to satisfy those mandates. Understand the extent of what’s actually required to meet your mandates so you can more fully explore options.

Define — and stick to — processes

Outline your processes at the beginning. Develop principles first, and stay consistent with them. Employees and members of your community may look to punch holes in some of the options you develop, so adhere to what you’ve agreed to. Don’t forget, the choices made in order to balance the budget belongs ultimately to your elected leaders. Engage them early, and keep them well informed throughout the process.

Stretch

There’s a saying: “Never let a good crisis go to waste. It’s an opportunity to do the things you once thought were impossible.” Well, the COVID-19 pandemic is a big crisis. You have people’s attention. Use it. Improvement efforts and organizational restructuring that previously seemed unimaginable may suddenly be much easier to carry out.

Remember what it means to serve

Empathy is a virtue. Servant leadership requires your actions and communications to show you appreciate that the decisions you make impact the livelihood of your community and your employees.

At this time, balancing the budget may seem daunting at best. Taking a realistic, transparent approach to both short-term and structural fixes will go a long way. Local governments that combine best-in-class budgeting techniques and a long-term outlook tend to, over time, create a sustainable decision framework to manage through — and emerge from — crisis.