Managing in Challenging Times: How Will You Bridge the Gap?

With the continued decline in Michigan’s economy, many units of government are facing large structural deficits. While governments have learned to adjust to declining state-shared revenue over the past decade, the significant, unprecedented reductions in property values and investment revenue declines in conjunction with rising health care and utility costs, as well as increased pension contributions have combined to create the perfect storm. How can governments combat these challenges to bridge the resulting structural deficit?

The first step is to quantify the gap between revenues and expenditures. Next, services should be reviewed to determine if any should be outright eliminated if other means exist for residents to obtain the service. Lastly, we recommend a three-tiered approach to narrow the gap, including: identifying revenue enhancing measures, evaluating additional cost reduction opportunities, and assessing the potential for collaboration/consolidation of services. 

Conduct a multiyear financial forecast

Many communities have either conducted a multiyear financial forecast or are in the process of doing so. It is crucial to understand the effects of the compounding of taxable value reductions and increasing year-over-year costs in order to determine the organization’s overall strategy. For example, estimated property value declines may be 10 percent for the next budget year, an additional 5 percent in the second year, and 3 percent in the third year of the forecast, resulting in a cumulative decline of 18 percent. Similarly, increased pension contributions may be 7 percent in the first budget year and an additional 5 percent in the second year. Engaging in this exercise will allow the creation of a comprehensive plan to best preserve the fiscal health of the community.

It is also important to understand the true costs of services when creating the forecast. Are services in other funds being subsidized by the general fund? Are programs really self-supporting? For instance, do outside charges and donations cover indirect costs, such as public safety overtime for special events?

Once you have a true understanding of the overall severity of the deficit, you can now develop the strategy for reducing it. 

The three-tiered approach

As the size of the structural deficits have increased, communities are finding that basic cost control measures (such as not filling vacant positions, deferring capital outlay, wage freezes, etc.) are not enough to solve the problem. In order to develop a plan that best meets the needs of the individual community, we recommend the blending of a three-tiered approach: revenue generation, cost reduction, and collaboration/consolidation of services. Individual communities will need to find the right mix of these three approaches to best fit the needs of the residents and preserve the fiscal strength of the community. The following examples are not intended to represent all of the options available to local governments, but to identify many of the more popular techniques. You should consult with legal counsel prior to implementing certain suggestions, in order to ensure there are no unanticipated issues with implementing these changes. 

Revenue generation

Opportunities for generating revenue are limited due to the structural problems inherent in the municipal finance model. However, there are still a few items you may want to consider, including but not limited to:

• Ensure all existing millage capacity is effectively used
• Creation of special assessment districts or dedicated millages
• Fees and charges for services—are they at full cost?
• Creation/enforcement of a business licensing program
• Create an allocation methodology to appropriately charge administrative costs from the general fund to other internal funds
• Charge for rubbish, recycling, and/or composting
• Selective traffic enforcement
• Auto accident recovery fees
• Advertising on government property
• Rental inspection program
• Selling your excess capacity to neighboring communities (building permits, animal shelters, etc.)

Cost reduction

While most governments have significantly trimmed the expenditure side of the budget by eliminating vacant positions and deferring capital outlay, many have found it necessary to incorporate more significant changes into the process, including:

• Hiring freeze/attrition. Most communities have instituted hiring freezes, and several have offered early retirement incentives. Retirement incentives need to provide a win-win for the employee and the community to be successful
• Implementation of four-day workweeks or reduced hours for non-emergency services
• Wage concessions/reductions, and use of part-time versus full-time resources
• Self-service opportunities
• Cross-training employees who might have been outsourced in the past
• Healthcare cost analysis/reductions
• Pooled “utility” programs/energy audits
• Department restructuring and consolidation
• Changing work rules to allow for job sharing
• Revise limiting legislation – charter, ordinance, state law, etc. (e.g., minimum staffing requirements, modify inefficient and outdated processes, etc.)

Consolidation/Collaboration opportunities

In general, these tend to be longer-term solutions and require a common service philosophy to ensure success. This can be a way to preserve services the community would otherwise have to discontinue. It is important to look for a “win-win” solution for everyone — each party must have something to gain to yield best results. Areas where we have seen successful consolidation/collaboration of service initiatives consist of:

• Consolidation of dispatch operations
• Consolidation of recycling programs
• Equipment and vehicle sharing
• Senior transportation collaboration
• Joint purchasing
• Insurance consortiums
• Animal shelter collaboration
• Recreational program collaboration

As local governments continue to navigate through these difficult and sometimes unchartered paths, it’s important to stay focused on the target — reducing the annual structural deficit. As you know, most state laws require a balanced budget and this will become an increasing challenge for most communities over the next several years. Without significant changes to the municipal finance model, generating significant new revenue will require focus and communication with residents related to potential loss of services. Achieving meaningful cost savings requires a critical look at redefining government operations, including restructuring government and department services, revising service delivery methods, streamlining processes with enhanced use of technology, and consolidating/regionalizing/collaborating. This will require change but, while change can be difficult, it can also be rewarding. View our webinar titled “Ideas for Balancing the Budget.” For more information or to discuss how Plante & Moran can help, please contact a member of your engagement team.