Taking Action When Fiscal Storm Clouds Threaten

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Joseph StefkoThe fiscal crisis club has a new member: the City of Harrisburg, Pennsylvania.  Faced with staggering debt payments it simply can’t afford, the capital city is weighing its options.  And none of them are particularly pleasant.  Does the city file for bankruptcy?  Does it make use of Pennsylvania’s Act 47 fiscal emergency program and avail itself of state oversight?  Does it raise the property tax levy to an unimaginable level to resolve its structural budget gap?

The unfortunate reality is that Harrisburg isn’t alone.  Hardly.  Local governments across the country, many of which were struggling long before the economy collapsed, have witnessed their fiscal wherewithal stripped to the bones in the past year.  Just Google “city fiscal emergency” and watch the lights dim as you click the search button.  Los Angeles has proposed closing all non-public safety operations two days per week.  The word “receivership” has been uttered in Detroit and Toledo.  And layoffs and programmatic cuts are pending in cities from coast to coast.

It’s painfully obvious that the fiscal storm clouds aren’t likely to break in the foreseeable future.  As states confront their own once-in-a-generation crisis, their ability to help localities is nil.  With wary consumers only beginning to regain their footing, consumption taxes will hardly be a source of salvation.  And as the federal stimulus dries up, states and localities will be forced to stand on their own.

Across the country, the cost side of the municipal ledger has broken ranks with revenues and driven ever-widening gaps.  The growing sense of urgency is palpable in local governments.  The conversation two years ago may have been about enhancing efficiency and optimizing resources; today, it’s about meeting payroll, preserving market access and sustaining basic essential services.

For many cities, the current fiscal crisis represents a brave new world.  Options become less palatable.  Choices become tougher.  Decision making becomes more controversial.  Outcomes become less certain.  And the margin for error shrinks.

From 2003 to 2008, I had a front-row seat as staff to the state financial control board in Buffalo, New York.  The period marked a dramatic turn for the better in that city’s fiscal condition, enabling it to weather the current economic storm from a higher-water position than many of its peers.  As others accelerate down the path of fiscal distress, they’d be well served to abide by the following guiding principles.

Resist the temptation to be blinded by the near term. The imperative of fiscal emergency reflexively drives a nearer-term focus.  How do we meet next week’s payroll?  How do we make next month’s debt payment?  How do we balance next year’s budget?  Uncertainty only brings the planning horizon closer.  But just as long-range planning is essential to prudent fiscal management under normal conditions, it’s even more so in situations of fiscal distress.  Managers and officials have to resist the tendency to focus on the immediate at the expense of the long-range.  Both are critical components of any effective recovery strategy.

Multi-year planning is not a license to speculate. Longer budget planning horizons are as much about identifying potential challenges as they are about developing legitimate solutions.  But long-range budgeting only works when anticipated shortfalls are married to likely, non-speculative actions.  Just because projected challenges may not come to fruition for three or four years doesn’t give officials free reign to plug gaps with “pie in the sky” speculative actions.  The multi-year financial plan should be built with the same stringent criteria used in the current year’s budget.  Anything less renders long-range planning meaningless.

Know your weaknesses, and have contingency plans at the ready. A budget is merely a roadmap – a plan for how service delivery will be funded for the next 12 months.  But as poet Robert Burns so aptly noted, even the best laid schemes o’ mice an’ men gang aft agley.  The reality often differs from the plan!  Consumption taxes may fall short.  Overtime costs may run high.  And unanticipated capital needs may present themselves during the course of the year.  Fiscal crisis only raises the ante for effective anticipation.  Know the potential “soft spots” in the budget, and the extent of their potential impact under the worst case scenario.  Moreover, inventory your contingency options before they’re needed.

Ignoring these principles is perilous and can lead to membership in the fiscal crisis club.

Joseph Stefko, Ph.D. is Director of Public Finance at the Center for Governmental Research (CGR) in Rochester, New York.  From 2003 to 2008, he served on the staff of the state financial control board in Buffalo, New York.

Note: a shorter version of this article was published by the Buffalo News on June 8, 2010