Nine years into an economic recovery has many pundits wondering how much longer can it possibly last. With experts noting that another recession is closing in, what can municipalities do to prepare?
By Tom Adams.
It’s hard to believe, but it’s been nearly a decade since the housing bubble burst and the U.S. economy went into decline. Since then, public agencies have worked hard to balance their budgets and prepare for the future. A general upward economic trend over the last few years has helped, and most municipalities are in a better position today than they were when the recession hit. However, many economists are starting to discuss whether another downturn may be on the horizon. No agency wants to hear the ‘R’ word, but preparing for a recession beforehand is the best way to minimize service impacts and keep your agency going through the lean times.
What is the best course of action for local government leaders to prepare themselves, their staff and their constituents?
Collect and Leverage Data
Planning for the unknown may be difficult, but it is important to consider and plan for the potential impacts of a downturn. Recessions typically lead to less government revenue and without careful planning, decreased revenues lead to staff and service-level reductions. Decreased service levels affect everyone – they may lead to adverse community impacts such as higher crime rates, lower property values and an overall decline in quality of life.
Leaders can begin exploring the potential recession impacts by exploring the city’s historic contraction rates during recessions. This will typically range from 3 to 8 percent depending on the nature of the local economy and the severity of the recession. Looking at historic trends can help determine what a recession might mean for a specific area. For mid- to long-term planning, it is good to keep in mind that a recession not only causes a short-term decrease in revenue, it also resets the revenue base at a lower level, so that as the city is coming out of the recession there are realistic and (hopefully) achievable numbers.
Another ‘best practice’ is to review and model an agency’s largest revenue sources to determine which areas will be most affected, and potential strategies to absorb some of the ill effects. A review of fund reserve levels and their regulations is a good idea because different fund reserves might have different use constraints. City managers and finance directors will want to know how vulnerable the general fund is to decreased revenues, and the policies for the use of different reserve funds to mitigate a short-term shortfall. A thorough review of revenue sources, potential risks, short-term gap financing opportunities, and potential cost savings strategies will provide a better picture of the agency’s exposure to a downturn and its potential solutions.
Maximize Today’s Revenue
Jurisdictions may find a surprising number of revenue opportunities by starting with a review of their revenue related ordinances. If an ordinance is not up to date or it does not reflect current costs, this may prevent an agency from capturing all possible revenue. For example, certain telecommunications fees that were introduced by newer technology, may not be collectable if an ordinance is based on older technology.
Another ‘best practice’ is to review current policies for all revenue sources to determine if taxes and fees are being applied to all applicable entities and whether all taxpayers are in compliance with city regulations. Using a ‘discovery and recovery’ compliance audit approach can generate significant new revenue from such areas as business license tax, hotel tax (or transient occupancy tax), short-term rentals, utility user tax, franchise fee, and other taxes and fees, where applicable. In addition to uncovering missing current revenue, a compliance audit will generate ongoing revenues by encouraging better future compliance.
In addition to revenue, there are also opportunities for agencies to minimize costs. For many jurisdictions, a third-party administration service may be a more cost effective way to provide certain services such as business license administration or IT support. Using an outside administration service not only provides opportunities for cost savings in the current term, but it also reduces long-term pension liabilities.
Anticipate New Revenue Streams
Depending on the jurisdiction, it may be easier to pass revenue measures during a good economy than when the economy is down and voters are more economically stressed. Revenue measures such as add-on district sales tax measures can quickly boost revenues which can help address pension liabilities and, if ‘sold’ in the right way to the voters, help increase fund reserves. Cities can also look into passing new taxes or modernizing existing taxes such as business license tax, documentary transfer tax (for charter cities), hotel/transient occupancy tax, and utility user tax. Some of these revenues require a majority vote to pass, while others require a two-thirds vote, depending on how the tax measure is written. Municipalities should take these factors into account when trying to strategize which revenue enhancement approach voters will support.
While there is no guarantee that these measures will pass, it’s may be easier to discuss a revenue measure with constituents and council during less stressful economic times. Even if the measure is unsuccessful, it might be re-introduced during a recession to an audience that is already familiar with it and will be better aware of the issues and the need during lean times.
City councils don’t like unpleasant surprises, so it’s best to hold early discussions on the potential impact of a recession and ways to mitigate its impact. Early communication will help prepare an elected board plan for economic challenges rather than react to them.
Elected leaders will want to know the details related to fund reserves, revenue policies and other facts as part of the annual budget hearing. Knowing what funds can be used for what purposes will help elected boards determine how to plan for and support their agency’s service delivery in the event of a downturn.
Since recessions tend not be an if, but a when, the best approach is to plan ahead and model potential impacts and potential solutions. Finance and budget staff should explore recession scenarios and discuss them as part of the annual budget process. With careful planning and collaboration between staff, council/board, and the community, a recession can be a manageable speed bump as opposed to complete road block.