Viewpoint: Steering toward financial recovery
Years before the Great Recession hit the global markets, local governments were faced with shrinking tax and state revenues, ballooning pension obligations and rising health care costs. The diverse array of challenges facing American city and county governments now is a far cry from the era of considerable growth in property and home values that only a few years ago contributed significantly to local government coffers.
When costs are rising and revenues are falling for private companies, CEOs generally confront the trend gap head-on, addressing causes for falling revenues and taking opportunities to minimize losses by reducing expenses. Governments do not have the luxury of changing operational direction with the rapidity that companies enjoy, but their hands are not completely tied. With proper financial guidance, local governments may take advantage of a range of opportunities to improve their positions.
To match falling revenues with reduced expenses, local government administrations should:
- Research privatization of specific services. Local governments have successfully contracted out various services from waste management to the management of conference centers. When carefully implemented, privatization can allow for greater operating flexibility at reduced costs.
- Meet with neighboring cities to assess service areas that may be consolidated and study the feasibility of sharing services. Governments should seek economies of scale wherever possible. Situations that warrant special attention are those in which services are duplicated within the jurisdiction of a single government.
- Gauge public support, interest and satisfaction with the government’s services and determine if ineffective or underappreciated services may be reduced or cut. Reducing expenses and services may prove to be politically sensitive, making public buy-in and input vital.
- Determine methods to reduce costs in ongoing operating and service areas. For example, review the policies on fleet vehicles, their use rates and fuel economy.
- Analyze current personnel compensation and compare it to the market. Governments should address personnel issues as a business would and determine the market level of pay and benefits to retain valuable employees. When pension benefits are considered, governments frequently discover compensation is at the high end and needs correction.
In determining an appropriate financial turnaround strategy, it is crucial for governments to produce realistic and attainable budgets that enable an accurate assessment of the complete situation. Over- or under-estimating future revenues and expenditures will paint a bleaker or rosier picture than what is likely to occur. Doing so can create panic followed by overly draconian cuts or engender a false sense of security. In either case, the local government would not be functioning optimally when reality becomes inescapable.
It also is critical to communicate challenges and the realities of the troubled financial situation with employee unions. When the fiscal situation is dire, unions often are willing to sacrifice along with the rest of the government. Bring union leaders into the decision-making process early to maximize the possibility of that they will support government restructuring tactics. Keeping unions outside the collaborative process may only add resentment toward administration and reduce the potential for non-adversarial negotiations. By working with unionized workforces, some governments recently have reduced costs for retiree and employee health care, reached compensation concessions and changed defined benefit pension plans to defined contribution plans for new employees.
Few envy the current position of city and county government leaders. They have little opportunity to please all stakeholders while remaining solvent. However, sitting on the sidelines while fund balances drop is neither the only option nor an advisable one. The above strategies require careful and professional planning, execution, communication and analysis, but they offer the real possibility of transparency and a balanced budget.
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Kevin Lucey is an associate at Bloomfield Hills, Mich.-based O’Keefe & Associates, a transactional financial consulting and turnaround management firm specializing in debt restructuring, turnaround consulting, litigation support, creditor and bankruptcy services benefiting distressed organizations nationwide. He can be reached at [email protected].
