Sell Assets. Selling assets can work if assets are underutilized or if the government has made a decision to leave the associated line of business entirely. Selling land (or other types of facilities) could also put them back on the tax rolls. However, this technique can be dangerous if the government could be in a position to have to re-purchase the assets later. For instance, it may not be advisable to sell parcels of vacant land that might be needed for expansion of government facilities in the future.
- Selling assets works best when government is looking to exit a service area.
- Selling assets can be effective for raising liquidity in the short-term.
- Selling assets can be destructive if the funds are not used sustainably or are used to simply plug holes without aggressive efforts to better manage ongoing resources.
- Assets must have a true market demand; “fire sales” can reinforce the perception of mismanagement or fiscal crisis beyond the actual conditions.
Obtain Better Returns on Idle Cash. Better investment strategies could provide some new revenue, but chasing yields could also increase risk. Consider benchmarking investment return performance against an appropriately conservative standard and make sure there is a comprehensive investment policy in place to guide decisions. Look at investment pools that exhibit strong, stable histories and are affiliated in some manner with a significant number of governments.
- Recent market performance has probably cured most officials of any desire to chase yields.
- In a crisis environment, liquidity may be more important than returns.
GFOA Best Practice, Use of Local Government Investment Pools (2007, 2008)
GFOA Best Practice, Collateralization of Public Deposits (1984, 1987, 1993, 2000, and 2007)
GFOA Best Practice, Managing Market Risk in a Portfolio (2007) (previously titled Maturities of Investments in a Portfolio - 1997, 2002)
GFOA Best Practice, Use of Various Types of Mutual Funds by Public Cash Managers (1987, 2003, 2006)
Use of Derivatives by State and Local Governments for Cash Operating and Reserve Portfolios (1994, 2002)
Offer Early Retirement Program. An early retirement program is not too difficult to implement, but it can be difficult to realize real savings. For example, if all of the retirees are simply replaced, rather than redesigning business processes to reduce the number of positions the government will soon be back in the same position of unaffordable personnel costs.
Human Resources and Benefits
- Can be useful, but requires discipline to re-design work and eliminate positions.
- Even though replacing retired employees with lower-cost junior employees may result in some short-term savings, any structural imbalances will be perpetuated.
- Early retirement programs can greatly increase long-term costs associated with pension contributions and retiree health care coverage. These may not be paid directly from the operating budget or are masked in the total contribution rate so are difficult to identify.
GFOA Best Practice, Evaluating Use of Early Retirement Incentives (2004)
Increase Part-Time Labor. This could transform labor into more of a variable cost and reduce benefit costs, however, it could also increase total exposure to risk. For example, part-time police officers may not have the same training standards as full-time officers or the same familiarity with the community. Some current full-time employees may be willing to consider part-time positions, particularly if the nature of their position has changed due to market conditions, i.e. building inspectors.
- Strongly consider part-timers as supplements to reduce overtime costs or to staff special, irregular needs.
- Be cautious with more extensive replacement of full-time workers with part-time.
- Morale can be affected significantly depending on how the changes are perceived. For example, workers who are “involuntarily” changed to part-time will still be part of the organization and may poison the work atmosphere.
Institute Hiring/Wage Freezes. A hiring freeze can provide temporary respite. It can also be used with an attrition strategy to reduce the size of the workforce.
- Hiring and wage freezes are a blunt instrument. They do not lend themselves to the precise surgery needed to fix the problem.
- When used to reduce the workforce by attrition, a hiring freeze makes it much harder to take a focused approach on what to cut and what to keep. Creating pools of similarly classified employees can make transferring between departments to fill critical needs may help in larger organizations, i.e. the retail “floater” concept.
- Wage freezes will tend to encourage the most capable employees to leave and create long-term market inequities if not undertaken by most regional employers
- It is important to establish policies governing the hiring freeze, especially any exceptions, and adhere to the policies if at all possible to avoid lack of trust and morale issues.
Reduce Hours Worked and Pay. A furlough or a change in work schedule (e.g., going from a 40 hour week to 35) can reduce personnel costs, while providing employees with more personal time.
- This tactic is equitable in that it provides employees with a trade-off for reduced pay.
- Not all employees will value personal time and wages equally. Those that value wages more may become dissatisfied, lose productivity, create morale problems, or leave the organization.
- Consider the impact of reduced work hours on services. Is the government willing to accept lower levels of quality or timeliness for certain activities? Will some activities be discontinued?
- This tactic will also reduce the cost of fringe benefits that are based on salary, but will not impact other benefits, like health care, that are provided equally irrespective of salary.
Use Short-term Debt to Pay for Vehicles. This spreads out the cost of these assets over multiple years. While this strategy offers breathing room, it must be paired with a policy that limits the life of debt to the life of the asset. Otherwise the strategy comes dangerously close to issuing debt for operational expenses. Also, this strategy should limited to situations where slack capacity for issuing debt exists – growing communities or communities with little existing debt. Otherwise, financial flexibility may actually be reduced.
- Evaluate this strategy in light of debt capacity, the need for strong internal debt management policies, and relationships with financing institutions.
- Establish parameters on the continuity of this practice; it may be appropriate for a short-term relief to cash flow but may not be a good long-term practice.
Defer and/or Cancel Capital Projects. This is a relatively common strategy and can be useful, however, government must be careful not to defer projects that are crucial for to the viability of community. For example, perhaps a road project is needed to improve access to commercial area, which would ultimately increase the business activity and sales taxes.
- Identify the point at which deferral of a capital project becomes fiscally unsound. For example, might delay of a major road repair project require large-scale replacement reconstruction later?
- This strategy is popular because it allows large expenditures to be taken off the budget without impacting day-to-day services or staffing in the near-term. Be sure any deferral of a capital project is not just a deferral of the financial reckoning day and that the operating budget will not be negatively impacted by continued delay.
Use Debt to Fund Pay-Go Capital Projects. This strategy could potentially be very helpful if there is excess capacity to issue debt. A comprehensive debt policy is very important to give elected officials and citizens confidence that debt is being issued within responsible limits.
- Evaluate this strategy in light of debt capacity, the need for internal debt management policies, and relationships with financing institutions.
Revisit Interfund Transfer Policies. A distressed government could re-examine its policy for transfers to the general fund from other funds (particularly self-supporting enterprise operations, such as utilities) to see if there is a valid basis for increasing the amounts transferred to the general fund. Perhaps the general fund has been subsidizing the activities of other funds unintentionally. Such a strategy must be pursued very carefully, though, lest it degenerate into unjustified subsidization of general services at the expense of the clientele of these others funds. Conversely, perhaps the General Fund is subsidizing the activities of other funds, thereby causing a drain on general tax dollars.
Financial Planning and Analysis
- This can be a tricky technique because cross-subsidization is a seemly quick and easy fix to financial woes within a fund. There may be very good reasons for revisiting subsidization policies, but it is important that the policies be follow sound financial reasoning.
- The unique composition and culture of the community will affect the ability to make changes in the transfer policies. It is likely more feasible to increase Payments in Lieu of Taxes (PILOTS) or service payments to the General Fund from self-supporting utilities if the rate payers are a larger or distinctively different population than the taxpayers, i.e. the utility serves neighboring communities as well.
Use Fund Balance to Soften the Landing. If fund balances (i.e., reserves) have been built up in past few years they may be available now to soften the landing during an economic pull back and buy time for other financial recovery strategies to be implemented. This fiscal first aid treatment works best when it is guided by a fund balance policy that has been adopted by the governing board. A good policy will set forth the portion of unreserved fund balance that is available for fiscal first aid purposes (often termed “rainy day” or “budgetary stabilization” reserves), versus other purposes such as responding to extreme events like natural disasters. Ideally, during a period of financial distress the board will also provide guidance on the amount of the existing rainy day reserve they are comfortable with management using and over what time period.
- Fund balances are often built up during years of good revenue yield with the expectation that they can be used to help whether periods of financial stress, so using fund balance to soften the landing is a natural treatment to consider.
- Using fund balance to soften the landing can help preserve organizational capacity to provide service.
- This treatment should be used in the context of larger recovery strategy. Even if the strategy is to try to wait out an economic recession, everyone must understand that this treatment can only be used for a finite period of time.
- If a policy does not define the amount of the reserve that is available for budgetary stabilization then the government runs the risk of overspending its reserves – thereby reducing financial flexibility and ability to respond to other unexpected situations such as natural disasters.
- Using fund balance to fund on-going expenditures without a larger recovery strategy could create an even more severe situation when the reserves run out.
Resources Close Facilities (or reduce hours of operation). The intent is to reduce operating costs associated with assets. Closures should be part of a strategic, prioritized approach to service reduction.
GFOA Best Practice, Appropriate Level of Unreserved Fund Balance in the General Fund (2002)
Financial Policies: Design and Implementation
- Consider supplementing closings with greater availability of on-line options, where possible, in order to mitigate service impacts. Identify and evaluate all service impacts with an emphasis on what alternatives are available when the office is closed.
- Ensure that closings to do not fall disproportionately on vulnerable populations.
- Reducing hours of operation reduces costs significantly only when the facility is closed and employees are not paid for the time. Offering flexible and reduced schedules
- Thorough communication is essential well in advance of changes in hours and frequently for an extended period to ensure a smoother transition.
Outsource. It is possible that outsourcing could reduce costs, but it is far from guaranteed. For distressed governments, a first step is to look at services where the private sector market for a service is stable – look to outsource services that other governments already outsource. This will help reduce risk.
- Outsourcing (especially privatization) is often looked to as the natural antidote to “government inefficiency.” However, studies have shown that outsourcing does not always save money. Evaluate outsourcing opportunities against the criteria for outsourcing cost-savings. Be very specific in defining the service requirements and expectations so that service quality and quantity are up to expectations.
- Take a longer-term view of outsourcing to make sure it is cost beneficial over the full-term of the contract and possibly longer. For example, some vendors have been known to pursue a “loss leader” strategy where they provide service at an artificially low initial cost with the intention of making it back (and maybe more) later in the deal or in subsequent deals if it will be prohibitively expensive to switch providers.
Key Questions to Ask When Considering Outsourcing for Cost Savings