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Fiscal First Aid

Revenue

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.

 

Evaluation

  • 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 – however, sale of real estate may take some time to execute and sale of other types of assets may not raise a substantial sum of cash.
  • 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.

 

Resources

Fiscal First Aid Quick Reference: Selling Assets 


 

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.

 

Evaluation

  • Recent market performance has probably cured most officials of any desire to chase yields. 
  • Opportunities here are probably limited unless following a very conservative investment strategy.
  • In a crisis environment, liquidity may be more important than returns.

Resources
BP, Use of Local Government Investment Pools (2007, 2008)
BP, Collateralization of Public Deposits (1984, 1987, 1993, 2000, and 2007)
BP, Managing Market Risk in a Portfolio (2007) (previously titled Maturities of Investments in a Portfolio - 1997, 2002)
BP, Use of Various Types of Mutual Funds by Public Cash Managers (1987, 2003, 2006)
BP, Use of Derivatives by State and Local Governments for Cash Operating and Reserve Portfolios (1994, 2002)

 

Fiscal First Aid Quick Reference: Obtaining Better Returns on Idle Cash 

 

 

Human Resources and Benefits

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. Further, this practice often simply shifts the costs to the pension fund, which will ultimately be repaid by the employer – along with interest rates significantly higher on average compared to the lower rates available on commonly used short-term borrowing instruments. Many early retirement plans are far most costly than the budget alone reveals.

 

Evaluation

  • 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.

Resources
GFOA Recommended Practice, Evaluating Use of Early Retirement Incentives (2004)

 

New Normal’ Retirement Plan Designs” by Girard Miller and Jim Link Coming Soon


 

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.

 

Evaluation
  • 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.

Fiscal First Aid Quick Reference: Increase Use of Part-Time Labor

 

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.

 

Evaluation

  • 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.


Resources

Fiscal First Aid Quick Reference: Hiring and Wage Freezes 


 

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.

 

Evaluation

  • 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.


Resources

Fiscal First Aid Quick Reference: Reduce Hours Worked or Pay 

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Reduction in Force (RIF). Because personnel costs are such a large part of most governments' cost structures it may sometimes in may be necessary to reduce the number of employees in order to cope with fiscal stress.


Evaluation

  • A RIF can quickly lead to significant and, perhaps, on-going cost savings.
  • A RIF will negatively impact employee morale.
  • More so than most other fiscal first aid tactics, a RIF could reduce service effectiveness


Resources

"Eight Steps to Instituting a Successful Reduction in Force, and One Interesting Alternative"

  • Article by Segal Company Senior Vice Presidents Cathie Eitelberg and Elliot Susseles that appeared in the February 2009 issue of IPMA-HR News, published by the International Public Management Association for Human Resources (www.IPMA-HR.org).

Increase Employee Contributions to for Pensions or OPEBs. An immediate solution to growing liabilities for pension or other post-employment benefits (like health care) is to move towards increased employee contributions or retiree co-payments, deductibles or premiums along with sacrifices made by active employees.  Some jurisdictions may need to arrange for suspension of retirement earnings credits during periods of distress (no pension benefits are accrued and thus no liabilities are created, thus no payments required).

 

Evaluation

  • For most governments with organized labor, the contracts often run several years and benefits changes are hard to negotiate.  However, if salary reductions and furloughs are on the table, then benefits might as well be added to the list of negotiable items– especially if the diagnosis suggests that changes are inevitable.
  • This treatment may be more politically feasible if required employer contributions are increasing as a result of market losses.

 

Resources
New Normal’ Retirement Plan Designs” by Girard Miller and Jim Link 

 

 

Capital and Debt

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.

 

Evaluation

  • 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, Maintenance, and/or Replacement. 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.

 

Evaluation

  • 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.
  • Identify and understand the risks associated with deferral, including higher maintenance costs later, increased downtime, decreased productivity, and, perhaps, decreased safety.


Resources

Fiscal First Aid Quick Reference: Defer and/or Cancel Capital Projects


 

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.

 

Evaluation

  • Evaluate this strategy in light of debt capacity, the need for internal debt management policies, and relationships with financing institutions.
  • If the organization has a conservative debt policy, debt service payments may be a relatively low portion of expenditures, making this tactic more potentially useful.



Restructure Debt. Change payment schedules to reduce financial pressure. There are various options for restructuring debt, such as stretching out the term of the loan, back-loading the principal repayment schedule, and interest-only payments. In some cases, loan forgiveness may even be a possibility. However, be mindful that while extending the maturities of debt can provide a near-term cash flow fix, it can also increase total debt service costs over the life of the issue.

Evaluation
  • Debt restructuring can be critical to freeing up breathing room in the near term.
  • Beware causing inter-generational inequity issues by stretching debt out past the life of the asset it is funding.
  • Consider the operating impacts of debt restructuring on future budgets, especially when evaluating more creative structures such as interest-only, flexible payments, and other shifts in payments over time. Back loading a debt issue with higher principal payments can be hazardous to future years’ budget condition. 
  • Tight credit markets may limit the ability to use this treatment

 

Resources
Fiscal First Aid Quick Reference: Restructuring Debt

 

Financial Planning and Analysis

 

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.

 

Evaluation

  • 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.

 

Evaluation

  • 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
GFOA Recommended Practice, Appropriate Level of Unreserved Fund Balance in the General Fund (2002)
Financial Policies: Design and Implementation

 

 

Management Practices

Small and/or Temporary Across-the-Board Budget Cuts. Small across-the-board budget cuts (10% or less) can be useful as a fiscal first aid tactic because they enlist managers in the solution by giving them a target to meet, it is an uncomplicated and reversible tactic, and is widely perceived as equitable. However, across-the-board budget cuts have important drawbacks – chief among them being that the reductions are disconnected from priorities. Rather than aligning spending with the most important services, all services are provided at a lesser level. Therefore, if an across-the-board cut is used it must be followed by a planning and budgeting approach that better matches priorities and spending.

Evaluation

  • Across-the-board-cuts may be the most realistic, immediate expenditure reduction option
  • Be wary of over-reliance on this tactic as it eventually does serious harm to core services


 

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.

 

Evaluation

  • 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.
  • 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.

 

Evaluation

  • 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. 
  • Outsourcing can be very difficult to undertake in a unionized environment.
  • Outsourcing usually entails start-up costs (political and economic) so the cost- benefit decision should consider these.

Resources
Key Questions to Ask When Considering Outsourcing for Cost Savings

 

Fiscal First Aid Quick Reference: Outsourcing