Local governments often join together to pool risk for insurance. Insurance pools save money by aggregating multiple local governments into a larger, more diversified risk pool. Or a government might provide insurance coverage as a central, shared service, which is far cheaper than each department independently contracting with their own insurance providers. This is also a form of risk pooling.
Governments can also save money by pooling budgetary risks across departments. Departments essentially build “insurance” into their budget to account for the possibility of unavoidable and unplanned spending. Some might call this “leeway,” or others might call it “padding” or “slack”—but no matter what you call it, it can really add up across all departments.
Creating a centralized budget contingency to cover unplanned, unavoidable spending makes it possible to pool the risks of each department. This allows the government to eliminate excess padding while still providing sufficient confidence that the organization will be able to cover unplanned, unavoidable expenditures
- Publication date: June 2021
- Author: Shayne Kavanagh