Fiscal First Aid

Step 1: Recognition

The First Step is Recognition

The first step in recovery is recognizing that a real problem exists. Someone in a position of authority must:

  • Recognize the problem.
  • Gain a substantive understanding of it.
  • Start developing countering strategies.
  • Enlist the aid of others.

This person is the “recovery leader.” The leader could be a city manager, finance director, mayor, or hold a comparable position. Ultimately, the leader should build a team of other able officials to carry out the recovery process so that there is a “recovery leadership,” not just a single leader. 

Make a Rapid Determination of the Problem

The recovery leader should quickly assess the problem and its severity. The COVID downturn is unprecedented so it is impossible to say what exactly the impact will be. Hence an assessment of the problem must be informed by an understanding of how to make decisions under uncertainty. You can watch this webinar to learn about decision-making under uncertainty as it relates to financial planning for local governments during COVID.

A more generic set of questions to consider when determining the problem is below:

  • Where do our revenues stand and what can we expect for the next six months to a year? Look for analogs from prior recessions for clues and to how much revenues might decline in the current downturn. However, do not assume past recessions represent a “worst case”. Augment your expectations for decline. The webinar referenced above explains how you can do this.
  • Are our expenditures within budget? How much can we rein them in? What are the most important causes of revenue decreases or expenditure problems? Step 3 in the recovery process provides a menu of generic retrenchment techniques that can be deployed relatively quickly.
  • What are reasonable expectations for future growth? The long-term outlook in any economic recessions is uncertain and this is especially true for COVID. However, the recovery leadership will benefit by thinking about different possible futures that might unfold. For example, depending on how long social distancing practices must remain in place or if such practices need to be periodically reenacted to respond to future outbreaks then the impacts will be different. This webinar describes how scenario planning can be fully integrated into the recovery process.
  • What size imbalance we are facing? Which funds are experiencing distress? How long can the revenue decline be expected to last? Based on the steps above you can begin to estimate the range of plausible financial futures that the recovery leadership will need to plan for.

Consider Deeper Questions about Financial Distress

Though the questions in the preceding section are important for formulating an immediate response, the Recovery Leadership should also consider questions that impact the recovery journey and have important implications for long-term financial health. It is also important to send the right messages to stakeholders from the beginning. For example, if the community tax burden is already high, then it is important to recognize early on that increased tax rates will likely have a limited role in the recovery plan.

  • To what extent is the problem structural versus cyclical? An economic downturn may have simply have exposed a fragile financial foundation. If a big part of the problem is structural, the downturn help convince stakeholders to consider further reaching changes than they would have considered before.
  • How realistic are revenue raising options? Balancing the budget doesn’t necessarily have to come just through expenditure cuts. However, revenue raising during a downturn is a delicate matter and is not always appropriate. The Recovery Leadership must consider if constituents willing and able to bear additional taxes.
  • How big of a problem are unfunded liabilities like pensions and infrastructure maintenance? These liabilities can be a drag on financial conditions during good economic times. During a downturn they could make the problem worse and further complicate recovery.
  • How do we better size and shape government to deliver the most important services with the money we have available? During a downturn local government usually will simply have to spend less money. It is unrealistic to expect the government to perform all the same services it did before, but with less money. The Recovery Leadership must think about how the local government can start to prioritize services so that cuts can be targeted on the lowest priority areas.

The Recovery Leadership does not have to provide a comprehensive answer to all of these questions right away. However, it is important to at least start to asking the right questions as soon as possible. The Initial Diagnosis and Detailed Diagnosis can be used to get more complete answers. 

Enlist Others

The recovery leader should recruit others into the recovery process by:

  • Crafting a message to help others recognize the problem's potential scope (which funds?), magnitude (how serious?), and duration (how long?)
  • Demonstrating a convincing understanding of the situation to inspire confidence
  • Preparing immediate generic treatments for near-term relief and to stave off panic
  • Generating preliminary ideas about how and where to cut costs or find resources as the recovery process moves forward.

However, maybe your audience doesn’t believe the situation is that bad, that an economic recovery will save the day, or that government can just “cut the fat.” Here are some techniques to help with tougher audiences:

Engage the audience

The Recovery Leadership should create a two-way conversation about the situation. Rather than just telling others what the problem is, listen to their concerns, ideas, and perceptions. Ask direct questions to elicit opinions if they aren’t being volunteered. Finding a common definition of the problem is an important first step to reaching a common solution.

Visualize the data

Financial data can be difficult to understand or simply not very compelling to some audiences. Graphics can enliven the data by revealing trends and relationships that are easier to grasp.

Interactivity and Simulation is Powerful

An interactive presentation of financial condition can:

  • Show changes in key variables and prevent discussion from getting stuck on the value of one variable
  • Allow viewers to participate in choosing different scenarios to view
  • Make the presentation more convincing by showing the magnitude of the problem under a range of possibilities.

Financial recovery will require hard choices. A budget simulation takes interactivity to the next level. It can be used to illustrate the difficulty of balancing the budget by challenging participants to allocate limited resources among a portfolio of valuable services. Such an exercise gives participants a better appreciation of the difficult choices that must be made.

This webinar shows examples of interactive data presentations and the benefits of interactivity and simulation.

Credibility in Forecasting is Vital

Forecasts are essential when trying to convince others of the gravity of financial distress. However, even when there is a sense of urgency the recovery leader should ensure the forecast’s credibility before presenting it publicly. A forecast released prematurely can become counterproductive when stakeholders quibble over forecasting techniques and assumptions rather than assess the big picture the forecast is intended to convey. The GFOA book Informed Decision-Making though Forecasting describes how to optimize forecaster credibility.

Use a crisis to your advantage

A sharp financial downturn can convince people to consider new ideas they may have not been willing to consider before. If a general downturn isn’t sufficiently motivating for the audience, the recovery leadership could use more specific events to get people’s attention, such as:

  • Bond rating downgrade
  • Closure of major employer/taxpayer
  • Change in elected or appointed leadership

Using a Crisis is Not without Risk

The recovery leader that considers using crises as a lever for change should be aware that: 

  • A crisis can mask the depth and breadth of the true causes of distress. A crisis is frequently just the most visible symptom of distress, rather than the root cause. People might focus on the symptom and ignore the cause.
  • People might adopt a “siege” or “bunker” mentality, making change and innovation less likely. 
  • Overplaying a crisis may reduce confidence in management if stakeholders perceive that the crisis was avoidable or at least foreseeable. 

Reduce Risk by Framing Perceptions

Framing the perception of others is crucial.

  • Carefully analyze the crisis event. If the recovery leader is knowledgeable about the crisis, then he or she will be a more credible interpreter of what is occurring. The leader can then frame the crisis as a call-to-action, and others will be less likely to interpret it as a panic-inducing disaster.
  • Share information about the event. Making information available can reduce feelings of uncertainty among stakeholders and constituents. 
  • Provide information in a structured, guided format. This makes it easier for others to understand, allows it to reach a broader audience, and increases leader credibility.
  • A financial recovery is often shrouded by uncertainty, especially at beginning of the process. This webinar describes how you can make better decisions under uncertainty, particularly in relation to COVID.

Bring in outsiders

Outsiders can be used in to confirm or validate that there is a problem. Often perceived as more neutral or detached, outside experts may bring additional credibility to the table. They can also bring new and valuable perspectives to bear. Experts can be found in the local business community, nearby universities, or a consulting firm. One particularly good role for experts is to validate key financial forecast assumptions, thereby making data visualizations more convincing.

Outsiders also offer the opportunity to present a citizen perspective and thus provide political momentum for making difficult decisions. For example, a special citizens’ committee might be able to talk openly about seemingly obvious structural problems that are otherwise difficult to talk about, or sometimes even to see, by people inside the organization. 

Present economic data

Economic data from outside sources can temper any unrealistic expectations of salvation by future revenue growth. Command of economic data can also improve the credibility of the Recovery Leader’s message and increase the perceived validity of long-term forecasts.

  • Universities often issue economic forecasts focused on the local area.
  • www.gfoa.org/ffa provides updates on special issues that might not be available in more general economic forecasts