Step 8: Long-Term Treatments
The near-term treatments can help balance the budget in the short-term. But, if local governments are going to transform their financial position for the better, then they need long-term treatments too.
The Financial Foundations
First, consider the foundations of how your local government operates. Technical strategies to improve financial condition won’t work well or at all if the foundations are not strong. The foundation consists of leadership strategies and the design of institutions.
Local government leaders cannot “order” the people who participate in a local government (e.g., staff, the public, etc.) to behave in a way that promotes financial health. Instead, leaders must inspire pride, loyalty, and enthusiasm so that followers will want to support a strong financial foundation for the local government. Below are examples key leadership strategies. You can learn more about these at GFOA’s Financial Foundations for Thriving Communities:
- Develop an inspiring, shared vision for the community in order to convince stakeholders of the benefits of working together for a strong financial foundation and thriving community.
- Build long time horizons into fiscal planning to circumvent short-term thinking that may have adverse consequences in the long run.
- Help people recognize their shared interest in a financially healthy local government by creating open communication between people.
- Make a concerted effort to improve trust. Trust is essential for a local government to perform at its best, to provide high-quality services, and to have a strong financial foundation.
- Keep key stakeholders and employees engaged in the decision-making process.
- Use the formal power of public office, such as control of the budget purse strings, to provide oversight and reinforce financially constructive behavior. Also, use informal power to encourage collaborative behaviors through organizational culture.
Institutions provide the “rules of the game” for people within local government to work together for a strong financial future. Institutional design provides the context in which the leadership strategies operate. Institutions also provide for continuity of good financial practices through changes in leadership. Below are examples key institutional designs. You can learn more about these at GFOA’s Financial Foundations for Thriving Communities:
- Develop new and better approaches to public engagement. The public “owns” the local government’s budget. The public will be more likely to sustain it when it is engaged in deciding how it will be used.
- Form and maintain relationships with other public, non-private, and private organizations in order to direct more resources and capabilities to solving pressing community challenges.
- Local governments need to define boundaries. Financial policies should be used to define boundaries around who shares and controls public resources and how resources can be used.
- Create a system to monitor the process of financial decision-making and the outcomes of those decisions.
- Sanctions and rewards encourage cooperative behavior. Develop a system of rewards and penalties that apply a lighter touch at first, and only resorts to weightier options in more extreme circumstances.
- People need to feel that how money is spent and who pays for government are fair. An important step is to be clear about where money comes from and where it goes.
- Develop decision-making systems that are perceived to be fair by the participants.
- Develop systems to manage relationships with higher levels of governments that can influence the local government’s financial position.
There are many technical things that local governments can do to reduce costs or strengthen their tax base over the long-term. Below is a list of potential treatments. You can use Step 6 – Detailed Diagnosis to help you judge which ones might be most important for you.
Control Employee Benefits Costs
Contain Employee Health Care Costs. Employee health care is a large cost that often grows faster than a government’s revenue. This puts pressure on the rest of the budget. Hence, local governments need to design their employee health plans to contain costs. There are a number of strategies that local governments can use to contain health care cost, including self-insurance and high deductible health plans.
Reform Pensions. Pension liabilities create a drag on local government finances. They are essentially a form of “bad debt” that hobbles a local government’s ability to provide the community’s desired mix of tax and services. Local governments can take steps to address this problem.
Don’t Budget Incrementally. A traditional, incremental budget makes marginal changes in spending from year to year. It impedes the major reform local government needs to make a transformation. There are methods of budgeting that are not incremental. Priority-based budgeting focuses spending on the services that are most important for meeting the community’s goals. Zero-base budgeting re-examines past patterns of spending comprehensively to see if there are better ways to allocate resources. Governments have also been successful with other approaches that use performance data, prioritize spending, evaluate return on investment, or better align spending with need/priority.
Ensure Capital Assets are Affordable Now and in the Long-Term. Capital assets are very costly. They are expensive to acquire and the long-term maintenance and operating costs can then outweigh the initial acquisition cost. Therefore, a capital planning and budgeting process must produce investment decisions where both the initial acquisition and long-term maintenance obligation are found to be affordable before the investment is made. Also, large capital projects are often financed with debt. Debt can be a great way to finance capital assets, but must be used responsibly. A debt policy that describes locally imposed self-limitations on the use of debt can make sure it is used responsibility.
Transform Government Services
Stop or Reduce Lower Priority Services. The traditional local government budget process is incremental, where last year’s budget becomes the next year’s budget, with changes around the margin. One of the effects of incremental budgeting is that decisions to offer a program years ago become frozen in place. This means that local governments may continue to offer a service that is no longer affordable or relevant to the community’s needs. Local governments should inventory the services they offer and then decide which ones they can continue to provide.
Shift from Remediation to Prevention. Local government services often remediate problems, rather than prevent them. However, remediation is also often much more expensive than prevention. There are many examples of how this can be done in local government. On example with particular relevance the finance office is lifecycle costing of assets. This allows local governments to focus maintenance on assets at the point before they begin to deteriorate more rapidly and become increasingly expensive to repair.
Improve / Simplify Work Process. Work processes often contain a lot of waste. Lean process improvement (or comparable methods) can be used to eliminate waste by changing the way work is done. This could involve smart investments in technology or simply changing the way work is done. For example, a process could be simplified by removing steps that are not necessary. That said, careful planning is needed to realize actual cash savings from process improvement. This is because time saved from process improvement often gets filled with other activities. Sometimes these other activities are valuable, sometimes not.
Overcome the Limits of Local Government Fragmentation. There are a lot of local governments and, collectively, they spend a great deal of money. The number of local governments combined with the lack of coordination between them is sometimes referred to as local government fragmentation. It is reasonable to ask: is there is too much fragmentation in local government and could public funds be better used if there was less fragmentation? Research shows that consolidating multiple local governments into one larger local government rarely saves money. A better strategy is to improve coordination where it offers the most value. Examples of strategy in the vein include regionalization, partnering with non-profits and the private sector to achieve community goals, and investigating opportunities to share day-to-day services with other organizations.
More Financially Savvy Community Development
Tame the Use of Economic Development Incentives. Empirical research suggests that 25 percent or less of the jobs that received incentives owe their existence in the local area to the incentive. In other words, more than 75 percent of the new jobs would have been created locally without an added incentive. For this reason, and others, most incentives are all cost and no benefit. Therefore, local governments could benefit by reforming their use of economic development incentives.
Choose Financially Sustainable Land Use Patterns. A local government’s financial health is largely determined by the land uses within its jurisdiction. However, land use planning decisions are usually made without regard to the long-term financial impacts on the local government budget. Local government should develop a capacity to analyze the true financial impacts of land use decisions. That provides the basis for making choices about land use that will better support the local government’s long-term financial health.