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The headlines across the country tell a troubling tale – local governments are wrestling with stagnant revenue growth, ballooning expenses, and constrained service delivery.
But there is a narrow path through. In our work helping municipalities across the country, we’ve learned that those who manage this adversity well share five common approaches to achieving financial sustainability.
Most municipal managers and finance directors have a strong understanding of their near-term financial condition, and a decent sense of long-term revenue and expenditure risks. Sometimes this understanding is implicit, based on experience, and sometimes it is based on formal efforts to project and interpret financial trends through long-term financial modeling (ahem…a best practice). Regardless, good municipal managers know that all the financial modeling in the world is useless unless staff can help the governing body make difficult decisions. This means active engagement to understand their policy priorities, their sensitivities, and their boundaries. This cannot be developed under the pressure of an immediate financial crisis; it requires sustained relationship building over time.
If the annual budget process is where the sausage gets made, the long-term financial planning process is where the ingredients are portioned. Municipalities that manage their finances well typically have a long-term financial modeling process that informs their annual budgeting. Those who excel at financial management strive for alignment between what they project and what they experience. In most communities, the finance director holds the keys to the long-term financial model. Finance directors are usually conservative, which is exactly what you want in a finance director. They underestimate revenue and overestimate expenditures for safety reasons. These conservative assumptions can sometimes translate into projected long-term structural budget deficits. Meanwhile, municipal leaders, being municipal leaders, manage their annual budget within available resources. Revenue comes in stronger than projected, and expenses come in lower than modeled. The “structural” issues disappear under active management. This creates cognitive dissonance in the community and on the governing body, leading them to defer difficult decisions. After all, we end up fine every year, don’t we? Striking a balance between conservatism and accuracy is important in the long-term model. Remember, the ultimate goal is to help the governing body make the difficult but necessary decisions. Accuracy builds trust.
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Many leaders, when faced with financial constraints, will first look to revenue opportunities to close the gap – usually this means property tax, sales tax, income tax, or user fee increases (e.g., solid waste, permit fees, etc.). In nearly every instance, the governing body pushes back and asks for options to reduce expenditures. Most want certainty that municipal managers have done everything they can to wrench the last drop of inefficiency out of government. However, what the governing body often does not see is the years of trimming, consolidating, and cajoling that have taken place behind the scenes, over many years, as staff “do more with less”. That story is rarely told. The municipal managers who excel at achieving financial sustainability embed expenditure review and service-level impact into contextual conversations with the governing body.
When service cuts are needed, service-level adjustments must follow. Too often, leaders absorb cuts in expenditures without changing expectations. Staff is then forced to contort the organization into uncomfortable positions in a Sisyphean effort to maintain historic service levels. This creates a high level of stress on employees – resources have diminished, but performance expectations remain unchanged. Service level reductions need to actually translate into community impact. Otherwise, the governing body will continue to defer difficult decisions.
Most of a local government’s costs are seated in salaries and benefits – people, serving people. This means that communities who are responding to challenging financial times often cannot bend the trajectory without impacting employees. Sometimes this means stagnant wage increases or diminished benefits. Sometimes it means that employees must take on more work for the same pay. Sometimes it means layoffs. Municipal leaders who excel at managing through difficult financial times engage with their employees, communicate the truth of the situation, listen to their concerns and fears, and lead with compassion.
Financial sustainability is not a destination local governments arrive at and then maintain on autopilot. It is the product of deliberate practice: honest relationships with governing bodies, financial models that inform rather than alarm, frank conversations about what cuts actually cost, and a workforce that is treated as a partner rather than a line item. The communities that get this right are not the ones with the most resources. They are the ones whose leaders have the discipline to build these practices long before a crisis forces their hand.
Jonathan Ingram is a Vice President at Raftelis, leading the firm's Local Government Organizational Assessment Practice. He works across a range of functional areas, from long-term financial modeling and decision-support for governing bodies to staffing, operations, and process-improvement assessments. His consulting work is grounded in a practitioner's perspective, and he has particular experience guiding fiscally distressed communities through some of their most difficult financial and organizational challenges.
For more information on achieving financial sustainability, you can reach out to him at jingram@raftelis.com.
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