How State and Local Governments Can Navigate the COVID-19 Pandemic

For state and local governments, the “black swans” have arrived. From an economic standpoint, black swans are immensely disruptive and spontaneous occurrences that have a dramatic impact on economies.

This can be a once-in-a-lifetime learning experience, as the defenses and responses state and local governments develop now could serve them when faced with future black swan events. Here’s a look at the landscape state and local governments have to navigate right now, with advice for next steps and planning.

A Glance at the Economy: Then and Now

Economic conditions before COVID-19 pandemic:

• Tariffs had been increasing for years, sparking retaliatory tariffs.
• Smaller institutions of higher education were under tremendous fiscal pressure.
• The National Association of Budget Officers reported states projecting only 1.6% revenue growth for 2020, despite state general fund spending growth of 5.8% in 2019.
• A November 2019 report by Virginia State University showed an all-time high in federal-state-local interdependency (average 22.6% of GDP).
• Rainy-day fund balances as a percentage of general-fund spending hit records, as well (but still averaged less than 30 days).
• Many private-equity funds and investors started converting quickly to cash (or shorting the market) in late 2019. • Gig workers made up a large portion of the workforce in 2019.
• It was easy (and cheap) to fly around the world with relatively short notice.

Key indicators of disruption now:

• Nearly the entire global economy has shut down.
• Nearly all nonessential workers have begun working remotely.
• Nearly all educational institutions have shut indefinitely.
• The Dow Jones Industrial Average dropped by over 20 percent under the tremendous volatility caused by COVID-19 and the oil-price war between Russia and Saudi Arabia.
• Trillions in stimulus have been approved by the federal government with likely trillions more coming.
• Millions of workers filed for unemployment.
• The global supply chain has been disrupted.
• Revenue flows have been disrupted and may have a lengthy impact on budgets.
• Valuations are going haywire, which puts pressure on large investors like pension and OPEB plans.
• The global contagion is being transmitted with lightning speed.

The Impact of COVID-19 on Governments

Right now, governments are feeling the impacts from COVID-19 and are also wrestling with confusion and uncertainty as new regulations and legislation like the CARES Act prove difficult to interpret. They have to manage:

• Understanding and meeting requirements for funding and stimulus packages.
• Independently funding expanded Emergency Paid Sick Leave and FMLA.
• Following OMB-issued memorandums and policy updates around federally funded positions.
• Developing budgeting and cash-flow projections for the next few years mid-disruption.
• Maintaining data security as their personnel move to remote work environments.
• Managing the completion of 2020 audits.

The U.S. Treasury announced new and expanded lending programs in April, such as the Municipal Liquidity Facility. And local government grant programs are due to receive additional funding to address the impacts of COVID-19. It is important to know your options and form a strategic plan for your organization.

How Governments Can Plan for Spring, Summer and Beyond

Many governments have postponed their budgeting sessions and even cut budgets in the wake of this crisis. The best next step is to build a flexible recovery plan that models for multiple potential percentages of revenue drops (10%, 20%, 30%, etc.). In this planning, all appropriations must be scrutinized anew rather than building off the prior year because the economic environment remains dynamic and uncertain. What should governments consider in preparing budgets this spring and summer in terms of cash flow projections, taxation and other assumptions?

The CARES Act
The CARES Act includes a $150 billion Coronavirus Relief Fund for state, local and tribal governments. These funding opportunities and provisions should be part of your planning strategy. Familiarize yourself with those that apply to your organization and their requirements.

Fiscal First Aid as Suggested by the GFOA
Consider your short-term strategy to get ahold of your budget. According to the Government Finance Officers Association’s (GFOA) Fiscal First Aid: Cash is King guidebook, strategic cash flow can help governments rebalance their budgets and move toward planning and recovery.

Cash Flow Planning Mid-Disruption
Cash flow planning is an important step for governments as they navigate through this crisis, though any planning will have to be flexible and account for multiple assumptions.

☑ Start with reconciled balance of cash (including available reserves).
☑ Revenue and spending analysis forward by month.

• Major sources of inflows:
• Taxation of all types. Remember to account for the impact of sales tax (direct or indirect) due to COVID-19 contraction of sales.
• Grants. Adjust only one time for CARES Act flows.
• Other fees and flows (if material). Ex: investment earnings.
• Major sources of outflows:
• Balance of budgetary appropriations flow by month (adjusted)
• Debt service and leases
• Payroll and Employee benefits

☑ Adjustment from previous reconciliation(s). Include explanation(s).
☑ Deficit result indicates short-term borrowing needed (or asset monetization).

Managing Cybersecurity as Government Personnel Go Remote

It’s important to consider the security and protection of your data as you transition your workforce to remote. Hackers see the current state of chaos during this time as an opportunity to step up their efforts. Even without the disruption of a pandemic, it’s not uncommon for organizations to have unforeseen gaps in their cybersecurity preparedness and planning.

Applying Forensics and Internal Controls for Governments

Forensics and internal controls are also key for governments navigating through this crisis. They can protect your organization by improving the quality of your information and providing consistent practices for employees. Internal controls come in different levels, or tiers, ranging from policies around credit card use to the separation of duties.

Preventative vs. Detective Controls
Preventative controls are put in place before the fact and deter or prevent unauthorized transactions from occurring. These include segregation of duties, proper authorization and physical safeguards. Detective controls are those which identify issues, like unauthorized transactions, after the fact. These must be performed continually to generate the “perception of detection.” They include independent checks and adequate documentation.

Forensics: Records to Review
Records should be accessed by an individual independent of the process being reviewed and/or records provided by a third party. Essential records to consider reviewing include:

• Bank statements with select canceled checks
• Credit card/p-card statements
• Point of sales records, if applicable
• Payroll system
• Accounting software

Be Proactive with Your Government
Governments are not immune from the impact of the COVID-19 pandemic. In the midst of all of the unknown, there’s much to consider and strategies to be proactive with your government. Understanding the impact of relief provisions, remote working situations and potential budgeting opportunities will help you strengthen your government during this time.