A Guide to Cost Containment and Cash Management in the Wake of COVID-19The COVID-19 fiscal crisis for state and local governments has brought a renewed focus on the importance of budgeting and cash flow modeling. Governments nationally are already initiating furloughs, layoffs and scaling back operations.
“The COVID-19 pandemic is set to inflict an unprecedented amount of stress on state governments throughout the country,” said an April 14 Moody’s Analytics report.
In the best case, tax revenue shortfalls are estimated at a range of 5.6% to 65.9%, according to Moody’s Analytics. At the worst, these range from 8.2% to 79.6% through fiscal year 2021. Overall shortfalls through 2022 are estimated in the same report to be at least $450 billion.
These shortfalls coupled with increased outflows due to COVID-19 costs necessitate at least monthly cash flow modeling for many governments. According to Brookings, “as the crisis unfolds, the impact on cities’ bottom line will be driven not by overall economic conditions, but specifically the parts of the economy where revenue is generated.”
Here are some of the common questions on the state and local government impact of COVID-19.
The Outlook for State and Local Governments
While different projections vary, state and local governments will be directly impacted by travel restrictions, jobless rate, GDP, potential recession models and more. Other factors include the increased cost of Medicaid due to unemployment, a rise in borrowing and a cost shift to counties and cities.
For many state and local governments, there will be a substantial estimated shortfall between potential needs and useable resources provided by various relief provisions. This will result in fiscal shock.
What is fiscal shock?
Revenue shortfalls + Increased spending for public health – reserves = fiscal shock
City Governments
City governments will feel a substantial impact, though timing depends on a number of factors. One of these key indicators is regional employment in high-risk industries, including:
Higher risk cities will be those who have greater than a 15% employment share in those industries and a greater than 25% share in variable general fund revenues such as non-property tax.
Special Districts
Special districts, such as water/sewer, fire protection or parks and recreation, will also see a direct impact and need to reassess revenues. Below are some key areas to consider:
Water/Sewer Utilities Revenues |
---|
Lost water shut off fees, late fees, interest, penalties, reconnection fees |
Increasing bad debt expense |
Lower water consumption from commercial users |
Possible utility bill forgiveness |
Anticipation of lower future property tax revenue |
Loss of developer impact fees and growth of assessed valuation |
Lower interest/investment income |
Fire Protection District Revenues |
---|
Loss of property tax revenues in the future |
Loss of benefits assessments |
Anticipation of lower future property tax revenue |
Loss of development fees/mitigation fees |
Potential loss of reimbursement fees |
Potential loss of grant funding due to market disruptions |
Loss of interest and investment income |
Parks and Recreation/Libraries/Cemetery/Resource Conservation Revenues |
---|
Anticipation of lower future property tax revenue |
Loss of developer impact fees and growth of assessed valuation due to less development |
Loss of ancillary revenues due to shut down |
Potential loss of grant funding |
Loss of interest and investment income |
Other |
---|
Lower development revenue for all |
Transit/parking district loss of revenues |
Potential loss of donations and sponsorships |
Tips on Budgeting and Cash Flow Through a Crisis
All of this points to a critical situation for state and local governments. COVID-19 has placed many organizations in a unique and potentially perilous position. It will be essential to begin planning for a potential crisis and modeling how situations of varying severity will influence your bottom line.
Here are some items to consider:
Prioritize expenses
Take a critical look at all expenses within your government. Prioritize each of them into one of four categories.
For those deemed essential, important and urgent, ensure you have enough reserves to cover these expenses for at least the next six months to a year. For those deemed important but not urgent, have a conversation about how to possibly delay these expenses. When it comes to discretionary needs and non-obligatory/non-urgent needs, it’s time to have a conversation about cuts.
As you review expenses, remember to consider new expenses caused by the COVID-19 pandemic. It’s important to consider these when budgeting for the future.
Direct costs include:
Indirect costs include:
Think long-term
COVID-19 has propelled many organizations into critical conversations without much warning. While prioritizing your expenses is a vital component right now, it can also be part of your long-term strategy.
Ideally, we suggest governments prioritize their expenses each year during the budgeting process. Sometimes, this can get complicated and you may need a neutral third party to facilitate these discussions surrounding expenses.
Expense Reductions
Many organizations are considering ways to reduce expenses and cut operating spending during this time.
For governments, there are two specific buckets to pay attention to:
Cash Flow Forecasting
In the short-term, cash flow forecasting will be essential. Governments can begin by preparing the upcoming budget for the next fiscal year. From there, add nine more years’ worth of projections, including revenues and expenses. Use an assumptions page so you can model a variety of scenarios.
Now is also a great time to create a reserve policy and use this in your cash flow forecasting.
The Importance of Preparation for State and Local Governments
In the wake of reduced revenues and potential future losses, budgeting and cash flow forecasting will be critical. Even if your government was not fully prepared prior to this, you can still take critical steps to reduce expenses and plan to move forward.
We can help you budget through a crisis.
Stay current on your favorite topics
Learn More
See what more we can bring to organizations just like yours.
GovernmentTake a deeper dive into this Insight’s subject matter.
State & Local Tax (SALT)