Budgeting and Cash Flow Management for Your Government in a Time of Crisis

The 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.” 

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.

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:

• Mining
• Oil & gas
• Transportation (airline)
• Employment services
• Travel services and leisure
• Hospitality

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:

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.

1. Essential needs, important, urgent
2. Important but not urgent
3. Discretionary needs
4. Non-obligatory/non-urgent needs

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:

• Cleaning and health: Sanitizing, PPE and other equipment
• Technology: Website changes, laptops, remote services
• Accounting and people: Payroll and benefits costs consultants, rising pension costs and investment losses

Indirect costs include:

• Payment of salaries while employees are not working

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:

1. Limit discretionary/non-essential spending:
   • Defer maintenance and capital project spending cuts
   • Training/travel cuts
   • Nonessentials consultants
   • Delay equipment/software upgrades
   • Discontinue nonessential association memberships
   • Conservation brochures and materials cuts
   • Office maintenance and replacements delays
   • Supplier negotiations
2. Personnel and benefit reductions:
   • Hiring freeze
   • Furloughs
   • Layoffs
   • Reduction or elimination of COLA
   • Suspension of vacation and sick cash outs
   • Elimination or freeze of some benefits, such as 401k/457 matches
   • Consolidation of agencies

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.