Local governments develop budgets in order to monitor progress toward their goals, help control spending, and predict cash flow. The central challenge that municipal officials face is mapping out the future, something that can never be done with perfect precision. The ever changing fiscal challenges that local governments continue to encounter, make developing effective budgets both more difficult and more important.
Governmental entities continue to face tough fiscal challenges including economic stagnancy, rising costs and underfunded state mandates resulting in expenses far outpacing revenues. Rising mandate costs from the federal and state government combined with an unwillingness to grant other revenue options continue to frustrate municipal officials. As the fiscal crisis continues to impact local government, challenges that are directly linked to this crisis can be identified. These challenges include:
1. The difficulty of balancing local budget realities with decreased revenues, increased service demands and the costs of unfunded state and federal mandates.
2. The dramatic cost of infrastructure and associated costs.
3. The ongoing structural fiscal problems related to pensions
Local revenue decreases caused by decreases in sales, income and real estate tax revenue have strained many local government budgets. In turn, local governments have been forced to closely examine how they spend money on programs and services in order to best meet constituent needs and interests. For example, demands for human services are increasing, while property tax revenues in numerous communities have remained stagnant and funding from the state for these services has decreased. In addition to decreases in revenue and increases in service demands, local governments must adhere to numerous state and federal requirements that are not necessarily accompanied by funds from the state or the federal government.
As revenues decrease at the state and local levels, the quality and sustainability of infrastructure, such as roads, bridges, water, and sewage systems are at stake. Due to the depletion of federal funding and the federal government’s focus on the national deficit and debt, it has become increasingly possible that states will bear more responsibility in the future for highway and bridge infrastructure maintenance. The ability to maintain local roads may be drastically impacted due to a decrease in local revenues. Local public works maintenance initiatives that could be impacted include, but are not limited to, paving, resurfacing, and snow removal. In addition to roads and bridges, there is also substantial concern about water and sewage issues. Local governments are often capable of designing and operating new assets, but many fall short in maintaining older assets. Most infrastructure is also underground and out of sight and suffers from deferred maintenance that is coupled with public distaste for rate increases.
Recent strains on state and local government finances have focused attention on public employee pensions. Pensions are already burdening some governments’ budgets, but there is considerable variation based on government type as well as employees covered (e.g., teachers, police, fire, or general employees) and jurisdiction age, population, and employment trends. For most of the past decade, state and local pensions were considered reasonably well funded. However, the recent financial crisis was hard on public pensions, which are on average 60 percent invested in corporate equities. Key issues going forward will be determining how local government employee pension costs affect current municipal cash flows and whether pension funding status is capitalized in local property values. Using property taxes to pay off pension legacy costs thus reduces local income and may compromise voter willingness to pay for services even through the cost of providing these services has not changed.
More than anything, what’s needed to guide local governments in the right direction, is a strategy – not a number of short term tactics. A strategic approach must focus on strategic outcomes. Job creation and economic growth must be the top priority outcomes. Without private sector business growth, the government’s ability to deliver the initiatives and services that many citizens have come to rely on is severely hampered.
A strategic approach would require governmental leaders to meticulously assess the value of all governmental activities and to assign priorities directly relating to a well-conceived strategic plan. Also, it would force lawmakers to fully distinguish the difference between funding operational programs and investing government resources in ways that directly nurture economic growth over the long-term. In short, strategic planning requires tough long-term prioritizing, and matching limited, valuable resources to the priorities.