The importance of smart spending cuts

The Great Recession has hit local governments hard. In fact, according to the National League of Cities and the results of their annual City Fiscal Conditions survey, between 2009 and 2013, city finance officers reported annual decreases in their municipal workforce. What’s more, they indicated that revenue and spending trends pointed toward a continued weak financial recovery. To cope with increasingly tight finances, government entities across the nation continue employing both targeted and across-the-board spending cuts. Though often necessary to avoid insolvency, it is important to examine how budget cuts affect government operations.

A recent study by the Center for American Progress examined the impact of budget cuts on four federal government departments. Specifically, the study concentrated on sectors of the federal budget where spending cuts resulted in increased deficits, including: the Internal Revenue Service (IRS), inspectors general, program integrity for major healthcare and disability programs, and support agencies to the legislative branch. The findings concluded that across-the-board spending cuts could actually increase waste, fraud, and abuse.

In all, collective budget cuts of $6.3 billion in these sectors from fiscal year 2011 through fiscal year 2014 resulted in at least a $27.2 billion increase in waste, fraud, and abuse. While the study conducted by the Center for American Progress focused on federal government departments, there are also meaningful interpretations for state and local government entities considering the impact of budget cuts on their operations. Baker Tilly state and local government consultants have found entities nationwide reducing staff and applying broad spending cuts, similar to actions taken at the national level in recent years. While many entities need to decrease budgets, reduce staffing, and eliminate vacant positions just to maintain solvency, these types of broad cuts may be shortsighted and have unintended consequences.

Real-world examples

Following the implementation of broad spending cuts, Baker Tilly consultants have witnessed state and local government entities struggle with various functions like internal controls management, procurement requirements, meeting three-way matching guidelines, revenue collection, and investigating fraud and abuse complaints. The following are two real-world examples where state and local government entities experienced quantifiable, negative impacts on their organizations after applying broad spending cuts:

  • Real-world example one: A large municipal entity reduced staff in its revenue collection department, but did not effectively reallocate duties to other staff members. The result was a more than ten percent decline in collection revenues.
  • Real-world example two: One organization decentralized its purchasing function, allowing for lighter staffing in the procurement office, but did not fully appreciate the significance of shifting this technical responsibility to non-technical staff. In the end, the entity needed to repay $2 million in disallowed purchases after a federal program audit.

Mitigating spending cut risks

While the mantra of state and local governments throughout the country has been doing more with less, governments continue to face serious financial challenges that require making difficult decisions. As highlighted in the Center for American Progress study and in the two aforementioned experiences shared by Baker Tilly state and local government consultants, budget reductions not strategically applied may cause more harm than good. To help mitigate some of these risks, it is best to avoid across-the-board cuts. If you need to eliminate positions, look beyond simple vacancy and consider whether the position is mission critical or mission vacant; and, when reductions are necessary, develop a comprehensive plan to reallocate duties.

For more information on this topic, or to learn how Baker Tilly state and local government specialists can help, contact our team.