Little did anyone know while crafting our budgets last summer and fall what the first quarter of 2020 would bring. Our new reality consists of questions and uncertainty that can turn well-laid plans upside down.  The common question many are asking is “How should we proceed with planned spending this year and what should we consider for next year’s budget?”

It’s safe to say that school and business closures will result in revenue shortfalls. Although the extent and timing of the shortfalls are unknown, we need to develop a plan to absorb revenue loss. Declining revenue combined with public expectations is a difficult challenge to face. Avoid an initial knee-jerk reaction to cut broadly across departments or deplete fund reserves. The fluidity of the current situation and the unknown fall-out in the coming months or years begs a more managerial approach to financial decision making. 

First, consider the short-term. The suspension of late payment penalties for May tax bills will likely result in a June property tax settlement significantly lower than anticipated prior to the pandemic. Monthly cash flows will help you determine if temporary loans are necessary to bridge funding gaps.  Borrowing externally can take 30 days or more, so determine sooner rather than later if cash flow deficits are eminent. 

Next, focus on the long-term with an analysis of existing strategic or capital spending plans. Include departments and stakeholders in the process and reevaluate and refine what is most important to your community. Rank priorities and examine the trade-offs, both positive and negative, of delaying action. Look not only at the near-term implications of delaying a priority, but also the long-term effects. For example, deferring critical maintenance projects may result in higher costs in the long run. Or, choosing to deplete reserves or rainy day funds this year could leave nothing for next year to cover continued revenue shortfalls.

 When developing a budget strategy consider constraints, context and consequences (the three c’s):

  • Constraints – Are budgeted disbursements equal to receipts to avoid deficit spending? Are there legal requirements or restrictions on uses for certain funds? Do you have policies or ordinances that require certain reserve levels? 
  • Context – What is the historical level of importance of a project? Why is it still important? What are the ramifications to the community if a project is suspended?  What relevant information is available to make decisions such as revised revenue estimates or guidance from State agencies?
  • Consequences – What will happen if an issue is not addressed or a position is not funded? Will it cost more to fix in the future and will a cascade effect bring about other future spending in related areas?            

The average length of a recession is ten to fifteen months.  Be proactive to get ahead of revenue shortfalls. Avoid drastic changes in the short-term, identify potential cash flow deficits over the upcoming months,  and develop a long-term financial plan.  Strive to make decisions to create a softer landing with a focus on future sustainability.

If you need assistance with cash flows analysis or long-term financial planning, please contact our team.

Baker Tilly Municipal Advisors, LLC is a registered municipal advisor and controlled subsidiary of Baker Tilly Advisory Group, LP. Baker Tilly Advisory Group, LP and Baker Tilly US, LLP, trading as Baker Tilly, operate under an alternative practice structure and are members of the global network of Baker Tilly International Ltd., the members of which are separate and independent legal entities. Baker Tilly US, LLP is a licensed CPA firm and provides assurance services to its clients. Baker Tilly Advisory Group, LP and its subsidiary entities provide tax and consulting services to their clients and are not licensed CPA firms. ©2024 Baker Tilly Municipal Advisors, LLC

Paige E. Sansone
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