The fallout from the national economy and the state budget crisis is hammering local government finances. Can cities avoid the feast-or famine cycle that entails expansive spending during good years and then, during bad years, scrambling to make cuts or find more revenue?

Despite the unprecedented convergence of higher gas prices, the housing market collapse and the banking system meltdown, there are actions that local governments can take to partially steel themselves against future inevitable economic declines.

1. Build and Maintain Adequate Reserves
For many years, local governments were critisized for maintaining what were thought to be large general fund reserves (anything larger than five percent of expenditures). Yet, reserves play a significant role in maintaining financial stability. The current fiscal stress shows that a reserve equivalent to six months of general fund operating expenditures should be a minimum. Agencies must be vigilant in resisting raids on these reserves and educate the public on the vital purpose of these monies.

2. Distinguish Recurring from Non-Recurring Funds
It is absolutely critical that a local government identify which revenues are recurring (can be counted on each year for funding programs) and those that are non-recurring (one-time). As an example, the property tax, which can be counted on year after year, is recurring revenue. Most federal grants are non-recurring revenues which typically sunset after a few years. Other non-recurring revenues are monies derived from unusual growth such as building and engineering permits from a new housing tract. Building booms can create huge spikes in development related fees. These fees should not be used to finance ongoing expenses such as police and fire personnel. Only recurring revenues should be used to fund recurring expenditures. Non-recurring revenues should be used to build reserves, pay down debt, improve the infrastructure and accumulated to replace ageing buildings and facilities.

3. Require a Structurally Balanced Budget
In the minds of many officials, a budget is considered balanced if revenues exceed expenditures regardless of whether the revenues are recurring or non-recurring. We now know that cities can wind up with a real fiscal mess when guided by this mindset. At some point one-time monies run out and the agency is left with a huge general fund deficit. Local governments need to strive for a structurally balanced budget that requires recurring revenues equaling or exceeding recurring expenditures. If cities cannot achieve structural balance they need to publicly identify how much is supported by one-time money and how they intend to bring the budget into structural balance.

4. Prepare Long Range Financial Operating Plans
Local government operating budgets cover a one or two year period. Often, they do not adequately reveal the information needed to evaluate the agency's long-term financial condition. A budget can be balanced during the good times but be out of balance twelve months from now. Long-term financial plans identify critical items often left out of annual budgets such as deferred costs, impacts of grants ending, future costs of salary and benefit agreements and post retirement benefits. A long-range plan serves as an early warning system and allows the city to take corrective actions before the problems become unmanageable.

5. Staff at the Minimum
Government work flow usually follows a peaks and valley cycle. Some agencies staff for the peaks. A better approach is to staff for the minimum (valley) and use contracted services to meet peak demands.

6. Identify the True Cost of Employee Salary and Benefit Packages
Public employee unions have been very successful at negotiating compensation packages during the past decade. Employee salaries and benefits can consume from seventy to ninety percent of a city's budget. Salaries are set based upon what the competition is paying. The competition usually consists of surrounding local governments that recruit in the same market for the same skills and experience. Too often, this leads to escalating salaries and benefits. While this process will not be changed easily, cities can do a better job of costing the full impact of both direct and indirect expenses before approving of negotiated salary packages. Public employee benefit costs have been creeping upward and in some cases exceed over sixty percent of salary costs. Cities should commission total compensation studies that show the total cost of an employee compensation package rather than just the salary portion.

It is still open to question whether many cities can afford the retirement and post retirement health benefits granted to employees. While not popular with unions, more cities may have to resort to tiered benefit structures with newer employees receiving scaled down health and retirement benefits.

7. Protect Agency Assets
Cities spend millions of dollars acquiring and developing capital assets-- buildings, grounds, sewers, utilities, water facilities and streets. Unfortunately, during periods of fiscal stress, infrastructure maintenance dollars are the first to be cut or diverted in favor of other more visible programs.

The result of this diversion is not seen immediately. In some cases, it takes years before the problems begin to appear, but eventually they show up in very noticeable ways. Neglect of road maintenance leads to street deterioration. A simple asphalt overlay is not adequate anymore. The street needs to be totally rebuilt at a huge cost. Or a city defers a water main replacement program. Shortly thereafter water mains start bursting, causing thousands of dollars of damage and creating safety hazards. The million dollar lawsuits soon follow. Good budgeting requires that a percentage of current revenues always be devoted to preserving an agency's investment in its capital assets. Failing to protect assets not only costs more in the future, it exacerbates community deterioration.

8. Avoid Grant Pitfalls
During periods of economic distress the federal and state governments may offer grants. Paradoxically, these grants can undermine fiscal discipline. Approximately 14 years ago the federal government offered cities and counties a deal that could not be refused, one hundred thousand federally funded police officers to fight crime through the Community -Oriented Policing Program (COPs). This program came with a huge balloon payment. Recipient agencies were expected to participate in the funding of these officers by increasing their contribution each year until they were stuck with the entire cost after the fourth year. Many agencies found that they could not afford the additional officers once the grants ran their course. As one police chief lamented: “I truly don't believe that many cities, including ours, thought about how we were ever going to be able to afford the additional police officers after the grants ran out.” Before pursuing any grants, a local government should publicly review its plan for paying for the new program once grant funding ceases.

The above strategies should be formalized, adopted by the governing body and included as fiscal policies in the annual budget. During budget review, the City Manager or Mayor should report upon these policies indicating whether or not they have been complied with and if not, when and how compliance will be achieved.

Cities are most vulnerable when times are good. This is when the big-ticket items are usually approved. Cities are more apt to approve an expanded program, bend to generous employee compensation demands or embark upon costly capital projects. Perhaps the most critical period is when the economy starts to improve. At the first sign of recovery, elected officials are barraged with pent up demands from powerful community groups, residents and employee unions. Officials tend to forget that the good times will not last and the years of plenty are followed by economic downswings. While constant vigilance is important at all times, it is especially important at this point. Before committing to a new program or increased expenditure, an agency needs to identify the total cost impacts (direct and indirect) of decisions and whether the agency can really afford them today and in the future.