Historically, local government budgets have followed a somewhat predictable up and down cycle. For the last several decades, municipalities have learned to effectively manage these up and down gyrations. Expenditure reductions and modest tax increases have allowed agencies to adapt during these rocky periods since swings have been limited and the overall trend has been upward.

This time, the trend is different and many governments have helplessly witnessed an unprecedented crumbling of their revenue base. While it is not clear whether the cycle is at or near the bottom, it is apparent that this is perhaps the most devastating plunge since the great depression.

While it's hard to believe, the initial indicators of recovery will soon emerge. Property tax declines will level off, building permits issuance will resume and retail sales will begin an upswing.

Shortly thereafter, tremendous pressures will be exerted to restore spending to the old levels. Elected officials will be bombarded by pleas for expenditure restoration by community groups, seniors, businesses and employee unions. Officials need to resist these pleas while taking steps to buttress their agency's fiscal infrastructure rather than resorting to old spending patterns.

Any of the following suggested measures will undoubtedly make officials temporarily unpopular. However, these steps will help create a fiscal infrastructure that will allow your agency to more adequately face the next inevitable downturn.

1. Increase Your General Fund Unreserved Balance
Engineers like to build flood control facilities for the inevitable hundred-year storm. Some people call it overbuilding until the tempest occurs. So too with General Fund, fund balance. The Government Finance Officers Association (GFOA) recommends an unreserved fund balance equivalent to 8 to 17 percent of regular general fund operating expenditures (depending upon agency size and other factors). Recognize that this minimum level was recommended prior to the latest meltdown. Agencies need to assess how much in fund balance they used during these last few years trying to maintain a balanced budget. Based upon the extremity of the problems cities faced, a minimum unreserved General Fund Balance equivalent to six months of operating expenditures or higher will not be uncommon.

2. Distinguish Recurring from Non-Recurring Funds
It is absolutely critical that a local government identify which General Fund 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. Close the General Fund Structural Balance Gap
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. Many cities created structurally unbalanced budgets by using one-time measures such as furloughs, under funding of equipment replacement funds, borrowings from other funds and federal and state grants, to get through the recession. Local governments should use any increased General Fund revenues to replace these stopgap measures before restoring spending to old levels.

4. 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 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.

5. 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.

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. 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.