Fiscal First Aid: Recovering from Financial Distress

The public safety concerns that the COVID pandemic raises are top of mind for local government officials, and with good reason. Another consequence of the pandemic is the financial consequence for local governments. Unlike recessions, which can be thought of as a steep hill downward, COVID, thus far, seems more like going off a cliff. 

Given the prolonged interruption to normal economic activity that many public health and economic experts expect, an extended economic recession seems likely even when the threat to public health subsides.  As leaders in Washington, D.C. work to develop strategies to stimulate the economy, provide resources to help counties and other local governments through this difficult time and limit the lasting damage from this recession, all local governments must also take action to address what they can do at a local level.

To help local government deal with the tenuous financial situation, GFOA has provided a program called Fiscal First Aid: Recovering from Financial Distress. This program was actually created more than 10 years ago to help local governments deal with the 2008 Great Recession. It was extremely popular at the time and we have even heard from a number of veteran GFOA members that they have dusted off their copies of the Fiscal First Aid material and are using it now. As counties work to deal with the public health crisis, they must also take action to deal with the economic and fiscal crisis that is shaping up from loss in revenue and increase in expenditures.

What is financial recovery and fiscal first aid?

Financial recovery is the process of recognizing, arresting and reversing a pattern of financial decline. Fiscal first aid refers to retrenchment tactics that can be used to stabilize financial condition. This stability builds stakeholder confidence in the recovery process and buys time to develop and enact more comprehensive financial recovery strategies.

There are three essential stages in the recovery model.

Bridging: In the bridging stage, the government must get through the immediate crisis and create breathing room to make more sustainable reforms. Bridging includes:

• Recognizing that financial distress exists and convincing a critical mass of stakeholders of the same;
• Diagnosing the causes of distress;
• Applying fiscal first aid tactics to stabilize the situation; and
• Developing a recovery plan.

Reform: The government carries out the short-term recovery plan and develops and implements long-term therapies in the reform stage. Reform includes:

• Developing long-term financial strategies and
• Starting a formal long-term financial planning process.

Transform: In the Transform Stage, the government institutionalizes long-term financial planning and becomes more resistant to future financial distress and adaptable to a changing environment.

What is the GFOA financial recovery web site?

The site at www.gfoa.org/fiscal-first-aid contains the following:

A 12-step process for financial recovery: The web site breaks down the three stages of recovery described above into 12 detailed steps.

Catalog of fiscal first aid techniques: The site highlights the most and least recommended techniques for providing short-term relief for financial distress.

Catalog of long-term treatments: A number of strategies to improve financial condition over the long term are discussed.

Diagnostic model: A full, ready-to-use diagnostic model is available to help find causes of financial distress that you can address.

What should you do right now?

Local governments are now in the bridging phase that we described earlier. Below are the most important parts of the bridging phase to get started with.

Get your mind around the basics of the problem. Of course, no one can predict exactly what is going to happen to your revenues and expenditures, but there are some questions you can answer now, such as:

• Which revenues are most vulnerable and least vulnerable? For example, property taxes will not be hit as quickly or as hard as a hotel tax or sales tax. Understanding the relative vulnerability of your major sources helps you understand your overall risk.
• What services are critical for the public safety response and which are not? This gives you an idea of where you might expect increased costs and where costs can be cut.

Form a team. Dealing the financial downturn will likely require some far-reaching strategies. Having a team that can help think these through is critical for the following reasons:

•  You will need support to get the strategies done.
•  You will need help thinking through potentially unforeseen and unintended consequences of cost cutting measures.

Slow the flow of cash out of your doors. Cash is king during a financial crisis. Local governments need to make sure they have enough cash on hand for essential services. Thus, one of the first things local governments should do is slow the flow of cash out the door. There are a number of tried-and-true retrenchment techniques that can improve cash flow during difficult times. You can get a catalogue of these techniques at www.gfoa.org/fiscal-first-aid.

Develop a culture of frugality and make smart choices about future investment. In a situation of severe financial distress, everyone needs to understand that every dollar counts. Applying some of the retrenchment techniques described at www.gfoa.org/fiscal-first-aid can help, but it is also important that the leaders of the recovery process apply frugality to themselves and their own immediate staff.  If the leaders and/or their closest colleagues are spared what everyone else is asked to endure, then the recovery process loses credibility.

Leaders must also be ready to prioritize spending using data on what will be most effective and cut where necessary so that the county can still continue to fund essential projects that both deal with the current crisis and allow the organization to emerge without taking too many steps backwards. Even in times of recession, few governments benefit from entire across the board spending freezes or indiscriminate cuts to all new projects. Governments must continue to invest in critical infrastructure that will support recovery.

Develop a cash flow analysis. Cash flow is a measure of the difference between cash sources and uses and is a key indicator of an organization’s fiscal health. Cash flow analysis takes on renewed importance in a financial crisis. Cash is critical for short-term operations. It pays the salaries and buys the equipment that produces public services. A balance sheet may carry plenty of assets, but without cash a government is effectively bankrupt. Governments in a financial crisis should develop cash flow models that allow the organization to pinpoint its current cash position and provide insight into future position. GFOA is working on instructional videos for developing your own cash flow analysis. It will be posted on www.gfoa.org/fiscal-first-aid when it is ready.

Conclusion

The financial downturn caused by COVID is concerning and local governments have not had to contend with a financial downturn for over 10 years. For some local governments, this may mean there is no institutional memory on how to respond. Fortunately, the GFOA fiscal first aid model has preserved and updated that institutional memory for the current crisis.

GFOA is working to update resources so they are most relevant for the current unprecedented environment. We will post resources as they become available. For more information please visit www.gfoa.org/fiscal-first-aid. For questions, please contact research@gfoa.org.