- Corporate Finance
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- Turnaround and Restructuring
Seven Michigan communities have been placed in state receivership since 2000. This rescue supersedes local control and strips officials of financial authority and sometimes their salaries. Local government officials should know that Department of Treasury officials are less likely to intervene when they see that municipalities have engaged experienced restructuring consultants to prepare a plausible deficit reduction plan. Bringing in business professionals to help craft a strategy buys time and credibility by showing serious intent to address problems.
Traditional One-Year Budgets
When preparing a budget, many of the standard costs can be projected with some level of accuracy, such as: payroll; pension contributions; health care; OPEB; capital spending; and debt service payments. Property tax revenues can also be projected with some level of certainty. By filling in the skeleton of the budget, and layering in assumptions for items such as revenue sharing, municipalities can identify what issues are coming down the road and give their administrators time to react. However, using the traditional one-year budget does not give adequate time to plan and react to problems, because by the time the problem is identified in a one-year budget, it’s too late for anything but the most drastic of slash and burn solutions to work.
Corporate Best Practices
Corporate-style discipline could be just what Michigan municipalities need as they tackle some of the same fiscal challenges confronting businesses. Fluctuating revenues, climbing benefit costs, and aging infrastructure strain public and private sector budget alike. As reductions in state aid and property tax payments create added shortfalls, progressive leaders adapt best practices from corporate counterparts.
GASB Proposes Five-Year Budgets for Municipalities
An overriding goal is to apply business standards to what is actually, a municipal business. One strategic change is moving from single-year budgets to three-year rolling budget cycles, as Oakland County has done for years in Michigan. Twenty states already adopt two-year budgets and a new proposal from the Government Accounting Standards Board would actually require state and local governments to prepare a five-year forecast as part of their annual financial reporting. There has been quite a bit of resistance in the municipal world to multi-year budgeting due to the uncertainty in future years’ tax revenue, state and federal revenue sharing, and other projected items. All true, and true in the corporate world as well. But objecting to the uncertainty backed into the projection misses the point of having a multi-year budget. Given the long-term structural nature of costs like retiree benefits and bond debt, only through a multi-year forecast can problems be clearly analyzed and solutions developed.
Some municipalities are already using multi-year budgeting. For example, the city of Birmingham prepares a five-year financial forecast every year and, per the statement introducing the forecast, does so “to evaluate the ongoing financial condition of the city” and have “a rational basis for identifying areas of greatest concern and devising fiscal strategy.”
Multi-year budgets, a best practice in large businesses, bring important benefits:
Bring in Objective Outsiders
Advisers with backgrounds in accounting, management, and finance look for data gaps, unrealistic assumptions, and inefficient practices. Then they suggest proven strategies to avoid or minimize service cuts, layoffs, and more dire consequences from chronic crises.
Before suggesting ways to maintain or regain financial steadiness, consultants look at accounting procedures, purchasing systems, lease agreements, and surplus assets. They investigate the validity of assumptions about retirement patterns, retiree longevity, investment returns, and other critical projections. This fiscal reality check also can involve “what if” analysis to forecast the impact of declining property tax revenues or rising benefit costs.
As a temporary part of the financial management team, objective outsiders can explore sensitive areas that may have been tiptoed around – such as wage and benefit adjustments, purchasing procedures, privatization, consolidating departments, and sharing services. They can be the voice behind recommendations that may be politically unpopular. Research driven conclusions and proven solutions help officials earn public confidence and employee support. Most importantly, savings and newfound cash flow typically exceed fees for professionals’ limited-term engagements. Investing in consultants to avert financial catastrophe is similar to insurance protection against losses from other calamities.
Private sector consultants bring a lifeline of credibility, turnaround experience, and staff development. The return on investment continues for decades and is measured in stability and public respect.