The Shocks that Are Coming: Creating Fiscally Sustainable Communities

March 23, 2020

By Mark Funkhouser

President, Funkhouser & Associates

Former Publisher, Governing Magazine; former mayor of Kansas City, Mo., former auditor, Kansas City, Mo.

A fiscally sustainable community is one that is able to deliver services and meet its responsibilities to its residents during good times and bad. When the economy turns sour or disaster strikes, residents need more, not less, from their government, and a fiscally sustainable government has the financial strength to meet those needs.

Unfortunately, there are abundant signs that many of America’s local governments are fiscally fragile and would really struggle to do right by their residents when put to a serious test. Among those signs are the results of the annual survey of municipal finance directors conducted by the National League of Cities. The 2019 survey found that revenues were expected to  decline and that more than two-thirds of large-city finance directors expected a recession within the next two years.

Many states have fiscal monitoring systems for local government, and the reports of those systems corroborate the findings of the NLC surveys. For example, the New York state comptroller’s most recent report, issued in September 2019, found that “almost 23 percent (12 out of 53 cities scored) were designated in some level of fiscal stress, up from 14.5 percent (eight of 55 scored) designated in stress in FYE 2017.” Monitors in Ohio reported that “In 2017, there was a 33% increase of local governments in potential distress/fiscal caution.” And a report by the California state auditor released in October 2019 found that more than half of the state’s cities were at a moderate to high risk of experiencing fiscal distress.

First Steps to Stability

To get started on the path to fiscal sustainability, make sure that your government has in place all of the basic financial policies recommended by the Government Finance Officers Association (GFOA). These policies ought to be formally adopted by the governing body, and staff should be required to publicly report on them at least semiannually. For example, if the policy is to have an unrestricted fund balance of 16 percent of general operating revenue, then the staff should report the actual amount in comparison to the required amount.

Among the GFOA-recommended policies is the creation of a long-range fiscal plan, generally spanning at least 10 years, so an important early step is the development and review of that plan. That review, with various scenarios considered, will most likely identify real or potential fiscal challenges. Staff should develop and review with elected officials a broad-ranging set of alternative responses to each of those challenges. Working together, staff and elected officials also should develop a robust and authentic public-engagement process, aiming to deliberate with a large and demographically and geographically representative sample of residents. Getting the public’s buy-in is crucial in deciding how the community should respond to the various fiscal challenges on its radar. Honest conversations about money are also vital to building public trust in government.

Real Economic Development

There is growing evidence that the use of tax incentives to spur economic growth rarely works, but local government officials feel tremendous pressure to create jobs. Many elected leaders feel that announcing that a new business is coming to the community is one of the most powerful things they can do to demonstrate their value to the voters and get reelected. It takes courage, but there is an alternative path to spurring real economic growth that is backed by solid evidence. It won’t get you a lot of ribbon cuttings or positive press. It’s a more gradual, but also more sustainable path to building community prosperity. Here are key elements:

• Use a racial equity lens to adopt and implement public policies that increase racial inclusion in the workforce and in the economic life of the community. Research by the Urban Institute found that cities that have economies that are more inclusive of race and class are economically stronger than those that are not. Likewise, cities that are more racially integrated seem to be more fiscally resilient than cities that are more segregated. Groups like the Government Alliance on Race and Equity and the National League of Cities’ Race, Equity and Leadership initiative can provide guidance on how to create a more inclusive community.
• Promote gender equity by adopting policies that make it easier for women to enter and rise in the workforce. According to research by McKinsey & Company, every U.S. state and city could add at least 5 percent to their GDP by advancing the economic potential of women. Governments can institute policies like paid family leave, and they can model in their own organizations policies that promote gender equity.
• Adopt policies that welcome immigrants into the community and its economy. From 2006 to 2015, the 10 American cities that experienced the largest percentage increase in the immigrant share of the labor force saw their collective per-capita GDP increase by just over 4 percent on average, while the 10 cities with the smallest immigrant-share percentage increase had slightly negative per-capita GDP growth, according to research by the George W. Bush Presidential Center.
• Adopt policies that support employee ownership of businesses through cooperatives and employee stock ownership plans (ESOPs). A look at the data confirms the power of employee ownership. During the Great Recession, the average job loss for U.S. companies was 12 percent. For ESOP companies, it was only 2.5 percent. The National Center for Employee Ownership can provide guidance and information on best practices.