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Budgeting During the Return of Growth
By: Kevin Burke, City Manager, City of Flagstaff
ACMA Board Member

As the Great Recession continues to linger for yet another fiscal year, it's time to start thinking about recovery. Believe it or not, the hardest part is yet to come. Budgeting during a recovery can be pretty fierce.

In times of great growth, everyone is a winner in some capacity. They may complain that they did not get enough to meet the corresponding growth in service demands, but everyone was receiving additional resources to accomplish their mission. Everyone was a winner.

In the last three years, everyone was a loser. As Managers, Deputy Managers and budget personnel, we have had to cut everyone and everything to balance the budget. No one was happy about it, but internal personnel in particular understood the predicament. Some were better partners than others, but in the end, no one was left untouched.

The consensus of economists regarding the Arizona economy is that any recovery is going to be gradual. We are unlikely to see revenue growth much greater than inflation. For counties, the continued state shifting of their financial burdens and the two-year lag in property values will likely delay their recovery of revenue. For cities, we anticipate slight growth in local sales tax, building permits, and other fees, but the state raid on HURF revenues, the expiration of the state sales tax, and similar property tax sequence as counties will limit overall revenue growth. Despite this, I believe we will likely start seeing slight overall revenue increases. As managers of budgets, we must now pick winners and losers within our organization. Is your house in order for this exercise?

Department directors, employee/union leaders, and community activists (whether its soccer moms, public safety advocates, Friends of Librarians, or social service heroes) have not forgotten the cuts their favorite program took during the recession. When they hear revenues are returning, they will be back in force in our chambers looking for restoration of cuts. We have a great opportunity to ask ourselves, "Do we want to put it back the way it was?" When we entered this recession I told the employees of Flagstaff, this is not a "hold your breath and hope recession." In other words, if you go into this recession thinking, we are about to go down the roller coaster but we will just pop up at the same place on the other side, you will be disappointed. This recession is not a symmetrical "U." It's time to build a new, smaller ship that can be sustained going forward. Many managers across the state took advantage of the opportunity to restructure their organizations. However, there are inevitably pieces that need to be restored. We deferred facility maintenance, fleet replacement, infrastructure replacement. There has been little employee training in the past three years. Our service levels saw reductions, but the supporting mechanisms behind those services are hanging on by a thread. What gets restored first?

If you haven't already done so, consider developing, with the help of your budget team, leadership team and even employee associations, a fiscal policy priority list. Then look for buy-in from your Council or Board. Flagstaff undertook this exercise in October and November of 2010 and it proved a useful tool even as we treaded water developing the FY12 budget. Here are the first 10 priorities [edited to be less Flagstaff specific]:

  1. Preservation of FY2011 Service Levels [this is our new baseline]
    1. Address inflationary costs
    2. Backfill those services funded with one-time dollars
  2. Restore Employee Pay Cut
  3. Increase Compensation Average to 15% below market (use merit to fix those below 19% and Market Adjustments to move the whole scale)
  4. Restore Training Budget to 25% of FY2008 level
  5. Establish a Reimbursement Policy for Uniforms at no more than 50% of FY2008 level
  6. Restore Benefit cut of $X for Dependent Subsidy or Deferred Compensation
  7. Achieve 50% of Equipment (including Fire Engines), Infrastructure, and Facilities Funding & Custodial to 75% of designated funding level.
  8. Restore General Fund, Fund Balance to 15%
  9. Restore Overtime to 75% of FY2008 level
  10. Take measures to reduce increases in energy costs. Goal is less than 1% Increase/yr

You will notice that none of these address a service level increase. No restoration of library hours. No elimination of fire station brown outs. No resumption of daily street sweeping. If you don't get a commitment to take care of the back office before the line forms for restoration of service cuts, it will be politically impossible later in the debate. Moreover, you need to determine, what is the optimal funding level? For us, we started with the FY2008 budget and said, how close does that get to optimal funding for our new, smaller ship. In some cases, reaching 50% or 75% of that number would be acceptable and a pretty challenging goal. In other cases, the service had changed so significantly, a new goal needed to be set. Lastly, how will you treat rapid recovery in an enterprise fund versus lackluster recovery in the general fund? Will some employees get pay cuts restored or furloughs removed while others don't? Will travel and training resume for solid waste technicians but stall for planners? These are the decisions a conversation with your leadership team will help discover.

However you get ready, be ready for the recovery. It is likely to come in small increments or in uneven locations such as to make equity issues during the recession seem like child's play. Good luck!
Arizona City/County Management Association
1820 W. Washington Street, Phoenix, AZ 85007   •   Phone: (602) 258-5786   •   Fax: (602) 253-3874   •