Responding to COVID-19: A Guide for City Budgets

The Bloomberg Harvard City Leadership Initiative is collaborating with Bloomberg Philanthropies’ Coronavirus Local Response Initiative to support mayors as they manage COVID-19. This article, advice for city leaders, covers key points from session eight of the Coronavirus Local Response Initiative, drawing on the work of Linda Bilmes and Jorrit de Jong.

A PERFECT STORM

This pandemic has plunged your local economy and budget planning processes into a sea of uncertainty. Needs — and expenditures — are rising, revenues are plummeting, and a liquidity crisis looms. Budget shortfalls are a certainty, but their relative size and severity are unknown. The lack of coordination at the federal level has left cities and states to chart their own courses, and the patchwork approach only exacerbates the uncertainty. The CBO is predicting budget shortfalls for states twice as high as they were following the 2008 financial crisis. States may not only cut aid to local governments but also impose additional charges and rules.

Many of the usual tools for raising revenues (e.g., increasing fees for parking, services, or utilities) are unusable for reasons both practical and humanitarian, and uncertainty is roiling the municipal bond market. It looks unlikely that any further stimulus will be structured in a way that offers much help to local government. How can you produce a budget that responds to all that has changed, is changing, and will continue to change? How can you make informed trade-offs? What can you do in your role to provide stability amid the uncertainty?

PHASE 1: RESPOND

It is not enough right now to simply revise your budget; you must reimagine it. This means questioning all your assumptions, giving serious thought to worst-case scenarios, and making adjustments to your operating and capital budgets as you learn more from residents, businesses, and other levels of government. Begin with a frank assessment of your situation:

• What are your short-term revenue losses?
• What are your short-term expenditure increases?
• Who in your community is suffering the most, and how can you provide relief?

Next, identify critical tasks:

• Create a team to coordinate budget-related tasks and manage hard decisions.
• Identify urgent cash shortages.
• Organize supports for high-priority sectors and underserved groups.
• Communicate your priorities, decisions, and plans clearly.

To cut your budget strategically, in a way that is aligned with your priorities, embrace activity-based budgeting. Think about the outcomes you want, the activities you think will produce them, and budget for those activities. Resist across-the-board cuts. Departments may not share your priorities, or may slash the line item guaranteed to turn out the public in defense of their budget. Ask them to break down their budget by activities (for most departments, these are the tasks that involve direct contact with clients or customers), then:

• Suspend ongoing activities that are not making a clear contribution to your strategic priorities.
• Prioritize essential activities and eliminate or scale back those that are lower priority.
• Cut overhead costs aggressively.
• Look for opportunities for productivity gains.

Ask yourself:

• Are you budgeting appropriately for new and emerging essential activities during the crisis?
• Are there any possible new sources of revenue?
• Have you reviewed (and renegotiated) your contracts?

On the capital side, examine every item with the same rigor you bring to operations — every project and every lease in your portfolio. Are there opportunities for refinancing debt or extending borrowing capacity?

To produce a budget, plan for two scenarios: your best guess about what will happen based on what you know right now and your worst-case scenario. For each of these, think carefully and creatively about costs and revenues. Build both version of the budget in a way that allows you to update, revise, and recombine them on at least a quarterly basis. Your budget is based on the information you have, and information is changing fast.

Use microsamples for forecasting purposes: take a small sample of taxpayers and use surveys or focus groups to understand their needs, priorities, behaviors, and thinking around issues that will affect your bottom line. (This is how the CBO forecasts the effects of new changes in tax codes.) Use what you learn as a rough indicator, and incorporate it into your thinking and planning.

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About the Bloomberg Harvard City Leadership Initiative

The Bloomberg Harvard City Leadership Initiative is a collaboration among Harvard Kennedy School, Harvard Business School, and Bloomberg Philanthropies. Its mission is to inspire and strengthen city leaders, as well as equip them with the tools to lead high-performing, innovative cities. Learn more on the Initiative’s website.