There must be a better way.
There is something wrong with the city’s budget process. The mayor provides the council with a yearly forecast of revenues and expenditures. This is done several months before the budget process. The next two fiscal years are also included. The forecast helps determine how much money is available from revenues such as property and sales taxes to provide city services. Expenditures have exceeded revenue in the current year and often for the next two years, resulting in a deficit.
Economic information is used in the forecast, such as the consumer price index, gross domestic product and labor statistics. For example, the city purchases commodities such as salt and asphalt. The cost of salting roads in the winter and fixing potholes is more expensive when there is inflation. If unemployment is high, fewer people will be dining out and shopping. This leads to lower sales taxes.
The forecast also includes direct costs and revenues. This can include personnel needed for new or expanded services. Cultural events and trends in tourism may increase revenues.
Projecting out two years enables the city to anticipate future needs so it can plan accordingly. However, it is hard to predict future conditions with accuracy. Unanticipated events can occur, such as the 2008 recession and COVID-19. The city accounts for possibilities using an optimistic, base case and a pessimistic scenario.
Sadly, the forecast for the end of 2024 indicates a deficit of $223 million. As the comedian Lewis Black would say, “And that is not the bad news.” The 2025 forecast projects a deficit of close to $1 billion.
These are not just numbers; they are indicators of possible human suffering. As I write, the city and the mayor are debating over which taxes should be increased or services should be cut to close the gap. Business failures, homes being foreclosed because of an unaffordable tax burden, vehicles being damaged by unfilled potholes and higher crime due to police cuts are all potential consequences of having to fix a budget deficit. State law requires a balanced budget by year-end.
I put the news of the deficit and the uncertainty around how to manage it up there with the annual news about the low funding levels of the city’s pension funds. These conditions become headlines. Reading them is stressful for residents and local businesses. While hard to measure, who knows how many businesses, trade conferences and tourists spurn our fair city because of this annual noise.
Something is not working with these forecasts. In other cities the forecast is a tool used to balance the budget before the end of the fiscal year. While most cities use the base case or status quo to budget, many also use a parallel worst-case scenario.
A best practice is to stress test revenues and expenditures based on the Great Recession. Adopting a contingency budget follows — it is formally approved at the same time as the actual budget. As the saying goes, “Forewarned is forearmed.” When you are in a crisis, you need to act fast. Hearings and approvals take time and will just exacerbate fiscal stress.
The contingency budget provides a road map in the event of an unanticipated decline in revenues or an increase in expenditure. Steps to bring the budget back into balance include using excess revenues such as reserves and tax increment financing funds, canceling a less essential capital project that was to be funded with cash or placing a nonessential cultural program on hold until a recovery. People should realize that pausing a program or capital project is not the end of the world. Cities are will live on for another day.
To be effective, the city’s finance committee, budget staff and relevant department heads need to meet on a regular basis to monitor budgeted revenues and expenditure as well as the economic assumptions used in the forecast. If the city finds an imbalance over a couple of months, it has the option to implement the contingency. The mayor and the council can have an agreed-upon trigger point to make this switch — for example, six consecutive weeks of expenditures coming in over budget by 10% or revenues coming under budget.
The result should be a balanced budget at year-end. More importantly, there is no chaos and scrambling on how to close the deficit. No headlines on uncertainty over which tax will be increased or how many police and firefighters will be cut.
This is clearly a better way.
Michael D. Belsky, a former mayor of Highland Park, lives in Chicago and is an expert on public finance.
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