CPA INSIDER

How public sector finance management can adjust to COVID-19

Even as the pandemic drains revenue, governments must brace themselves for more of the same. Here’s how bright public servants will keep the lights on.
By Lou Carlozo

If local governments have lived for generations by the mantra "do more with less," then 2020's COVID-19 pandemic has added a dire level of complexity: one you could sum up as "do more in distress with less and less."

Given the unprecedented challenge for the public sector, local and state finance professionals are struggling with how to address revenue shortfalls created by COVID-19, even as they come to grips with what post-pandemic budgets and hardships will look like.

"Governments were getting squeezed prior to the pandemic with higher demands for their services and political difficulty in raising taxes," said public sector accounting veteran Jack Reagan, CPA, now a partner with UHY LLP based in Columbia, Md. "The pandemic only exacerbated these existing pressures, and most of the financial structural issues present prior to the pandemic will definitely be there once we reopen government."

The stresses are particularly tough in states such as New Jersey, said Walter J. Brasch, CPA, CGMA, chief success officer at Prager Metis CPAs in Cranbury, N.J. "Many states in the Northeast already have huge debt issues facing them for such things as pension obligations, and unemployment funds running out of cash." 

As with private businesses across the spectrum, the disturbing notion of a new normal might as well be a new abnormal. But whereas coffee shops and retail stores can close temporarily or permanently without jeopardizing public services, governments can't.

"The COVID-19 pandemic will absolutely exacerbate financial hardship for many governmental entities," said Carrie Kruse, CPA, CGMA, economic development coordinator for the city of Des Moines, Iowa. As for the hits that local and regional governments will take in revenue, Kruse ticked off a list that sounds like the backbone of Main Street itself.

Said Kruse: "We are experiencing massive declines in a number of revenue streams including road use taxes as many people are working from home and driving less; hotel/motel taxes as hotel occupancy rates have plummeted to unprecedented levels as corporate and leisure travel have suspended; sharp parking revenue declines, especially in urban settings with more people working from home; and sales tax reductions as overall taxable spending has dropped."

About the only bright spot in all this requires a glance in the rearview mirror. In the years leading up to the pandemic, municipalities such as Des Moines enjoyed strong gains in real estate and construction revenue, Kruse said. "We were seeing record numbers of building permits and upward pressure for property values to start surpassing annual inflation." And yet, "we were considering it more of a catch-up from a prior decade of strategic cost-cutting measures."

At a time when local governments have shifted from catching up to catching their breath, here are five ways they can maneuver during the COVID-19 squeeze, provide service to their communities, and prepare for an uncertain future.

Share resources. Now more than ever, local governments should consider teaming with other municipalities to pay for the services they need.

"Pooling resources across jurisdictional boundaries is one of the greatest ways to provide high-quality public services at a lower cost to the taxpayers," Kruse said. In Des Moines, that has meant sharing library services with the adjacent city of Windsor Heights, just steps from Des Moines's Franklin Avenue Library. "It's far more cost-efficient than our neighboring community building and maintaining their own library and having to hire their own staff to operate it."

Address technology. One obvious solution is to invest in new technology; for example, with legacy systems a generation older or more. "The issue with many governments is that their IT systems are more than 40 years old," Brasch said. "In New Jersey, the unemployment system shut down in March and April as it couldn't handle the volumes of claims." 

Of course, most, if not all, 2020 budgets went out the window in March as the pandemic froze or cut additional funding for needed new systems. But while a full technology overhaul may prove impossible, a small department could upgrade one small system as a start.

Governments can also look for other technology solutions to support community needs. For example, consider a cloud solution that depends on current IT resources and thus could be implemented with little additional cost. Review technology within other areas as well. 

Double down on data. Need to do more with even less? Leverage more data. Reagan pointed to data and analytics as part of "the emerging next wave of government reinvention. Capturing, standardizing, and analyzing this data — then using it to make quicker decisions — is critical for governments in the next few years." That said, Reagan noted, "None of that matters unless there is also subsequent monitoring of the effectiveness and efficiency of the decision. The old saying when I first got into the industry used to be 'what gets measured gets done,' but governments measure a ton of things already. The effective governments continuously monitor because in reality, 'what gets monitored gets done.' Don't be afraid to change course if that is what the data is telling you."

Get energy efficient. Upgrading the city's public properties also encourages private developers to follow suit. "We recently passed a benchmarking ordinance that requires privately owned commercial buildings over a specific size to benchmark the energy use of those buildings," Kruse said. "One of the best ways for the city to participate in these efforts is to lead by example and show the factual fiscal savings and environmental benefits with energy-efficiency upgrades with our very own city facilities."

Develop or enhance partnerships with elected officials. While political gears often grind slowly, there's an added incentive for politicians and public sector finance pros to hammer out smart solutions that avoid the last-resort option of massive tax hikes. This requires intentional, proactive effort to get all parties together and initiate discussions on best strategies. Keep in mind that video meetings or conference calls will be more effective and direct than exchanging emails.

This will also set the stage for ongoing regular interactions that can include brainstorming sessions or calls to action, such as revisiting antiquated legislation that gets in the way of smart fiscal practice.

Lou Carlozo is a freelance writer based in Chicago. To comment on this article or to suggest an idea for another article, contact Drew Adamek, a JofA senior editor, at Andrew.Adamek@aicpa-cima.com.  

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