When exploring financial options, remember these considerations
May 26, 2020
During this pandemic, many governments are feeling the pressure on their general fund and looking at cost cutting and other measures. Acting early can be very beneficial. We noticed some local governments during the Great Recession (2007-09) that seemed to fare better because they did just that. Another strategy we observed was the use of teams to flush out financial options and strategies, to take advantage of some creative but legally allowable solutions. Even if you have a small staff, you can potentially reach out to peers to work on this together. Here are some areas you might be looking at and some tips and resources to keep in mind.
Analyzing your special revenue funds and the uses allowed
Your special revenue funds often can be used in many ways. Just because you have always spent the funds in a certain manner does not mean that is your only option. For example, during the Great Recession, a county shifted the use of its REET funds from new projects to making debt service payments that qualified under the statute's stipulations.
There is a lot of great information on the Municipal Research and Services Center's (MRSC) website, mrsc.org, about the allowable uses of various revenue streams.
You'll also want to review laws carefully, consider any legal interpretations, and work closely with your legal counsel before you use funds in any new manner. Make sure you document the analysis to support your conclusions, because this is an area we frequently review in audits.
Revisiting the taxes you impose
There can be public sensitivity about imposing taxes, but if you consider this option, there are a few things we'd like you to know. Only the state Legislature can authorize a tax, but that doesn't mean that all local governments have necessarily taken advantage of everything authorized. If you are considering any new or increased taxes, keep these things in mind:
- All taxes must be authorized in state law for a local government to enact them.
- Make sure to follow all applicable requirements to enact new taxes, such as approval from voters or the electedbody.
- Most taxes have a maximum amount that can be imposed. Make sure you don't exceed that limit.
- It's important to work with your legal counsel, and keep in mind statutory and court-imposed legal limitations.
An excellent set of resources is the MRSC City and County Revenue guides: mrsc.org/Home/Stay-Informed/MRSC-Insight/February-2019/New-City-and-County-Revenue-Guides-Published.aspx
Re-evaluating your rate setting
You typically have control over the fees you charge for functions like parking, building and planning, or recreational programs such as a golf course. If these activities are part of the general fund, you might be subsidizing them more than you realize. Taking the time to evaluate fees, including whether your fees recover the full cost of service, might be a worthwhile exercise. Also, if your policy is truly to set rates to recover costs, these activities must be reported in an enterprise fund – this will also give you a better financial picture for decision making.
It's also important to periodically evaluate rates for Equipment, Rental and Revolving (ER&R) programs. For example, it's common in a recessionary period to defer replacement of vehicles and equipment. But, if you do this and do not adjust the rates then departments might be overcharged unnecessarily. You'll also want to consider any assumptions about inflation and salvage value. Rates should be equitable and fair to all the departments, and also adequate to operate the program and replace equipment when it's time.
To read more about ER&R, consider information in the Budgeting, Accounting and Reporting System (BARS):
- GAAP: www.sao.wa.gov/bars_gaap/accounting/interfund-activities/equipment-rental-and-revolving-err-fund/
- Cash-basis: www.sao.wa.gov/bars_cash/accounting/interfund-activities/equipment-rental-and-revolving-err-fund/
Undertaking short- and long-term borrowing
There are many financing options available and local governments might be looking at different strategies than they have used in the past. Before you go down this road and take on any new debt, consider establishing or revisiting your debt management policy to help guide you.
For more information, check out:
- MRSC debt management policy guidance: mrsc.org/Home/Explore-Topics/Finance/Debt/Debt-Management-Policies.aspx
- Government Finance Officers Association also offers guidance on best practices over debt management, such as for selecting advisors and many other debt-related topics. www.gfoa.org/best-practices
As always, if you have a question we are here to help if we can! While we might not be able to answer your legal questions, reach out to us with any specific technical questions at the SAO help desk which is available in the client portal. Or, if you want to talk with one of our financial technical staff, email Center@sao.wa.gov.