Funding Cliffs in Municipal Budgets

September 23, 2010

The Civic Federation often voices concerns when governments use one-time or nonrecurring revenue sources for ongoing expenses. There are a number of reasons this can be problematic. By definition such revenue sources will not be available in the future so if the government utilizes nonrecurring revenues for operations, they are ensuring future fiscal challenges. The practice allows governments to run structural deficits and postpone making inevitable difficult choices.

There are also issues of intergenerational equity to consider. If the source of one-time revenue is a governmental asset or reserves that have been built up over many years, their use is a benefit to current taxpayers at the expense of past and future taxpayers. In essence, current residents receive more services than they are paying for. There also can be a significant opportunity cost. Funding operations instead of making long-term investments such as a capital improvement may hurt future growth. 

The Government Finance Officers Association (GFOA) recommends that all governments adopt a number of financial planning policies including the use of one-time revenues. The GFOA advises that the financial policies discourage the use of one-time revenues for ongoing expenditures.[1] The best practice is that the policies be adopted by the jurisdiction’s governing board and summarized in the budget document. 

Local governments across the region and nation are under enormous fiscal stress and it is sometimes appropriate to address short-term fluctuations in revenues with a nonrecurring revenue source.  One of the purposes of fund balance is to be able to withstand economic downturns, and many governments designate a portion of balances for such “rainy days."   Unfortunately, it could be years before municipalities see their revenues rebound as local government tax collections typically lag economic recovery.[2] In addition, some governments had structural deficits before the current recession.  In this economically distressed environment, financial planning and forecasting is especially critical. Planning may allow governments to utilize one-time sources to smooth the transition to needed structural changes while avoiding sudden disruptions in services and staffing. 

Two recent examples illustrate the issues with using one-time revenue sources for ongoing expenses. The City of Chicago spent the majority of the $1.15 billion in revenues generated from its lease of city parking meters on operating expenses in fiscal year 2010. In July, it was reported that the City had just $180 million remaining from the deal.[3] The City is still left with a structural deficit, as reflected by their projection of a FY2011 budget gap of $654.7 million.[4] Utilizing the parking meter revenues for ongoing expenditures did nothing to solve the City’s ongoing financial challenges while costing the City a significant asset. 

The Civic Federation’s latest local government budget analysis was of the Chicago Public Schools (CPS) FY2011 budget.  The analysis outlined the Civic Federation’s concerns with the District’s plan to close its budget deficit with the use of a one-time drawdown of its entire General Fund unreserved fund balance and its use of other one-time resources. The one-time solutions would have worsened CPS’s structural deficit and heightened the coming “funding cliff.” Chicago Public Schools is now exploring other options such as debt restructuring to close its budget deficit in light of Civic Federation concerns.[5]

[1] Government Finance Officers Association, Adoption of Financial Policies (2001).
[2] National League of Cities: City Budget Shortfalls and Responses, December 2009.
[3]Spielman, Fran, “Reserves dwindling as city faces $700M budget gap,” Chicago Sun-Times, July 21, 2010.
[4] City of Chicago, FY2011 Preliminary Budget Briefing document, July 30, 2010.
[5] City Room, “CPS Officials Say They Plan on Restructuring the District's Debt”, Wednesday, August 25, 2010.