Six Rules for the New NormalProblem Solver I PUBLIC MONEY
By Girard Miller
Six Rules for the New Normal
Even in a post -recession economy, leaders must learn to Just Say No.
ith a little luck and some help from our friends the general economy. States that enjoyed a revenue rush from
overseas, the U.S. economy will begin to pull out of taxes on capital gains won't be seeing anything like that for a long
its malaise in 2010. The recovery, however, will be time to come. Investors' portfolios will carry forward their huge
less robust than previous turnarounds, reflecting 2008 losses.
the hangover from the real estate bubble in 2007 and its asso- This is the New Normal economic environment. To survive in
ciated stock -market bubble. State and local budgets will lag the it, there are a handful of ground rules that state and local officials
general economy on the way back up, as tax receipts typically trail in charge of fiscal policies ought to preach and practice.
1 d
Z
Nit
Live within your
means. Some elected
officials try to promote
politically popular
pet projects without
a viable long-term
funding plan. That
kind of short-term
thinking won't be pos-
sible --lurking financial
problems will surface
before today's incum-
bents leave office. So,
fiscal policies will have
to address the limits
of the New Normal
economy. Setting
expectations is a vital
part, starting with a
budgetary teach -in for
policy makers —maybe
a special study session
that focuses on real-
istic five-year revenue
projections and five- to
seven-yearincreases
in retirement -plan
expenses. That will be
an eye-opener.
Look to the future.
It's time to set long-
term priorities and stick
to them —even though
governing bodies tend
to focus on the issue
du four and react to
the current develop-
ments without putting
all competing priorities
in perspective. If basic
services such as roads
and public safety are
all the community can
afford, then it may
be time to begin a
long-term process of
downsizing or eliminat-
ing activities that were
great ideas but are
simply unaffordable in
light of other costs.
Stop deferring
expenses. When the
economy enters a
recession as deep as
this one has been, it
is natural to cut back
on equipment replace-
ment, infrastructure
and capital mainte-
nance. But deferred
expenses don't go
away. They come back
and bite you later.
Budget officers should
prepare a list of all on-
going deferred spend-
ing. That way, policy
makers can see what
needs to be funded
before discretion-
ary programs can be
restored. Get depart-
ment heads involved —
they won't be bashful
about their needs.
Fund retirement
obligations. Few
states and localities
are funding their retiree
medical benefits on
a proper actuarial
basis. Many can't even
afford the pension
and post -employment
medical benefits they
have already granted.
The new reality is that
policy makers have
to fund full annual
contributions to both
plans —or else the
costs will escalate
really fast —fast
enough to torpedo
those leaders before
they leave office.
Meanwhile, most pub-
lic employers need to
scale back their ben-
efits for new employ-
ees and begin making
all employees pay a
greater share of the
cost of their benefits.
Dedicate your
surplus. At some
point, state and local
revenues will once
again exceed budget
estimates. When they
do, it will still be neces-
sary to focus on fiscal
catch-up. Depleted
reserves will have to
be restored. For three
to five years, at least
25 percent of budget
surpluses should go to
retiree medical benefit
trusts (known as OPEB
in public finance cir-
cles) that are presently
unfunded. Another 15
to 30 percent should
be used to restore
deferred equipment
purchases and facilities
maintenance.
Set up a rainy -day
fund. This may be the
most important fiscal
policy decision any
governing body can
make. The suggestions
I've already offered will
likely consume every
dollar of free revenue
that most governments
receive between now
and 2012. But once
the revenue revival
comes and stabilizes,
it will be important to
set money aside from
the operating budget
for lean periods in the
future. The time to
enact such a policy is
now, when memories
are fresh and the pain
of recent retrench-
ments is vivid. G
E-mail girardinmalibu@charter.net
48 GOVERNING I December 2009