4 ways the pandemic forced local governments to rethink budgeting and technology

Policy analysts have estimated that state and local revenue losses due to COVID-19 will total about $300 billion through FY 2022. While this number is lower than previous dire predictions, pandemic-related costs continue to rise in many localities, resulting in budget deficits that may force states to cut back on other services, lay off workers or raise taxes.

The economic recession resulting from the pandemic accelerated government procurement of cloud technologies to deliver remote services to citizens that could not come to city hall or for workers who needed to work from home. As a result, public-sector leaders have been forced to reevaluate their digital transformation strategies -- even the nature of budgeting itself.

The governments that were most efficient and strategic throughout this turbulent time were those that had already transitioned from Excel-based to cloud-based budgeting. Digital budgeting solutions enable collaboration in a way that analog systems never could, with interactive features that allow teams to communicate more effectively. With budgeting data accessible from anywhere, administrators and officials had the ability to analyze historic data and adapt current budgets as the needs of their constituents evolved.

The COVID-19 pandemic was a catalyst for digital transformation in the public sector. As governments review their past performance and evaluate budgeting and technology options for the future, there are four key factors they should consider. 

1. Greater emphasis on strategic planning

Strategic planning is central to local governments, helping them engage the community and distill their needs and expectations. Leaders can then further refine those needs and expectations into a mission statement, a vision statement, goals and objectives.

When it comes to budgeting, this planning must be more than just a document placed on the shelf. It must be a centralized repository of all the budget planning and execution that drives toward goals and objectives. When resources dry up and expenses start spiking, cities must prioritize spending based on their established objectives. If governments can easily communicate that their realigned spending priorities are based on strategic planning, it will make it much easier for citizens to accept any service adjustments required because of revenue shortfalls.

Modern budgeting and performance management software is essential to strategic planning because it allows governments to not just tie a budget to goals and objectives in a more automated fashion, but also to report on actual expenses and performance achievements toward those goals. For example, cloud-based budgeting software can create a virtual chart of accounts that allows leaders to tie allocations of line items to strategic objectives.

2. Prioritization of forecast budgeting

Out of the strategic plan, governments start their budgeting with a base year, then forecast out five or 10 years. Based on certain assumptions -- i.e. property taxes growing, personnel costs rising, sales tax declining, etc. -- governments can start planning accordingly.

The first year of a forecast typically becomes the next year's budget, and then governments must start executing against that budget. During the pandemic though, governments were challenged to forecast their needs and spending. For example, when many downtown areas that relied on tourism emptied out, cities had to determine how much revenue to forecast. They also had to decide how would they pay employees and whether they would need to rely on reserves, lay off staff or some combination.

Technology enables governments to automatically recalibrate their forecasts and address these pressing questions. With cloud software, governments can automatically forecast budget execution through the end of the year based on current spend. By automating this process, governments can easily get a new base year and make necessary strategic decisions.

3. Scenario planning is your best friend

With so much uncertainty, it’s nearly impossible to determine the trajectory of economic recovery because every day brings new information. That’s why when it comes to budgeting, developing various revenue and budget scenarios will be critical to helping cities monitor the economy and surrounding financial conditions.

What-if scenario planning is especially important in helping governments identify which plans to implement during times of crisis or during more stable periods. State and local governments must start developing their own action plans according to different circumstances. If a crisis arises, governments will then be prepared to staff and properly respond to any situation, even the worst case.

4. Necessity for continuous budgeting

Budgeting best practices are always evolving. Line-item budgeting was replaced by priority-based budgeting, and now continuous budgeting is the next frontier. At its core, continuous budgeting means all activities take place in a cycle of financial planning, executing, reporting on financial plans, adjusting those plans and repeating the cycle. All the while, it’s important that the budget always aligns with strategic plans.

There are six phases to continuous budgeting:

1. Developing the strategic plan.
2. Developing a long-term financial plan.
3. Making the first year of the long-term financial plan the annual budget.
4. Projecting the end-of year actual balance as the year’s reporting proceeds.
5. Recalibrating the long-term financial plan based on year-end results.
6. Implementing scenario planning.

Part of the process is acquiring financial economic and performance data, cleaning it and making it available to various applications. Cloud-based solutions can help facilitate the process of bringing all the data together into one portal. At that point, governments can create the right mathematical models to understand the data, make forecasts and predict outcomes.

This is also where collaboration comes in to play. As more stakeholders are involved in the budgeting process to coordinate budgets and strategic plans, a centralized application that is not susceptible to version control issues is essential. Similarly, the introduction of social functions will streamline workflow and provide greater transparency and accountability.

Eventually, predictive analytics, statistical algorithms and machine-learning techniques will be essential to helping cities identify the likelihood of future outcomes based on historical data. The goal is to go beyond knowing what has already happened to capturing insights of what could happen in the future.