It might seem like some cities only just stopped reeling from the last recession. Now many officials want to prepare for the next economic downturn.
An expert panel offered some insight recently at the National League of Cities summit in Pittsburgh.
One way to prepare is through something called stress testing — basically, financial modeling to help governments budget resiliently.
“We provide alternative economic scenarios to say: ‘If we go into recession next year, this is what the Pennsylvania economy is going to look like. This is what unemployment will be, this is what disposable personal income would be,'” says Moody’s Analytics Senior Economist Dan White. “And we use those factors to try and figure out exactly how much tax revenue the city or state would lose, how much Medicaid spending or other social services spending would increase.”
The point is to figure out how much money to put aside to prepare for the next recession.
For local governments, saving often means declining to fund otherwise worthy endeavors. Saying no might be easier with a quantitative, research-backed target reserve on hand.
White says he’s not handling any local government clients in Pennsylvania, but does provide stress testing for some state departments. He wouldn’t say which, or get into costs. The states’ pension funds were undergoing a stress test as of this summer, according to the state Auditor General’s office.
Stress tests are really meant for government entities with budgets of hundreds of millions of dollars, or billions, White says. Not the financial plans typical of most of the state’s 2,500-plus smaller communities. Especially when they’re distressed.
“Stress-testing is not something that can help you get out of a problem today,” White says. “It’s a solution that can help you from getting into a problem five to 10 years down the road. And so for those small places that are in trouble, stress testing is probably … of 100 things they have to do, stress testing is 97 on the list.”
But that doesn’t mean smaller government entities should do nothing.
Minimizing debt also might be wise. S&P noted the strong link between debt load and vulnerability in the financial firm’s analysis of 10 states’ budgets.
The multi-state stress test, however, found that Pennsylvania is among the least resilient, along with Illinois, Connecticut and New Jersey.
“Local governments in Pennsylvania should be on high alert,” says White, who lives outside of Philadelphia. “I mean, we’ve got to maybe about $250,000 or something, you know, really insignificant in terms of our statewide reserve. Which means that when we go into another recession, the state’s going to be looking for places to save money and local government aid may be a big place if they do that.”
The Government Finance Officers’ Association advises that local governments put aside enough money to operate for two months, or about 15 percent of annual expenses.