Pandemic highlights need for reserves
More than 1,000 members of the Government Finance Officers Association watched and listened to expert advice Tuesday on how to estimate highly uncertain events, like natural disasters, economic downturns and pandemics.
The COVID-19 pandemic was a late addition to GFOA’s annual discussion for members on budget reserves and risk management, as was the venue.
The presentation was a web-based live video with presenters in Chicago, Newport Beach, California and in Chatham County, South Carolina, instead of a convention hall in New Orleans as originally planned.
“Accepting that we cannot identify all risks, this couldn't be a better year to go, ‘Who could have predicted this?’” said Shayne Kavanaugh, GFOA’s senior manager of research.
Kavanaugh said he hopes that COVID-19 has convinced financial officers that they need to plan for both the known risks and the unknown ones, which he referred to as “the unknown unknowns.”
GFOA has launched a program called fiscal first aid to help communities address the current financial problems associated with the pandemic.
Some financial officers might be inclined to simply compare how much in financial reserves a neighboring city has. But that’s not sufficient because each community faces its own risks based on factors that include their own revenue mix and geography.
GFOA advocates what it calls the “Triple-A” approach to sizing a reserve.
The first step is to “accept” we are subject to uncertainty, including events that we haven’t even imagined.
The next is to “assess” the potential impact by using historical reference cases such as previous natural disasters or economic downturns such as the Great Recession.
The final step is to “augment” the reserves to prepare for the unforeseen.
GFOA considers a minimum baseline level of reserves to be 16%.
Amy Davis, the finance director of Chatham County, Georgia, said her county has set a goal of increasing its reserves from 25% to 30% this year.
Chatham County has already spent $450,000 on pandemic expenses such as protective equipment and sanitizer for employees.
“I think it’s going to be an ongoing expense for several years yet to come,” said Davis, whose county includes the city of Savannah.
In the more than six years that Davis has worked for Chatham County, she said the county has faced a $33 million cost for debris cleanup in the wake of Hurricane Michael and $10 million from Hurricane Irma.
“Unfortunately, the timing of the pandemic happened in the last fiscal quarter,” said Dan Matusiewicz, finance director for the City of Newport Beach, California.
“For the current fiscal year, we recognize that our budget is a bit of a place-holder and that we will need to look at longer-term therapies,” Matusiewicz said. “To the extent that the effects of the pandemic continues, and I think we all have to agree, that we really just don't know how long this will occur and if it will come back.”
Matusiewicz said he decided to use the Great Recession as the most similar previous experience although there are important differences between it and the pandemic. “This was the best we had,” he said. “So we started with the Great Recession.” Doing that exercise at least helped him provide the city council with a visual aid to provide the city council with a range of possible outcomes.