As we recently reported, states and localities are being thrust into a new era of “fend-for-yourself federalism.” In light of growing risks from inflation, economic volatility, funding uncertainty, and impacts of climate and other disasters, a strong fiscal position is key to a government’s ability to avert a crisis or recover from one. In fact, a structurally balanced budget is the single most important vital sign for a municipality’s fiscal (and overall) health. The disconcerting truth is that most jurisdictions fall short on that metric.
The Government Finance Officers Association defines a structurally balanced budget as one in which recurring revenues are equal to or greater than recurring expenditures. The problem is, most government spending is recurring. True standalone, one-time expenses rarely exist if one takes into account operating and maintenance costs, including the hard infrastructure, human effort, and institutional systems required to run government services.
A personal anecdote to illustrate the point: When I was Kansas City auditor, the city’s convention center underwent a massive expansion, but no funds were allocated for the increased requirements for basic maintenance, such as plumbing or janitorial services. When asked what the plan was for the facility, the then-director replied:
“As soon as we finish construction, we should lock the doors.”
Over the years, I have become increasingly concerned that our failure to capture this total cost is at the root of much municipal distress. Running on a structural budget deficit can get cities mired in quicksand. Once in it, the struggle to get out can become increasingly overwhelming.
To ward off this downward spiral, here are five key principles governments should follow to achieve a truly structurally balanced budget:
1. Pay recurring expenses with recurring revenues
GFOA’s best practices don’t strictly advocate for recurring revenues to be formally allocated or “earmarked” to recurring expenditures, acknowledging the need to maintain budget flexibility in times of economic shifts, emergencies, or policy changes. Instead, GFOA emphasizes transparency, requiring budget presentations to clearly identify whether, and how, recurring expenditures are aligned with recurring expenditures.
Yet, as described above, this approach can be too flexible. Without stricter safeguards, governments may incur financial obligations and kick the can down the road, creating a cycle of short-term fixes and long-term underfunded liabilities.
2. Consider the total cost of ownership
The total cost of ownership includes all direct and indirect costs associated with acquiring, operating, maintaining, and ultimately retiring an asset or service. Considering expenditures through this lifecycle lens, while complex, will help governments plan ahead for large-scale projects, whether it’s an infrastructure development or an IT systems deployment.
IT systems, especially, often fall under the radar. The total cost of ownership encompasses not only the upfront expenses of hardware and software—which are increasingly subscription-based—but also the ongoing costs of personnel with up-to-date expertise, maintenance, upgrades, and eventual replacement. A chief financial officer recently remarked to me that her budget is balanced “if I never have to replace technology,” a scenario that is, of course, impossible. Governments today depend heavily on sophisticated IT systems, such as enterprise resource planning, for essential day-to-day operations, from accounting to procurement to payroll. Yet many governments are stuck with outdated computer systems, because their budgets did not account for regular IT upgrades. This reliance on obsolete technology poses significant risks, including security vulnerabilities, inefficiencies, and potential system failures. By adopting a clear-eyed view of the total cost of ownership, governments can proactively allocate funds to replace aging technology, improving continuity, security, and efficiency in their operations. Planning for these costs isn’t just prudent—it’s essential to maintaining the functionality and reliability of critical public services.
3. Allocate sufficient funds for maintenance and repair
The total cost to acquire assets should also incorporate the ongoing funds for maintenance and repair, preserving their usefulness throughout the life of the asset. For example, the U.K.’s Daily Mail reported in January that the Los Angeles wildfires came three months after the Fire Department requested $1.9 million to restore 16 maintenance positions deleted from the previous year’s budget. An article published by Matt Stoller’s newsletter site cited the staggering statistic that 100 out of L.A.’s183 fire trucks had been out of service at the time. L.A. Fire Chief Kristin Crowley told CNN that “having these apparatus and the proper amount of mechanics would have helped” reduce the losses from the wildfires.
4. Have a strong reserve fund
GFOA notes that governments should define a minimum amount of funds they will hold in reserve. The old rainy-day standard prescribed two months’ worth of expenditures in reserve. More recently, GFOA has moved to advocate for a risk-based reserve, acknowledging that every community has its own dynamic mix of variability in revenues, expenses and other liabilities and/or risks.
Before the wildfires, L.A.’s reserve fund balance was only about 4 percent of expenditures. That’s absurdly inadequate, especially considering the growing frequency of natural disasters and the increasing number of people impacted by them. Los Angeles and other areas prone to extreme weather events or climate impacts must adjust their reserve funds to take these elevated risks into account. As we have written before, jurisdictions must get better at measuring and managing their total cost of risk.
5. Plan for revenues to exceed expenses for at least five years
Achieving a balanced budget each year is not enough. If a structurally balanced budget aims to support long-term financial stability, governments must plan for revenues to exceed expenses for at least five years. Delaying necessary sacrifices in the short term could lead to an ever-deepening financial hole—quicksand—that typically proves difficult to emerge from.
Take Chicago, for example. The city’s massive and growing unfunded pension liabilities mean increased reliance on debt to keep things running. And things aren’t running well. Mayor Brandon Johnson’s approval rating has dropped to an abysmal 6.6 percent. In an op-ed, Illinois Comptroller Susan Mendoza noted that Standard & Poor’s Global had lowered the city’s bond rating to just above junk status, citing the administration’s apparent unwillingness to even consider cutting spending.
The day after the downgrade, Johnson’s administration offered a plan to borrow $830 million more. The bond was structured as an interest-only deal that would defer principal for the first 20 years. It would have cost taxpayers a total of $2 billion. Unsurprisingly, and correctly, the City Council voted it down.
Clearly, Mayor Johnson is caught in the quicksand—a place no mayor wants to find themselves. The key to both a financially secure city and a better prospect of re-election is to budget appropriately. More, this tactic produces a city that people will want to call home.
In my experience working with localities, strategic budgeting and scenario planning are practical tools that can guide jurisdictions toward achieving a structurally balanced budget—as well as help them surface tradeoffs and engage with residents about difficult financial choices. By integrating these approaches into their financial practices, jurisdictions can move beyond short-term fixes and start to lay the foundation for lasting fiscal stability, ensuring they are better equipped to serve their constituents both today and in the years to come.