September 2003 · Volume 85 · Number 8

A Tale of Three Cities: Managing in Difficult Financial Times

Matthew Kridler, Steven Husemann and Tracy Williams 
A recent survey by the National League of Cities has found that for the first time in a decade, the majority of cities in the United States report that their financial conditions are worse now than in 2001. Sixty-seven percent projected tough budgets for 2003. The large majority of cities reporting financial difficulties are in the midwestern region of the nation.
The financial problems encompass communities of all sizes. The majority of respondents in each size category, from the smallest cities to the largest in the survey, report that they are less able to keep up with their financial needs now than in previous years.
In September 2002, the Ohio Municipal League reported that the income tax—the primary source of revenue for Ohio cities—in most member cities is going flat or in a negative direction. While reserve or “rainy day” funds peaked for municipalities in 2001 at their highest level since 1985, many of these funds now are depleted or greatly reduced and are not available for 2003.
At its February 2003 conference, the Ohio City/County Management Association assembled a panel of three veteran city managers to discuss their approaches to managing in difficult financial times. Their cities range in size from 14,000 to 65,000 in population and encompass both urban and suburban localities. Here are details of the panel’s presentations.
Springfield, Ohio 
Springfield (population 65,000) was featured in Newsweek’s 50th-anniversary edition as the typical American city. The city’s industrial base grew out of the manufacture of farm implements and equipment—harvesters and reapers—and made the transition to truck assembly and metal fabrication over the years. Springfield is a slice of middle America, where 48 percent of the workforce remains in the manufacturing sector.
Managing in a midwestern community like Springfield is a challenging task. The volatility of a local economy based largely on an ever-changing manufacturing industry requires constant financial stewardship. The question is not whether an economic downturn will occur but rather when the next downturn will occur and how long it will last.
Before recent years, Springfield had suffered its worst economic decline in the early to middle 1980s. Coming off years of high inflation, followed by the loss of federal revenue sharing, the city struggled to address its financial shortfall by imposing intermittent wage freezes, making layoffs, privatizing refuse collection, and turning off two-thirds of its streetlights. Although many of these actions were necessary, the predictable outcomes were high rates of employee turnover and widespread, long-lasting public discontent.
The difficulties of the 1980s taught city officials lessons that are useful today as the current financial challenges are being addressed. Although Springfield’s economy is more diverse today, the length of the current recession has by now depleted much of the city’s financial reserves, built up during the good times of the 1990s. State aid is being cut, and unemployment is rising. Now is the time to apply these lessons learned. 
Be proactive. Certain measures should be taken early when a financial crisis is looming. One of these measures is to move slowly or think twice before filling nonessential position vacancies: this is an opportunity to consolidate duties, reengineer your activities, or contract out certain functions. Adjust user fees, and “enterprise” nonessential services where practical. Be realistic and move on cost-cutting initiatives. We all make better and more thoughtful decisions before we are in a full-blown crisis! 
Keep the council informed. Councils need to know the extent of the financial difficulties facing our cities. Tell them what staff members are doing to keep the local government out of financial crisis. Lower councilmembers’ expectations by pointing out that certain goals and objectives involving costly new programs should be reconsidered or delayed until economic times improve. Let them know early if they might need to take action on tax increases or service changes, so they have enough time to consider alternatives that best fit their political considerations and constituencies. 
Involve department heads and employees. Among the leading causes of organizational stress are budget constraints, financial pressures, and layoffs/reductions in staffing—all of which can be exacerbated by poor communications. Lay out the full picture of the locality’s financial difficulties. Challenge your department heads and employees to come up with solutions. Hold brainstorming sessions with your staff, for example, at which department heads and others can offer suggestions for any department, not just their own. No idea is off the table. They need to understand the overall financial situation and know that the solution is a team project.
Avoid quick fixes. Implementing wage freezes or across-the-board, indiscriminate budget cuts are political expedients. A wage freeze sounds good politically but causes years of employee resentment, especially if it is only imposed on nonrepresented (non-union) employees. It may take years to repair the damage. And across-the-board budget cuts are a disservice to the organization. Not all city services are equally important.
Stick with the basics. Understand and remember which basic services are truly important to your citizens. Typically, citizens place the highest value on such services as police and fire protection, garbage collection, utilities, and street maintenance. These services are parts of their daily lives. (The annual report of the city can be delayed for a couple of years!)
Stay true to the capital plan. It is often tempting to sacrifice capital improvements to relieve stress on the operating budget. Some adjustment may be necessary, but giving up the capital plan will have long-term consequences. Besides, the current distressed economy offers excellent opportunities to obtain low-interest financing and to invite competitive bidding on capital projects.
Invest in the future. We must keep investing in economic and employee development. Economic development is key to future financial stability and the hope for prosperity for the community. More than ever, local businesses and industries need our support and assistance. Additionally, the talents of our workforce allow us to compete in today’s economy and are our best hope of successfully getting through challenging times. Don’t be too quick to eliminate essential training programs or incentives (such as tuition assistance) that help workers keep pace with the rapidly changing workplace. Retaining and developing talent in the organization may be the linchpin of survival. 
Stay personally optimistic. It is more important for the manager and other organizational leaders to remain optimistic in tough times than in any other. We often don’t realize how much our own moods set the tone for the organization. We need to remember that a crisis brings opportunity and that recessionary economic cycles will continue long after we leave this profession. Americans have experienced at least eight recessions since 1950, sometimes two per decade, all followed by recoveries. Keep your chin up!
Kettering, Ohio
Financial management is especially difficult in a challenging economy. When the economy is healthy, a manager should be seeking to get the most value out of every tax dollar, just as he or she does when times are bad, yet a manager doesn’t want to manage so close to the financial edge that every economic downturn creates a crisis. Sound financial management requires long-term revenue planning, expenditure planning, and a flexibility to react to changes in the economy.
Kettering (population 57,500) is a first-ring suburb of Dayton. It is Ohio’s largest suburb and is best characterized as having an economically diverse population with a large proportion of senior citizens (18.3 percent). With a revenue base that is heavily dependent on income taxes, staff members must be especially alert to changes in the economy that could affect Kettering’s ability to deliver the services that its citizens deserve. For this reason, they must constantly bear in mind several planning concerns.
Advance Planning of Revenues 
Kettering’s management tries not to lose sight of some guiding principles and useful tools.
Tax-base diversity. Ohio cities operate predominately on income taxes. This works extremely well in prosperous times, but in a slow economy or recession, a drop in these highly elastic taxes can quickly jeopardize the revenue stream necessary for operations. Thus, it is important for a local community to establish a tax base that is built upon numerous sectors of the economy. In 1990, approximately 15 percent of Kettering’s income-tax revenues came from one employer.
To seek a broadened tax base management began an aggressive economic development program to attract new businesses and industries. In 2003, three of Kettering’s five largest employers are firms that were not located in the community 10 years ago. These employers are from quite different economic sectors. Income taxes have increased from $16.3 million in 1990 to $25.1 million in 2002 (54 percent) despite the loss of the city’s second-largest employer through the Air Force base realignment and closure process.
Every parcel an asset. As a first-tier suburb, Kettering has little space in which to grow. Local officials have learned to treat each land parcel as an asset that should produce some value to give back to the community. In the past seven years, the city has bought and demolished a vacated dairy and shopping center. In neither case was the city receiving payroll taxes from the site.
City administration promised residents that it would redevelop both sites and recover its investment within 10 years. The dairy site has been completely redeveloped as home to a commercial-art school and a small, technology-based manufacturer; tax dollars generated have already exceeded the city’s investment. The shopping-center site is approaching buildout as an office park, and reinvestment should be repaid within five years.
Advance Planning of Expenditures
While Kettering has done well in income-tax growth, the other half of the revenue base has remained pretty flat. To keep a balanced budget, it has been essential that the city continue to seek expenditure-side reductions.
Projections. As a routine part of the budget process, the city projects revenues and expenditures out for a 10-year period. Management makes no secret of the fact that projections beyond a few years lack much reliability, but they do give councilmembers and the public a reasonable understanding of the city’s long-term fiscal situation. 
RAMSAM program. To assure long-term financial security, Kettering’s finance department has been challenged to an annual RAMSAM (Raise a Million, Save a Million) program. Each year, Kettering looks for programs and activities that will either raise an additional million dollars in revenue or save a million in expenditures. Achieving this aim was easy for a few years because of insurance demutualization, a workmen’s compensation reimbursement, and a retirement system rebate.
But in other years, RAMSAM has required taking a hard look at the fees charged for various recreational programs, at building permit fees, and at charges for emergency medical services. On the personnel side, Kettering routinely examines every vacancy to see if there are opportunities to maximize the scope of existing positions and cut overall personnel costs.
When Advance Planning Is Not Enough
No matter how much you plan, however, financial challenges happen. In the summer of 2002, the staff saw a sudden, unexpected dip in revenues. July and August income-tax revenues trailed the previous year by nearly $600,000. While Kettering’s fund balances provided protection from any sudden spending need, projecting this large a revenue dip out for a full year caused major concerns.
The decision was made to take on a number of symbolic, as well as practical, measures to address the problem. All actions were measured responses. For example, while an immediate hiring freeze was put in place, positions were filled after the staff had looked for chances to merge responsibilities and produce some long-term savings.
Cutting training and travel expenses were obvious symbolic gestures that could represent a significant amount of money, but cutbacks in these areas needed to start at the top. The city looked closely at recreation fees; building inspection fees; charge-backs to programs funded by outside sources; and services being provided to other communities for which Kettering was not being fully compensated.
Help from Your Friends
When economic woes are generated by a downturn in the regional economy, other local governments will generally find themselves in a similar situation. This was the case with the Greater Dayton Mayors and Managers Association, which represents 31 area communities and meets monthly. During the summer of 2002, nearly all of these cities were facing revenue problems.
A special meeting was assembled with the intention of comparing situations and solutions. This initial meeting gave everyone a better understanding of the current financial situation and a better knowledge of what other communities were doing in response. It also led to the generation of future study topics, including cooperative income-tax collections, health insurance options, and alternative methods of financing regional initiatives.
West Carrollton, Ohio 
The 2003 general-fund budget for West Carrollton (population 14,000) reflects both substantial expenditure reductions and revenue increases implemented to address losses in income tax from the depressed economy and the closure of businesses. A downturn in the economy has resulted in a 9 percent reduction in tax revenues. The city depends on a local 1.75 percent income tax to generate about 70 percent of the general-fund revenue, but closure of three major businesses in the past two years has taken a heavy toll on the tax base.
West Carrollton, a Dayton suburb, prides itself on being a family-friendly community with traditional neighborhoods and a strong business base to support city services. It has been fortunate over the years to possess such a strong local tax base, ensuring that businesses paid a large portion of the bill for these services, and the city also has seen new business development and continues to strive to attract new businesses. These efforts, however, have not been enough to offset major losses over the last couple of years. Other solutions, including recent annexations of property, will be developed, but the immediate need has required action to bring in additional revenues to maintain services. 
The city has not increased its share of the property-tax rate since 1989: it gets about four cents of every dollar paid in property taxes. The charter allows the council to levy up to 6.25 mills, but since 1989, West Carrollton has kept the rate at 2.74 mills because of the normally strong tax base. In 1978, in fact, the voters increased the income tax rate from 1.5 percent to 1.75 percent.
Extraordinary budgetary cutting measures have had to be taken in 2003. A number of key positions have been abolished or will not be filled for the time being. Other cuts have included reduced educational expenditures, elimination of the July 4th fireworks, publication of fewer issues of the city newsletter, and other belt-tightening measures to address the declining revenues.
Even with these budget cuts, the city has needed to raise revenues. Residents will be billed for refuse collection, and this service will become a separate enterprise fund. Assessments for street lighting in 2004 also are being considered.
Economic development efforts have succeeded, but replacing large operations that employed hundreds of workers cannot happen overnight. There are no quick fixes when a small city loses major employers. 
West Carrollton still is a vibrant community, which is going through a difficult transition during the challenging economic times facing the whole nation. The community can be proud of the excellent quality of life it enjoys and the progress it is making, in spite of recent setbacks in the economy, and is pleased to share these lessons it has learned:
•	Councilmembers and all employees need to work together closely to examine objectively the alternatives both for reducing expenses and for increasing revenues. Remember, administrators and citizens are in this predicament together. 
•	Take a long-term perspective, and set forth a multiyear plan to address your needs. 
•	Keep the community informed by briefing the news media and by using your local government newsletter. There should be no surprises; be open and up-front; welcome ideas and suggestions from the community. Again, everyone is in this together. 
•	Compile a comprehensive schedule of all fees and charges, and review it annually. 
•	Use cooperative purchasing like municipal pools for liability and health insurance to greatly reduce costs. 
•	Explore the sharing of equipment and other resources with neighboring communities. 
•	Maintain a sufficient monetary balance, which is critical to ensuring adequate time to implement corrective actions when hit with major financial setbacks. 
•	Diversify your revenue sources. Overdependence on a few major industries leads to difficult times when they close. 
•	Educate the public on the value of local government services, compared with other cost-of-living expenses. 
•	As managers, take care of yourselves, keep your stress level under control, and remember that your families are your first priority. Move forward with a positive attitude. 

Matthew Kridler is city manager of Springfield, Ohio (mkridler@ci.springfield.oh.us). He also teaches budgeting at the Wright State University M.P.A. program. Steven Husemann is city manager of Kettering, Ohio (steve.husemann@ketteringoh.org), and Tracy Williams is the city manager of West Carrollton, Ohio (citymanager@ westcarrollton.org).