 income sources. It is volatile to be sure. Consider that revenues from income and sales taxes are going to be directly impacted by the employment rate and volume of sales. When those things go down, so too do the monies derived from them.
Recall the different scenarios I laid out in The Hows and Whys of budgeting for individual incomes. Some of us have a stable income, some of us do not. Do you remember what I said you would need to do if you have a variable (unstable) income?
But if you own your own business or have a job, like sales, where the pay tends to rise and fall with the season, you'll want to consider your total yearly income.That's right, you need to average your income over time to come up with a realistic budget. For a municipality that has the potential for huge swings in income, historical averaging is a good way to plan for the future. Any city, county or state that has been around for more than 10 or 15 years has been through at least one boom and bust cycle. That's plenty of time to see where the peaks and valleys are in terms of income. This information ought be used to average out what the effective income and outflow can be safely assumed to be.
So, for example, if I am the mayor of Anytown and I know that our tax revenues bottomed out at $1.2 million in 2001 and peaked at $3.4 million in 1999 and just a while back in 2009 we again saw a dip down to $1.5 million, I have a pretty good scatter chart to work with to establish a trend line. The trend line will describe my average projected income year over year. The trick for me as mayor is to keep my expenses BELOW that line each year. Like a smart individual, anything that comes in above and beyond that line is going into the savings fund for future down-turns in the economy. Just because we have an off-year, I still want to be able to keep my fire and police and emergency services running, the streets lit and repaired and so on. If I plan carefully, I'll be able to do this. If I have a short term view of things, however, or decide to spend all of my income each year, I leave nothing for when the economy goes in the tank and have a hard choice to make: cut services or take on debt.
Unfortunately, many state and local governments over the past several decades have chosen to take on debt all too often (in my opinion - you can decide for yourself if you agree - I suggest looking at how many of these are filing for or about to file for bankruptcy and default on their debts though). There are actually two nasty things about debt. We already know about the interest, but the worst bit is the over-reach it allows. Over-reach is when you buy or establish more legacy services than you can realistically sustain. This is made easy by cheap credit (low interest) and the willingness to borrow. It's politically very expedient and easy for me to agree to any terms, as mayor, that any of my public service unions bring to the table if I'm willing to over-reach. It takes some discipline, though, to have to say no to expansions in expenses and resist credit and the pain it brings later.
So - what can we afford? Only so much as we have coming in and/or have saved for.
What do we have to do when we run out of money? Stop spending or borrow - which is really just more spending. The obvious answer is stop spending.
Can a government just pull the plug on critical services? Emphatically, no. And that's the problem with over-reaching. Once you establish a level of service, especially in the public sector, you are going to have hell-to-pay to roll any of it back. It can be politically damaging to do so. But, if your goal is to keep your town, village or state from totally defaulting on its debts (making any future borrowing VERY expensive), cuts have to be made.
Some recent history illustrates the drastic side of this. In the State of Michigan, Flint and Detroit have had such a dramatic down turn in their local economies that they have had to actually SHRINK the size of the cities to keep basic services up and running. By reducing the extents of the city limits, they are reduci