Budgeting, long-term financial planning, and financial resiliency are even more critical as financial, economic, and climate events continue to make headlines. Planning for uncertainty, and developing a long term financial strategy is important to ensure we can provide services to our communities. We essentially need to become more resilient, but many face the question, “how do I become more resilient?” The Government Finance Officers Association (GFOA) has conducted research and published multiple articles to assist governments with long-term financial planning and resiliency strategies. Conducting a budget “stress test” is one activity organizations can do to “test” their budget for resiliency. The below steps are derived from a recent article by Jack Ryan-Feldman published in GFOA’s Government Finance Review magazine.
A budget stress test will primarily reveal three things: the susceptibility of certain revenue streams, the flexibility of expenditure decisions within the budget, and the margin a system has for enduring this new reality. The importance of conducting a stress test is to determine whether your organization’s budget is capable of handling crises of different magnitudes.
Follow these steps to conduct a stress test on your system’s budget:
- Start with your 5-year model, including baseline assumptions.
- This understanding will help you understand your organization’s history as it relates to all revenue sources, historical economic drivers, and obligations such as debt and pensions
- Understand what assumptions are in your baseline long-term financial plan.
- What does your budget look like if those are removed?
- Develop alternative scenarios for the stress test.
- What if your economic development patterns change?
- Is your community susceptible to natural disasters?
- Think about realistic budget adjustments. This is difficult, but very informative.
- Develop a list of the budget adjustments and their related impacts.
- Develop a list of budget solutions and then rank solutions based on ease of implementation.
- Summarize and report results. This exercise will help you understand you level of resiliency, including your strengths and weaknesses.