Planning and Finance Series: The dangers and opportunities of having too much money
Planning and Finance Series: The dangers and opportunities of having too much money
by Patrick L. Dugan, Everett, Washington
Awhile ago, I received a telephone call from a reader in an area experiencing an economic boom from energy development. This economic boom is generating a great deal of new revenue for the affected local governments - well above the levels they had been receiving before, and more than they need to support ongoing services. This reader wanted my advice on how this money should be managed. It is indeed refreshing for those of us who have been wrestling with the impacts of the recession to know that there are areas that are doing well. Since there are quite a few places in various parts of the country that may be benefiting from energy development of various forms, it might be useful to consider the implications of a sudden, and likely temporary, revenue boost.
Dangers
The reader was, I believe, correctly concerned that if these lucky local governments were not careful in managing the short-term revenue boost, long-term problems could be created.
While it may be tempting to immediately reduce taxes and fees and rely primarily on energy revenue to support services, such measures generally create problems when the energy boom has run its course and those taxes and fees must be restored to pre-boom levels. I have worked in areas where federal timber receipts made it possible for some county governments to eliminate or substantially reduce local property taxes.1 When those timber revenues went away, these local governments suffered fiscal crises when voters resisted restoration of property taxes.2 Voters get accustomed to low tax levels and have short memories.
Another measure that is difficult to live with over the long-term is using the additional revenues to increase the level of service provided. It is very difficult to cut these higher levels of service to pre-boom levels when the extra revenues go away. However, from my experience in energy development,3 there may also be impacts on local governments’ operational needs such as increased services needed for energy workers and their families (e.g., schools, social services, etc.) and increased police services. Local governments will probably need to increase their budgets to address these needs. Ideally, such increased services to serve the energy development should be budgeted and accounted in separate funds that are separated from regular services and clearly designated as temporary so these funds can be eliminated when the energy development is complete.
Having lots of money tends to make us overly optimistic, leading us to overestimate how long we will have the extra revenue and even to overestimate how much money we will have after the energy development is completed. It is important to resist this optimism and be conservative in forecasting — it is better to have money in the bank in the future than to over-commit on the basis of optimism.
Opportunities
The most effective strategy is to use the additional boom revenue for one-time type expenditures that do not have to be sustained in the long term. The extra money could be used for several types of uses, listed below in order of priority (in my opinion):
- Impact Mitigation: Although, ideally, any needed mitigation of adverse impacts caused by the energy development should be financed by the energy developers outside of their tax obligations, there are likely to be impacts that are not addressed by the developers. Such impacts might include restoring damaged resources, and addressing capital facility needs (especially roads) to accommodate energy development, etc.
- Maintenance: Unfortunately most local governments, especially those in depressed rural areas have a backlog of deferred maintenance needs. The energy revenue offers an opportunity to catch-up, and maybe even get ahead of maintenance needs. • Economic Development: Many rural areas benefiting from energy may have been previously economic depressed areas and depressed conditions may return after the energy development. The excess revenue provides an opportunity to finance economic development projects that serve the community in the long-term.
- Focus on long-term land acquisitions: Times of financial abundance are the perfect time to land bank for long-term needs. The best opportunities are open space-type acquisitions that require little ongoing maintenance.
- Capital investments: The energy boom offers a golden opportunity to invest in modern capital facilities without burdening the community with debt. All types of facilities could be considered: libraries, schools, roads, public buildings, museums, etc. However, remember that such capital facilities require ongoing maintenance that must be sustained by the remaining budget after the energy boom is over.
Conclusion
It is possible to have too much of a good thing, especially if the good thing is temporary. Energy development has the potential of creating long-term problems if the temporary infusion of revenue is not well managed.
Patrick L. Dugan has been a city planning director and a city finance director. During the last 30 years, he has held various financial and planning positions in cities, counties, and regional agencies in three states. Now a private consultant in Washington, he can be reached at consult.dugan@frontier.com.
Endnotes
- Some counties in southern Oregon in the 1960s and ‘70s.
- In my first finance job as a county budget officer in southern Oregon almost 40 years ago, we had to cut the county general budget by 20 percent, in part due to declining timber revenue.
- Nuclear power plant construction in Grays Harbor County, Washington.