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Financial Health

Financial Health:
Confronting Munster's "Fiscal Cliff"

Here’s the story: Back in 2008, Governor Mitch Daniels signed an amendment to the State of Indiana constitution which capped property taxes at 1% (for homeowners), 2% (for landlords and farmers), and 3% (for commercial property). This tax cap mechanism is commonly referred to as a "circuit breaker." If the town requires more tax revenue than is available at the 1%, 2%, 3% levels, the circuit breaker kicks in, and the town is unable to collect that money. In this way, residents will not pay more than these amounts. Also, the town has no authority to raise more money through a referendum. The School Town is able to do so, but the civil town is not.

At the time this amendment was passed, there were two counties in Indiana that received an exemption from the circuit breaker: Lake County (our county) and St. Joseph County. This exemption allowed towns, like Munster, to continue to collect property taxes at levels above the circuit breaker to pay off loans that were taken out before July 1, 2008. These exemptions will expire on December 31, 2019, and the circuit breakers will kick in for Munster.

As a result, in 2020 the Town of Munster will have significantly less revenue than in years prior. While lower taxes are great for residents, this creates a big challenge for the town: We all expect Munster to provide the same levels of safety and services as always, but now this must be accomplished with a smaller budget.

The Financial Advisory firm, Baker Tilly, just published its latest estimate of the impact on Munster's budget for 2020 due to the circuit breakers taking effect. This estimate states a $1.8M shortfall (their previous estimate was a $2.8M shortfall). 

Fortunately, the Town of Munster has been able to cobble together a number of savings techniques so that they expect to be able to cover this $1.8M shortfall in 2020; however, they recognize that each year going forward, they are going to need to come up with a way to cover the shortfall. 

As one example of the 2020 savings included in this year’s budget proposal, an early retirement program for town employees implemented in 2019 has shaved off just over $100k in costs; however, it has left the town short-staffed. This is not a sustainable structural change, and we will need better solutions in future years.

In my work as a business consultant at a global strategy consulting firm, I specialized in helping organizations deal with this type of financial hardship.  I learned to approach these challenges in the spirit of Stanford economist Paul Romer’s words: “A crisis is a terrible thing to waste.” Financial challenges can motivate us to transform in ways that make us better prepared to succeed going forward.

Next, I’ll explain the cost transformation approach that I saw consistently work well for the organizations with which I worked. They would typically see cost savings of between 20-35%, and the process typically took from 6-18 months to complete. I believe this would be the most effective approach for the Town of Munster to take when reworking its budget. 

First, in general, the worst (yet a common) way to approach a budget shortfall is to tell all of an organization’s department managers, "We need to cut 15% of our spending, so you all have to cut 15% from your budget." This approach is often referred to as the "peanut butter approach" because when you spread peanut butter on bread, you do so evenly.

Sure, this peanut butter approach is simple, and at first glance seems quite logical; however, it misses something critical: Not all spending is equal. Some spending is more valuable than other spending. Some spending is absolutely critical and cannot be cut.  Some spending is simply nice-to-have and won't have much of an impact if cut. Some could easily be cut without anyone really noticing now but would make it impossible to attain an organization’s goals for the future.

If you simply think about this at your home, you will see it is true. If you were to suffer a 15% decrease in your income, you couldn't simply reduce the following items by 15%: mortgage, water, electricity, property taxes, insurance premiums. These items are fixed, and if you stop paying 15%, you will suffer serious hardships --you could even lose your house. So, you cut back on your cable package, change your cell phone plan, eat at home more frequently, change your shopping habits, etc. This is a smarter way to do it that takes into account that some spending is more valuable (i.e., more important to your family’s well-being and goals) than other spending.

To be able to determine the relative value of different types of spending in an organization (in our case, the Town of Munster), it’s critical to start by clarifying the organization’s vision for the future. In other words, are we as a town clear and in agreement on the finish line we’re running toward?The town council needs to confirm that this is a shared vision held by the town’s residents.

Next, you develop a strategy for how the town can go from where it is today to the town described by the shared vision of tomorrow. Finally, all areas of an organization’s spending are assessed on whether or not they are critical to achieving the vision. In this way, your clear vision and strategy become your strategic filter for sorting and reworking your spending.

The process of applying this strategic filter works like this:

  1. Determine the amount of money you spend today, by each category (for example, by each department) in the budget.
  2. Within each category, look at each line of spending and sort it into one of these piles:
  • "Lights On": money that, if not spent, will result in the town shutting down in a matter of weeks or months. These items must stay in the new budget, and all efforts should be made to make this spending as efficient as possible. [Save some money here]
  • "Table Stakes": money that delivers basic services expected by residents but that is not highly visible and not critical to the future vision for the town [Save more money here]
  • "Visionary": Money that is vital to achieving the future vision for the town. These will reflect the few, critical areas of focus that will enable the Munster of tomorrow. [Potentially invest more money here]

The result of this strategic cost transformation approach is a town that both spends its tax payers' money much more efficiently today and is pointed directly at creating the future of the town that is inspiring to and desired by its residents.

This is the opportunity I would love to help Munster seize in the face of financial challenges, which we must sustainably solve due to the circuit breakers taking effect in 2020 and beyond.

Paid for By CTE Steve Tulowitzki
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