June 18, 2021 – Recent measures indicate inflation was running north of 5% last year (more than double what we used to view as appropriate) and the Federal Reserve has just signaled it plans to maintain the policies that are helping fuel it until at least 2023.
How should our state and local governments approach the necessary and essential task of budgeting during this inflationary cycle?
First of all, any government agency that has to pay for gas, heating and cooling, and other consumables knows, the same as every other consumer, that costs are going through the roof. More must be set aside for those unavoidable expenses in the next budget and reserves might have to be raided to cover them in the interim.
Also, if you issue contracts for infrastructure work (like roads, sewers, new buildings, etc.) or must go out on the market to purchase capital goods (police cars, garbage trucks, school buses, etc.) you should expect to encounter skyrocketing costs. A good rule of thumb is that if you developed estimates for a project last year or earlier in the spring, tack on 20-40% to the earlier estimate and you may be in the ballpark. Adjust accordingly and be pleasantly surprised if the bids come in lower than anticipated.
For the time being the bulk of your labor costs (which are often the largest portion of a government’s budget) are fixed by existing contracts. But don’t get excited about that happy fact. Like many businesses expect governments at all levels to struggle to hire entry level and other new workers at what was formerly the going wage. If you want workers you are going to have to pay up – and as the contracts of your existing work force come up for renewal you will probably have to pay more to keep them around as well. Employees are going to point at the inflation rate and say, at a minimum, that their raise should be commensurate with it. Pay the good ones for sure, the mediocre ones, probably, and let the bad ones jump!
For Wisconsin’s local governments everything will cost more but their revenue will still be capped by existing levy limits. One way to “bust” these caps is to get some growth in your area and it may be smart to incentivize it. Be very careful about how you “incentivize” private sector growth, however, because the “incentive” may turn out to be a “boondoggle” and then you will be worse off than if you had just remained still and done nothing. If you have trouble differentiating between an incentive and a boondoggle call me and, for a fee, I will give you some shrewd advice. Oh, by the way, you really are on your own so don’t trust “experts” too much either. I am an expert and I just told you the truth. Not all the others are as honest as I am.
Of course, the Federal government did distribute some money to the states to help pay for pandemic expenses and as that trickles down to the local level it will give you a bit more to spend. A word of caution in that regard. With inflation roaring at current rates the stimulus pittance will evaporate faster than water poured on a hot, cast-iron stove. Don’t take your “windfall” and use it to start any new programs!
Budgeting in an inflationary environment takes more discipline than in normal times. Stay focused, prioritize correctly, and you might survive – or even flourish. Get bamboozled by the numbers or mesmerized by an alluring but unproductive priority and you will get blown up. Good luck. Hopefully we will see one another on the other side.
Van Mobley is President of Thiensville and Professor of History & Economics at Concordia University Wisconsin.
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