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How To Manage Against Increasing Volatility: Lessons From A City That Went Bankrupt

November 4, 2021

For many folks working in government, Stockton, California, wouldn’t be the first place that comes to mind when we think about sound financial management. But maybe now, in today’s volatile world, it’s time for us to do just that. 

A decade ago, the city 60 miles east of San Francisco became the largest American municipality to ever file for bankruptcy. Free public spending and generous employee benefits collided with a real estate boom that suddenly crashed. Tax revenue plummeted, debt service soared and Stockton’s fate was sealed.

But now, all of us could learn a lesson from the “new” Stockton. With bankruptcy behind it and savvy leaders looking ahead, the city has vowed to never repeat the mistakes that brought it down in 2012. Today, Stockton has an incredible year’s worth of revenue in its reserves, and its leaders say they are prepared for whatever the future holds.

“The bankruptcy scared the city straight,” City Manager Harry Black, who took the job in 2020, recently told me. The city diversified its tax base and has taken a much more fiscally conservative attitude. “You think about every single dollar because you know what the consequences can be, and no one wants to relive that,” Black added. 

Of course, none of those working in government have a clue what the future holds. But they’ll likely face increasing volatility. Given that, every community would benefit from a “New Stockton” attitude in city hall. There are some common elements to such an approach.

Prepare for the Unpredictable

Local governments must increasingly grapple with issues reaching well beyond city limits. Pandemics, global economic shifts, further political strife and intensifying impacts from climate change are all but inevitable. And those are just the things we can see on the horizon. Who knows what else is coming?

My biggest piece of advice: be prepared for the unpredictable. Now. 

But how can you plan for something you don’t know is coming? You start planning for whatever could be coming. Then you do it again. And again. When disaster strikes, even if it’s not something you prepared for, you’ll have some frame of reference. You may have tools in your arsenal to help you fend off a crisis, and the capacity to bounce back quicker.

In a previous newsletter, we discussed the importance of “anti-fragility.” An anti-fragile organization is flexible, and it changes in the face of disruptive events. It gets stronger and smarter and better able to withstand disruption — just like Stockton did. And an essential complement to anti-fragility is preparation. 

Plan for the Worst

The pandemic is the most glaring example of how much the world has changed in just the last few years. But that’s only a small part of it.

An economic revolution is happening. Suddenly, white-collar commuters are no longer in the office every day. Meanwhile, many blue-collar workers are deciding they’ll no longer endure crummy working conditions. It’s the most dramatic shift in the workplace in my lifetime, and we’ve yet to uncover what these changes really mean for municipal finances, administration and governance.

Or take climate change. The headlines have made it clear: it’s irreversible, and it will have a dramatic impact not only on our weather but also on our geography, our homes and our economy.

And we can’t ignore the latest warning from the Organisation for Economic Co-operation and Development, which predicts that the combination of an aging workforce and slowing productivity will cause the GDP growth of its 20 countries to be cut in half in the next 30 years. 

Has your community done extensive scenario planning for any of those events? If not, you’re far from alone — but you’ve still got a problem. “What’s the worst that could happen?” should no longer be a hypothetical question but instead something you plan for every day.

In addition to having the foresight to do this work, you’ll need the tools. That means investing in technology that can help with financial forecasting, scenario planning and asset management.

Be a Savvy Saver

No matter what unfolds in the coming months and years, two things are almost universally helpful to have in the face of volatility: savings and liquidity. 

Today, it’s critical that communities follow the fundamentals of sound financial management. But they’d be wise to be even better prepared than what the current standards call for. Today’s guidance is that local governments should have two months of revenue reserves on hand, but I (like Harry Black in Stockton) recommend much more.

And now is a wise time to shore up your infrastructure. By addressing maintenance and development in the moment, you not only prevent higher costs later, you’re also building a more livable and resilient community.      

These steps aren’t necessarily popular. Building up a fund balance often leads to demands from citizens  to reduce taxes. Preparing for disasters won’t win plaudits from voters the way a new community center will. But leaders have a responsibility to look beyond short-term wins.

What all of these elements have in common is a focus on the long haul. When climate change causes severe flooding in your community, you can’t wait for the U.N. to develop a climate fix; you’ll need a flooding response team at the ready. When the next pandemic overwhelms your county hospital, you can’t wait to see how the World Health Organization or Congress will respond; you’ll need resources to hire nurses immediately.

But what is needed most of all is something that can’t be purchased: leadership. Leadership in the face of volatility requires foresight and resourcefulness, but also a New Stockton attitude of learning from past mistakes and making the difficult changes that will allow your community to emerge from the current crisis better prepared for the next one.

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