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Government Budgeting Practices to Prepare for Future Pandemic and Economic Instability

Posted by Neubrain Communications

Since early 2020, the world has been forced to quickly adapt to unprecedented circumstances presented by the COVID-19 pandemic. Government organizations have been at the forefront of the crisis dealing with a plethora of issues. These include unanticipated costs incurred from the pandemic response, double-digit declines in tax revenue, consequences of eliminating or reducing services to citizens, and delaying critical infrastructure projects, which drastically impacted the communities they serve.

Budget Resilience

Before the pandemic, most organizations already knew they needed to improve their budgeting and planning capabilities. The economic fallout created by pandemic has shown an even greater need for structurally balanced budgets, agility in value-based budgeting, continuous forecasting, long-term planning, and scenario modeling, as well as robust digital services and stakeholder involvement.  

Structurally Balanced Budget. One of the main goals for any budgeting committee is to achieve a structurally sound budget. They must take into consideration realistic assumptions around recurring and non-recurring revenues and expenditures, and appropriate levels of reserves. When the pandemic was at its worst, workers nationwide were forced to stay home and either collect unemployment or work remotely. As a result, crucial revenue streams declined, and the structural soundness of budgets was put to the test, causing organizations to take drastic steps to cut non-essential expenditures and postpone capital projects. 

While the country recovers, state and local governments still have various challenges from the pandemic and struggle immensely. The finance and operational leaders must assess where false assumptions were made, which practices must be revised to better handle unexpected and drastic changes, in order to lay a foundation for better financial and operational resilience in the future.

Continuous Forecasting. Continuous forecasting can be implemented in many forms but typically involves readjusting forecasts every month or quarter rather than annually. Before 2020, a global pandemic was not at the forefront of the budgeting committee’s agendas. They planned based on historical data and assumed revenues and expenditures.

As the pandemic unfolded, new policies and guidelines came into play more frequently than ever before. Organizations that still rely on paper-intensive and semi-automated processes lack visibility into the most up-to-date figures and the ability to predict cash inflows and outflows accurately. Had continuous forecasting been utilized, governments would have been better positioned to predict changing necessities and accurately adjust expectations. Going forward, the adoption of continuous forecasting will allow government organizations to have more budget flexibility and better resilience. 

Value-Based Budgeting. Another critical practice for governments to consider is value-based budgeting. Unlike traditional line-item budgeting, value-based budgeting helps allocate resources to achieve specific objectives based on goals, priorities, and measured results. The public is a partner in the process and is involved in decision-making to the maximum extent possible. With a moderate to high level of shared decision authority, the government is forced to evaluate which programs and services hold the most value to citizens, and allocate funding based on value. The evaluation framework will take into consideration program/service rankings based on well-defined criteria. This could include, for example, program vision, necessity or mandate, size of the community served, effectiveness, cost recovery, and performance. These rankings can help organizations during tough or uncertain economic times make thoughtful decision around cost cutting measures. 

Long-Term Planning and Scenario Modeling. Government organizations also need to enhance their long-term forecasting. The concept of long-term forecasting is to extend plans into 5, 7, 10-year, or even longer horizons so that agencies can continue supplying the same level of services without any significant complications. Scenario planning is key to preventing substantial hiccups caused by unavoidable circumstances or decisions. Properly executed, it can bring clarity and insight into potential future challenges with revenue and expense imbalances so that corrective actions can be taken early on to maintain financial stability. 

Stress testing is a method of determining how vital financial indicators will fare in the worst economic scenarios. Stress testing typically requires access to statistics tools and an analysis of relevant historical and current economic development data and a review of this data in the context of the agency’s strategic plan. Based on stress testing, organizations need to re-evaluate and possibly adjust general fund reserves minimums or rainy day fund balances as well as associated policies, including policies for borrowing between funds. In turn, governments will be better able to withstand financial turmoil and become more resilient.

Digital Services and Stakeholder Involvement. When designing a budget, it is easy to get caught up in the big picture. In doing so, the ones who are most affected, the governed, are left to struggle. With a wide variety of new accounting rules and regulations resulting from the federal stimulus, most governments do not have the resources to collect feedback from their communities adequately.

Implementing robust web-based systems where citizens or stakeholders can receive services or voice their needs would save time and money rather than manual data collection. This would further support continuous forecasting and budgeting efforts, as more recent data would be available for planning purposes.

Modern web-based technologies could also be used to better explain strategic goals, budget priorities, and operational performance to all stakeholders. Taking the time to present a thoughtful, well-laid budget and organizational performance metrics builds stakeholder confidence. In turn, stakeholders will be more open to collaboration. Increased collaboration and feedback will allow governments to allocate time and resources more efficiently. 


About the Authors

Frederick Almond is a student at the University of Maryland, College Park. He is currently pursuing a Bachelor of Science Degree in Computer Science with a Minor in Business. Frederick is hoping to become a software professional and an engaged citizen with interests in public policy, fiscal matters, and improving digital infrastructures.

Nicole McConaty is pursuing a Bachelor of Science Degree in Business and Marketing at The Robert H. Smith School of Business at the University of Maryland, College Park. Nicole is passionate about digital storytelling, human centric design, and business of experiences (BX).

Topics: Government Budgeting, budgeting software, Revenue Shortfalls, COVID


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