How to develop your local government expenditure model

Our three-step process can help communities build an expenditure model for their unique needs.

Many communities have had to spend money on unbudgeted supplies, equipment, and overtime in order to keep first responders, other front-line personnel, and the community at large as safe as possible during the COVID-19 pandemic. And now, many of these same communities are looking for ways to not only cover these increased costs but also decrease expenses to align with revenue shortfalls.

Figuring out where to start to analyze expenditures is a challenge, and local government leaders must consider both the short- and long-term needs of their communities.

While figuring out where to begin this analysis might seem overwhelming, we have designed an easy-to-follow, three-step process to help you navigate expenditure analysis during the COVID-19 pandemic and in better times ahead.

The three steps include:

1. Gather your data

As with building a revenue model, the expenditure side starts with gathering historical data from the past three to five years along with pre-COVID-19 budgets and expense projections. These inputs will help you identify significant trends with your expenditures, such as seasonality with costs, and also allow you to assess how past events might inform the current situation.

2. Break down expenditures by type

Next, break down expenditures by category. Consider using the following expenditure types, knowing that all types might not apply to every community:

Operations. Operational costs account for the majority of budgets for many communities. Breaking down your operating costs into subcategories such as personnel, supplies and materials, and contractual services will help in identifying scenarios that might be modified moving forward.
Capital outlay. Break down the percentage of capital outlays into categories such as construction, the purchase of land or other structures, and the purchase of equipment. This breakdown will help when creating visualizations to determine historical spend and identify ways to potentially decrease costs down the road to align with decreasing revenues.
Debt. Break down interest on debt by loans, notes, and bonds. Explore opportunities to refund outstanding debt. Contact your registered municipal advisor to explore options to reduce costs.
Assistance and transfers. Categorize funding provided to other units of government and not-for-profit or other nongovernmental organizations.
Insurance benefits and repayments. Identify payments to beneficiaries, retirement annuities, and other expenditures such as retirement contributions.
Other sources. Each community is unique, so it is important to include all other expenditures for your jurisdiction.

3. Apply scenario levers

Once you have gathered information about your historical expenditures and future budgets and have broken down your expenses into subcategories, you can model your costs. Here’s how:

Use your expenditure category breakdowns as a starting point, assuming 100% of expected costs for each category based on budget.
Next, estimate potential reduction requirements.
Then, estimate potential impact to expenditures on a percentage basis, by type and subcategorization. For example, assume that for operations your expenses will be reduced to 80% of budget for months eight through 12 of this calendar year. This is just one example. You might apply these levers on a percentage basis to each month or year by expenditure type and subcategory – or even more granularly if your data model allows for it.