There are three key areas that we anticipate governments and non-profits will be most impacted by COVID-19: business continuity, revenue implications, and your organization’s fiscal policy.
Business Continuity:
COVID-19 has likely presented for your organization a unique scenario where you are unable to continue your operations as you normally do. If you are a municipality, you will be providing services that your community will continue to rely upon – everything from garbage removal to repairs of critical infrastructure. If you are a school district or college, you may be tasked with continuing educational programming remotely. And if you are a non-profit (particularly in the human service or health care sector), you are tackling the challenge of serving your clients at the same levels as you normally do. Additionally, your employees will need to be assured that they can continue to be paid and have reliable insurance benefits. If your organization has developed a Continuity of Business Operations Plan, you are one step ahead of the game. The Federal Emergency Management Agency (FEMA) offers a continuity tool kit with several resources to help you prepare for activities such as connecting to systems remotely, maintaining human resource systems and data, producing payroll, and addressing other fiscal office related needs. The ability to support procurement needs, pay vendors, and deposit payments in a timely manner are also considerations. Additionally, you will need to rely on sound bookkeeping and accounting records to obtain state or federal disaster relief funds. Thought should also be given as to what your office will do if staff members become ill and are unable to work.
Revenue Implications:
Governments: Governments that rely mainly on property taxes are likely to be more stable than entities with a large exposure to consumer or business activity levels. Many local governments rely on sales taxes or business taxes of some type for a significant portion of their revenues. A consequence of COVID-19 may be a disruption in the underlying activity that results in these taxes. Events have been cancelled, commercial activities have nearly all been eliminated, and the majority of small businesses that rely on foot traffic have been forced to close. If this continues into late Spring and Summer, the inevitable “trickle through” effect will be a decrease in the related sales, business & occupation, and other taxes. We advise that you estimate the scale of the potential impact on your organization’s revenue.
Non-Profits: Like governments, non-profits are also impacted by the disruption in commercial activities. If you are an arts organization for example, you have had to cancel classes, events, and other revenue generating activities. If you are a professional association or membership-based organization, you have had to cancel conferences and seminars, and subsequently you will face a loss of revenue. You also likely rely on member fees for revenues, but your members may be unable to continue paying these fees. You should consider if you will provide your members a payment grace period or temporarily suspend dues requirements. If you are a human service agency, you may have clients that you serve who are impacted by COVID-19 by becoming ill themselves or taking care of sick family members. This will place an additional financial burden on your organization. If your organization has an economic development function, your role will likely be different now since many of the smaller, local businesses in our communities are dealing with unparalleled challenges. As restaurants, hotels, and similar businesses scale back their operations or close, this impacts individuals who rely on these jobs for their income. You will need to assess what options you have in place that can support small businesses impacted by this disruption. Most non-profits rely on donations and revenue from fundraising events to support their operations. If you had an event scheduled in March, April or May, you likely have had to cancel or postpone it. Your donors that you have counted on from year to year might have to reduce their contributions or postpone them for another year due to the economic impacts on their own businesses or personal financial situations.
So – what to do? Review your revenue profile and analyze the degree to which your organization is susceptible to revenue impacts related to the virus. With so many unknowns, your analysis should be based on the best information you can gather, with ranges of impact. Information sources could include:
1. Your agency’s historic revenue performance during other recession periods (i.e. you could look back at the economic impact of 9/11 and the Great Recession in 2007-2008 for example).
2. Information from the local public health office regarding the spread of the virus in your community – the more significant the community spread the more likely that your organization will have to prepare for a longer length of disruption in activities and significant financial impacts.
3. General guidance from other local governments or non-profits that may have more expertise and experience in forecasting revenues.
4. For non-profits, Information regarding donations and event revenues from your own historical data (and other similar non-profits) during other economic downturns.
5. Reports from major businesses that generate retail sales tax.
If the risk to your revenue sources is significant, you may consider adjusting revenue forecasts for the current budget. Additionally, if you have begun working on your next fiscal year budget, you should consider the impact of COVID-19 on your financial projections for the coming year.
Fiscal Policy:
We have always advised our clients to develop sound fiscal policies to help guide their thinking. Fund balance reserves is a common fiscal policy topic. You could consider utilizing a base level reserve of 8.5% (the reserve your organization can rely on in the event of a pandemic, natural catastrophe, etc.). In addition, you could consider adding a 4% economic stabilization reserve to your fund balance. This is an ideal time to review your fund balance reserve policy. It is important to work with others on your team to review your individual circumstances to arrive at the best decisions to meet your organization’s needs.
At this point there are more questions than answers with respect to the impact of COVID-19 on your finances. At a minimum, review your business continuity capabilities, assess potential impacts on current and future revenues, and review options to assist those who may be in need.