Public finance
Stewarding the balanced allocation and fiscal control of the government's financial resources
Head into 2024 with cautious optimism, mitigating declining revenues through value-based prioritization and the use of modular contracting.
Many economists predict a global economic slowdown in 2024 that could lead to declining government revenue streams that rely heavily on income, sales, and corporate taxes. If central banks raise interest rates to combat inflation, financing public spending could become more expensive, particularly for long-term infrastructure investments. Global supply chains continue to be disrupted, driving up commodity prices and further straining public budgets. The good news is that we avoided a global recession in 2023 and expect the economy to be stronger in 2024 than in previous years.
While the fiscal forecast for government is mixed, most entered 2024 with a strong position. Over 40 states in the US ended the last fiscal year in July 2023 with revenue surpluses for the third consecutive year and rainy day fund balances exceeding plan. However, most states forecast reduced growth or declines in general fund revenue and net tax decreases for fiscal years 2024 and 2025. While government reserves and rainy-day funds are expected to decline, they remain at near historic highs.
To prepare for declining revenue forecasts in the upcoming fiscal year, department and agency leaders will be looking for ways to achieve fiscal sustainability while balancing competing priorities and protecting funds with anti-fraud measures. During the pandemic, we saw first-hand how our public servants could turn challenges into opportunities to modernize how services are delivered to communities. However, responsiveness is constrained by the government's necessary and intentional fiscal controls to constrain how monies can be spent within a fiscal year, which are essential to ensure the responsible use of public monies.
Here are some actions public finance professionals and agency directors can consider as they seek to fill short-term budget gaps and more accurately forecast future revenue streams for longer-term scenarios:
Fiscal foresight: Modernize how you forecast and capture revenue streams and use anti-fraud measures.
A ‘beyond budgeting’ mindset: Work within your constraints (which may be statutory) to prioritize and optimize allocations based on performance and value to the community you serve.
Incremental funding, modular delivery: Control risk by breaking large procurements into modular yet seamless contracts.
State and local governments can also address budget gaps through strategic use of the approximately $1.5 trillion in federal funds and grants available to state and local governments for infrastructure investment, economic stimulus, and pandemic relief.
Federal Package
Focus
Estimated amount allocated to state and local government
Find allocation for my state
Deadlines
American Rescue Plan Act (ARPA)
COVID-19 recovery support for healthcare, housing, schools and businesses
$ 350 billion
ARPA State Fiscal Recovery Fund Allocations Dashboard
Obligate funds by December 31, 2024; Spend funds by December 31, 2026.
Infrastructure Investment and Jobs Act (IIJA)
Transportation, broadband, cybersecurity, disaster response, environment and energy
$984 billion ($287 billion directly to local governments and $697 billion to state governments)
IIJA Funding Resources for States and for Counties
IIJA Grant Opportunities
IIJA White House Guidebook
Obligation deadline varies; most states have until September 30, 2026, to spend funds.
Inflation Reduction Act (IRA)
Funds tax credits, grants, and initiatives spread across manufacturing, Medicaid and healthcare, renewable and clean energy, energy efficiency, electric vehicles, agriculture, and other water and transportation infrastructure.
IRA isn’t a one-time investment like IIJA, APRPA, and CARES; it’s a longer-term investment with various funding mechanisms.
IRA Funding Resources for States and State Allocations
IIRA White House Guidebook
Timelines differ by initiative with deadlines not yet set.
1. Fiscal foresight: Modernize how you forecast and capture revenue streams and use anti-fraud measures.
Unlike private sector finance, government traditionally intentionally leans toward fiscal constraint and fiscal control. By intentional design, public finance professionals have less flexibility in their options for diversifying revenue sources. The mission of government is to be responsible stewards of public monies in service to the common good. When revenue sources decline, government cannot quickly authorize or levy new taxes or fees without lengthy legislative or voter action. Further, most state governments in the US are constitutionally required to balance their budget and generally cannot run deficits (with certain exceptions). This will push them to look for other ways to manage fixed agency or program budget allocations.
The potential risk in FY 2024-25 to state and local tax inflows stem primarily from:
Impacts on local tax revenues of growing vacancy rates in commercial real estate in city centers
Rising residential housing costs (as housing makes up around 40% of what consumers spend every week)
The rising cost of financing government projects
Flat or declining lottery game sales in over half of the states. Fewer people playing the lottery means less state revenue to fund essential public services, such as education scholarships, infrastructure projects, social programs, and parks and recreation.
Additionally, large government programs, such as Medicare, disaster assistance, and unemployment benefits, remain the biggest targets of fraudsters. State agencies may be more vulnerable to such fraud due to the breadth of programs and dependence on online application portals. Public finance professionals can turn these risks into opportunities to modernize how revenue and budgets are forecasted, captured, and protected. By doing so, you’ll also create an environment that enables government to be more responsive to the evolving needs of the people served.
Find your state revenue forecast on NASBO here.
Actions and models to consider:
Modernize how revenue is captured by state lotteries. State lotteries are both a market-driven business and a public trust. This means that they can use proven customer strategies used by commercial organizations to create new digital channels to engage players, optimize pricing and prize structures, and diversify gaming solutions while promoting responsible play. The Oregon State Lottery provides a model for others in how it built its internal digital and marketing technology capabilities and diversified its product portfolio. It’s also one of the first agencies to engage new players through a sports betting app, as retail and online sports betting in most states is now legal.
Unlock monies faster and secure against fraud. The transaction experience residents and government employees have for processing payments for fees, permits, licenses, and taxes can be improved through the use of secure, automated real-time payments (RTPs) for transactions. These solutions automate processes, reduce errors, protect against fraud, and increase convenience for residents and businesses. The Federal Home Loan Bank of Chicago's ebanking portal and loan underwriting platform is an example of the use of self-service transactions and reliable, same-day funding.
While in their early stages of adoption, mostly outside of the United States, blockchain and Internet of Things (IoT) also offer exciting possibilities for transforming government-to-citizen (G2C) and citizen-to-government (C2G) transactions. Sweden, Poland, and Estonia are piloting use of a blockchain-based system for secure distribution of child support payments, land registration, and permit issuance, allowing secure and instant sharing of data and eliminating paperwork.
More efficiently allocate grant program allocations. Automate award eligibility screening, funding allocation, and post-award performance and reporting with artificial intelligence and machine learning (AI/ML) and customer relationship management (CRM) solutions. Agencies can use AI/ML to automate the evaluation of grant proposals and direct funding to where it is needed most, as modeled by the United Nations Office for the Coordination of Humanitarian Affairs (OCHA).
Find sources of revenue from newly created programs. While the long-term effects of the legalization of cannabis on government revenue, job creation, and public health are still emerging, billions of dollars in revenue from cannabis excise and sales taxes have been generated across Canada and the United States by the jurisdictions that have legalized and regulated safe, recreational use of cannabis. These states have used cannabis revenue streams to fill budget gaps and fund public safety, education, healthcare, and mental health programs.
Defining fraud, waste, and abuse:
Fraud is an illegal activity to deceive government.
Abuse is a gross misuse of power or resources that may or may not be illegal.
Waste involves excessive or unnecessary spending that isn’t necessarily illegal. Even if they’re not illegal, abuse and waste can violate public trust. For purposes of this document, the word “fraud” represents all three forms of misconduct.
2. A ‘beyond budgeting’ mindset: Work within your constraints (which may be statutory) to prioritize and optimize allocations based on performance and value to the community you serve.
When budgets get tight, the typical response is to cut or control costs. Traditional government budgeting processes deliberately rely on fiscal controls to constrain how monies can be spent within a fiscal year. These fiscal controls restrict the ability of government employees to freely shift fiscal allocations, by design. They are essential to ensuring responsible use of public monies. This also makes government less responsive to changing needs and requirements, unless exceptions like the emergency procurement declarations we saw during the pandemic are used.
Knowing that we cannot quickly change fixed budget allocations across programs or even within a single program when statutory requirements apply, how can government be more responsive? Government needs strict budgetary controls and long-term goals, but what if a program administrator could shift funds more incrementally based on performance or value delivered? What if we were able to reallocate in smaller increments in response to shifting requirements?
Our government customers have shared with us their aspirations to create a culture that embraces the principles of beyond budgeting. These principles align with many of the lean-agile methods commonly used to design and implement technology and non-technology products. It’s a long-standing management philosophy developed in the 1990s that aims to change the traditional budgeting practices used by commercial organizations. Its principles promote adaptive and decentralized decision-making in response to changing requirements. It promotes transparency, accountability, a cost-conscious mindset, and a culture of continuous improvement.
While it may not be possible for government agencies to fully implement beyond budgeting principles to the extent commercial businesses can, our public finance professionals can still adopt the mindset and philosophy.
We believe the government can apply these principles within the constraints of the existing budget allocation process and public funding model. Department- or agency-level fixed budgets can continue to be treated as a constraint within which leaders can optimize allocations more effectively. To use the words of Bjarte Bogsnes, Chairman of Beyond Budgeting Roundtable: “This means making decisions as late as possible because we then have better information about what we should say yes or no to, and about our capacity to fund it. At the right level means more of these decisions taken as close as possible to those who will live with them. We need continuous delivery of decisions and funding.”
In the area of public finance, AI/ML has great potential to prevent fraud, waste, and abuse through its ability to identify unique activities that don’t conform to regular patterns across large datasets. The federal government enacted the AI Training Act in 2022 that instructs federal employees on how to use AI technology while considering the risks and ensuring privacy, safety, and responsible usage. Explore the use of AI/ML to automate the analysis of large datasets and extract details from budget documents for forecasting revenue inflow and outflow predictions and the impact of agency budget justification requests.
Occasionally, embrace participatory budgeting and zero-based budgeting methods to prioritize and re-allocate. They’re more labor-intensive because the methods rely on bottom-up approaches and greater participation of citizens and/or employees. But they’re a more responsive and responsible way to allocate public monies, especially when budgets are shrinking or during sequestration. For example, zero-based budgeting forces agencies to justify what’s working and what’s not working and incorporate learnings year-over-year. It brings the agency’s back-office and mission-side together to prioritize, negotiate, and justify what they need for the next fiscal year to deliver their mission.
When allocating budgets, be willing to pivot funding (and people) away from poorly performing programs to those that fund the highest value initiatives for your community. Try thinking of budgets as commitments to a forecast and agreed-upon outcomes. Assess the value delivered in regular, shorter increments of time (within fixed budget allocation and statutory constraints). We recognize that this may require government to loosen some of its fiscal controls and reengineer its budgetary processes, which is not an easy ask. However, we’ve seen our public finance and procurement officers do these things under the pressure of sequestration at the federal level and within state and local government during the recent pandemic. The growing use of lean-agile budgeting and contracting for delivery of small and large IT implementation projects show us that government’s use of beyond budgeting principles is indeed possible. Application of these principles can also lead to even stronger fiscal stewardship of taxpayer monies.
3. Incremental funding, modular delivery: Control risk by breaking large procurements into modular yet seamless contracts.
More flexible budgeting enables more responsive contracting. However, traditional government acquisition techniques aren’t designed to enable adaptive behaviors, even less so for the rapid, modular, and iterative nature of modern IT design and deployment. In the U.S., federal departments continue to lead the way in showing us how to make lean-agile budgeting, contracting, and program delivery work for government, especially for implementing technology solutions.
As far back as 2012, the US Office of Management and Budget (OMB) and Government Accountability Office (GAO) started directing agencies to shift to greater use of lean-agile methods. More recent guidance released by the OMB, GAO, and Federal Acquisition Regulation (FAR) provides direction on how to budget for modular contracting divided into smaller acquisition increments. As a result, the percentage of major federal IT projects characterized as agile or iterative has increased from 9% in 2011 to over 80% in 2022, with many coming in under budget.
Many states are still working to standardize processes that enable budgeting and procurement of agile delivery projects. The National Association of State Chief Information Officers (NASCIO) urges the increasing use of modular contracting that breaks up large procurements into smaller projects that can be implemented in seamless increments. This also allows government to better control budget overruns and investment risk and deliver the right solution faster, often at lower cost. It shares the risk between government and their partners, enabling them to do things they normally couldn't do together.
Additionally, a few states are already testing out the use of AI to streamline and automate procurement processes, draft bids, and forecast more accurate timelines by analyzing past contracts. e.Republic’s new initiative, “Center for Public Sector AI,” summarizes recent government policies and guidelines related to responsible use of AI. While the picture of AI’s potential is developing and should be used cautiously by government, we see many promising use cases to explore.
True state IT procurement reform will not happen overnight, and NASCIO’s five recommendations will not completely fix the problem. State CIOs must work together with their governors, legislatures, chief procurement officials, and private sector partners to ensure that states can achieve their vision of digital government and enjoy cost savings, efficiencies and enhanced services for the citizens they serve.
An increasing number of federal departments are moving away from the traditional 100+ page proposal process to a demonstrative challenge or hackathon-based acquisition competition as part of the procurement process. The procurement process allows for companies to actually show the government what they can do and compete for work through multi-day prototype development events, such as those used by the United States Air Force and United States Citizenship and Immigration Services.
Procurement offices are starting to provide strategic acquisition and contracting templates for contracting officers that allow both the agency and the vendor to deliver using lean-agile methods. These allow for flexibility to refine detailed requirements through close collaboration between government and its vendors. They also align contracts, payments, and oversight reviews to match agile cadence and practices (e.g., frequent, incremental deliverables, and product demonstrations). NASCIO and the GAO provide recommendations for actions states can take to improve the IT procurement process.
Slalom contributors: Stephen Walsh, Andrew Warren, Chris Pierz
