Modeling the Financial Impact of COVID-19Posted on May 11, 2020 2:21:49 PM
If it has not already happened, in the near future you will likely be asked about how the COVID-19 pandemic will financially impact your district. While things like FY20 expenditure savings and FY21 interest earning reductions can be projected now, the fact is that the scope and/or duration of many financial impacts are still unknown. Nonetheless, there is great value in positioning your district to assess the impact of new information as it becomes available.
First, it's important to prepare a multi-year projection based on pre-COVID-19 assumptions. This will allow you to have a base to measure against.
Next, it makes sense to develop several scenarios—one that models a quick recovery, a medium-paced recovery, and a slow recovery. Any more than that and you run the risk of overwhelming your audience. Modeling three scenarios may seem like a daunting task, but by reviewing what has happened to date and what we already know, it becomes much more manageable.
Many districts that we work with do not anticipate a decrease in FY20 revenues. (Some are anticipating a delay, but most eventually expect to receive budgeted amounts.) Many of those same districts are able to reasonably project reduced FY20 expenses, and as a result will actually end up financially better than their pre-COVID-19 projections for FY20.
Assuming schools open in the fall, expenditures will likely return to pre-COVID-19 levels, but revenues may decline. The question will be by how much, and for how long. This will likely vary by state and revenue type. For example, property taxes are a major source of funding for many districts in Illinois. Since the FY21 formula components were set prior to the pandemic, the only impact of COVID-19 on FY21 receipts could be a decline in the tax collection rate. If the economic shutdown causes CPI—a major factor in the formula—to track low through December, that could have a substantial impact on FY22 receipts. Consequently, Illinois districts may want to develop several scenarios, one where the December CPI is not impacted (quick recovery), one where the CPI is impacted starting in 2020 (medium recovery), and one where the CPI is impacted for two or more years (slow recovery). If your main local source of revenue is formula driven, analyze when you will likely be impacted, and develop three different scenarios (quick, medium, and slow) using varied formula assumptions.
Interest Earnings will likely decline beginning in FY21 for most districts, regardless of the state in which they are located. Since no one knows if the interest rate drop will be relatively short or extended, adding a quick, medium, and slow return to pre-COVID-19 rates to your three scenarios makes sense.
The impact on state revenue will depend on how prepared your state is to weather an economic downturn. Has your state communicated any information about FY21? If not, you may be able to look back at the Great Recession for clues. 5Sight is a great tool for doing this. During the recession, did your state reduce entitlements across the board? Did it preserve the primary funding source for schools and prorate mandated categoricals? Did it reduce payments or simply delay them? Once you have determined how you think your state will proceed, you can then model assumptions of varying lengths into your scenarios.
Finally, the last component to look at is federal stimulus. Has your state projected out disbursements under the CARES act? If so, those amounts should be built into all your scenarios, except the pre-COVID-19 projection.
The comparison dashboard below shows the results on Fund Balance of the three scenarios compared to the pre-COVID-19 projection.
Your results may or may not look similar to the chart above. If they do, what is there to be learned? First and foremost, the chart is showing relative stability through FY22 in every scenario. That should provide some comfort, as it means there is time to be more measured and deliberate in reacting to the pandemic.
It's likely that with each passing month, more information will become known, and one of the scenarios may start to emerge as your district's most likely trajectory. Until then, new information should be added to all three scenarios (quick, medium, and slow) to assess the impact and stay as current as possible.
Steve Crouse, 5Cast Product Specialist, demonstrates how to access the 5Cast Comparison Dashboard and how to easily update assumptions to your scenarios using Assumption Assist starting at the 1:02:32 mark of the Illinois COVID-19 Financial Planning Forum Webinar (04/15/20).
If you have questions about modeling the impact of COVID-19 and are not yet a 5Cast user, please request a demo. (5Cast clients, please reach out to your Advisor.)
Allen Albus joined Forecast5 in 2016 and is a Senior Manager/Analytics Advisor working with our 5Cast software. Prior to joining Forecast5, he worked as a CSBO for almost 30 years, served on the Illinois ASBO Board of Directors, and was the Illinois Association President in 2004-05. Allen has a BA in Management and an MA with certification in School Business Management.