Doug Houser:
From Rea & Associates Studio, this is unsuitable, a management and financial services podcast for entrepreneurs, tenured business leaders, and others who are ready to look beyond the suit and tie culture for meaningful, measurable results. I'm Doug Houser. On this weekly podcast, thought leaders and business professionals break down complicated and mundane topics and give you the tips and insight you actually need to grow as a leader while helping your organization to grow and thrive. If you haven't already, hit the subscribe button for future episodes. And if you want access to even more information, show notes, and exclusive content, visit our website at www.reacpa.com/podcast, and sign up for updates.
COVID-19 continues to make major impacts, especially in government funding. Today, Zac Morris, Principal and Director of Government Services Practice at Rea & Associates, and Ken Richards, Principal at Rea & Associates, are here to talk about the latest and greatest in government funding and our most recent merger with Kennedy Cottrell Richards. Welcome to unsuitable, both Zac and Ken. Great to have you on.
Zac Morris:
Great to be here. Thanks for having us.
Ken Richards:
Thank you. It's good to be on.
Doug:
Absolutely. I wish we were together in person, Ken, perhaps at Three Tigers we should all be sitting there having a local beer right now. But such is life today. So, unfortunately, maybe next time we'll do that. We'll get Zac down to Licking County and get him some Three Tigers there. T.
Ken:
There we go. That sounds like a plan.
Doug:
Absolutely. Absolutely. Well, welcome gents. Again, appreciate you having one. Obviously a lot of unknowns and one of the things I continue to look at, particularly in the construction space, and I'm interested to hear your guys' take on it. What are the concerns at this point about government funding as we look into '21? What are you hearing along those lines? It's got to be top of the line for all of your clients in the government segment. Isn't it? Let's start with you, Zac.
Zac:
Yeah, Doug. It's interesting. I think you look at this there... I was just doing a quick search preparing for some of this and what we were looking for and just the Auditor State's Office in Ohio was listed over 100 different grant programs that have stemmed from the CARES Act and similar type items that have come in through as away, as a mechanism to flow some funding into our state and local governments. And just like we've said, the big concern is '21. A lot of our county and municipal governments have gotten some Coronavirus relief funding that needs to be liquidated before the end of this calendar year. So there were a lot of short-term patches going on right now, but obviously, we don't know some of the long-term effects and some of the long-term economical effects that will trickle down into our state and local governments and what that will be long-term.
Doug:
Yeah. And Ken, along those lines, obviously you've got the long experience in dealing with a lot of those state and local entities and municipal entities across the entire spectrum. Really, when we're talking about tax revenues though, they haven't seen the full impact of that yet. Have they, or won't that most likely more so be in the '21 that the impact of the reduced tax revenues [inaudible 00:04:03]?
Ken:
I think so. And Zac and I actually... That's a great question, Doug. We were talking about that this morning. And you think about the across the board impact on the local governments, even state agencies, you've got the income tax, sales tax, sales and use tax, hotel-motel tax, and what's happened to all of those industries and segments and that's a decrease and with property tax that's in arrears. So you're going to see, I think you're going to see decreases in all of those funding sources either continue to go down as the payments come in. And just case in point, we were talking this morning, just look at what happened with most municipalities' income taxes this year. You typically do April, I think most of us... What did we say, Zac? I think we-
Zac:
July.
Ken:
July. That has an impact, especially a county that's then dispersing it out to... Other taxes going to counties that are then dispersing it out, or even the income taxes. So those are just delayed impacts, but then the actual decrease in people paying those taxes, I think is going to have a long term effect that we just don't know yet. I was talking to a treasurer the other day, working on their five-year forecast. And they're really struggling with that right now because they don't know the true impact. And something Zac mentioned was this money that's coming out so quickly and then a short turnaround time to spend it. That puts me in mind of the last big ARRA, however you want to say it, tomato, tomato, all that money that came out so fast. And the regulations in a lot of cases trailed behind, but yet the governments were told to spend, spend, spend. And then auditors come in and audit it. There's a lot of things happening here. So that's a long answer to your short question.
Doug:
Yeah. A lot going on there. A lot to unpack. Along those lines, Zac, I mean, we've seen obviously recessions before. I think back to the Great Recession, '08, '09, '10 timeframe. And you obviously experienced that as well. With the government segment client base and the reduced revenues that followed, what was most impacted that you saw through that period for those different agencies?
Zac:
When you look at that, one of the things that Ken mentioned was the ARRA funding that happened at the time of the recession. And that's what he was referencing here was that in the American Recovery and Reinvestment Act that happened. And there was a lot of federal stimulus money that was injected into the state and local governments. And so that was really some of the biggest impacts that we saw then. Obviously, similar to what anyone else would feel outside of the government environment is there's always [inaudible 00:07:09] there are items that result in fee compression. There's a new competition that comes into our world of would-be firms that sometimes wouldn't do work in this type of industry, but then will come in. But when you look at what we impact, a lot of it was actually, there were more compliance requirements that were built around the funding streams. And that's kind of what we're experiencing right now, too.
And as Ken mentioned, one of the things you see is the government injects all of these funding sources and these programs, and then the regulations around them trail. So, I think back to a lot of [inaudible 00:07:52] the webinars I listened to you talking about the PPP money and the SBA and how it was continuously changing. And that was an evolutionary process. And that's exactly what we're experiencing now. We're waiting on the Office of Management and Budget. They're going to have a COVID supplement for compliance items for monies that are currently being spent, but we don't have that supplement yet. So there are just some things out there that we know is coming. We have a general idea. Our clients, the state and local government agencies have done a wonderful job of getting themselves up to speed the best they can. But there are just a few things here and there that we don't know yet that we'll be playing catch up on when some of that comes out.
Doug:
Yeah. I think it's harder too. People forget, me not being obviously a government expert like you guys, and public entity expert, the federal government doesn't have to balance its budget. And in fact, rarely if ever does. But our state and local governments, do. So when revenues change, expenses have to change immediately. There's no such thing as deficit spending there. And Ken, maybe talk a little bit about what, what you see there in terms of the impact, and then just kind of dealing with that from an agency perspective.
Ken:
The decrease in funding? Is that-
Doug:
Yeah. I mean, just in general, trying to manage that so quickly. All of a sudden when their revenue sources decline so quickly, so rapidly.
Ken:
Well, I guess I've got a perfect example of it. I won't name it, but there was a large state agency that we work with that literally overnight, because of COVID, their entire funding stream changed. And it's the first one that I've seen impacted this drastically, but they actually had to turn around and lay off 70% of their workforce. And this is a significantly large state agency. And then they had a turnaround and the six or seven that are still on the payroll, so to speak, have actually been lent to another state agency. And they worked out a payroll arrangement to where they can at least continue to keep their agency afloat until the funding gets back in place because it's a user fee-funded state agency.
So, I mean, that's extreme. I think the typical governments that we're dealing with, the schools like I talked about, and the counties and the cities, they're just fortunate enough that there is a baseline revenue coming in from the tax base. But they are looking out not just five years, five months. And how can we deal with this? And are we cutting programs, cutting hours? What can we do to deliver our services, but on a much skinnier or unknown funding situation? Because even with this COVID injection, it's tough to sustain until revenues get back up to where they were. So if you have a three-month injection, but the crisis lasts eight or 10, you've got a seven-month shortfall that you've got to be thinking about until you get re-established.
Doug:
And like you said earlier too, and this is unique to public agencies, their budgeting requirements are different. So Zac, maybe you can talk about that. I know the State of Ohio has a bi-annual budget. So it has to be a two-year budget. Some of the other agencies obviously are different. They're looking at longer-term budgets. Not like a business where they can necessarily just sort of change that on the fly as it were. Correct?
Zac:
Yeah. And that's interesting in how this impacts budgets for especially local governments. When you look at your municipalities, your counties, your school districts who have administrative code requirements. So when the budget and how they budget. And like you had indicated before, there are limitations on deficit spending as far as the code, and it's really designed to prevent deficit spending. So obviously if your revenue streams decrease, you need to modify your budgeted expenditures to align with that. And so I think in, as Ken mentioned, in the short term, they have had the ability to use some of these funding sources that have been coming in to replace that.
And there are some grants out there for some of our user entities, user fee type governments that are replacing revenue and doing some of those types of things. But it's all really like we said, it's all short-term right now. And everybody going through this budgeting process and looking ahead and forecasting are really just using the best guess that they have at this time. Just as it is across the board and what it's done to industry, to different things. It's having a very similar impact on our state and local governments.
Doug:
Yeah. It's interesting. And so much is unknown, as you suggest. I read earlier this week, there's a proposal in the Ohio legislature to change the withholding requirements on an individual level. I'm sure you guys have probably heard about this, but there are so many folks obviously working from home at this point, and there's been some folks kind of raise the question, "Well, I'm working from home. But maybe I worked in Columbus, that's where my company was located. My taxes are still being withheld as if I'm in Columbus, yet I'm not there." And so there are some Republican proposals to change that, which would massively impact certain revenue streams, income tax. I can't even imagine the trickle-down of something like that. Have you guys heard much about that at all? Ken, have you [crosstalk 00:14:11]-
Zac:
I do know here right after the crisis started, there was some legislation that in essence, knowing that everybody was working remotely, there was some legislation that basically indicated your principal place of employment is going to be treated as it was prior to the crisis. So we have heard and with what we're considering now is what we're talking about with our new normal, there's a lot of uncertainty on when or if that flow for businesses and state and local governments will go back into those urban centers and some of those places where that tax was generated and used. So it could have a very big impact on a lot of these governments who rely on that tax source and that revenue stream as a big part of their budget.
Doug:
Yeah. And Ken, obviously you work a lot with a large number of school districts as well. I'm curious to see what you've seen from that perspective, in terms of are they all in crisis mode or does it differ by school district depending on their individual situation? I mean, obviously, they're all adapting to this either hybrid or some or all remote. Some are still trying to do it in person with increased expenses. What's the impact at the school district level?
Ken:
Well, I mean I think it's similar across really all governments. There are certain key factors that all these governments had to deal with that they never thought they'd have to even be thinking about. Right? You hit it, the hybrid method. Well, to go to a hybrid method, that's not cheap and it's not something they had in their back pocket. Most of these schools had to move quickly and look for a company that could provide them with that service. And so there's a great example of an unplanned significant cost. I think you've seen this Zac, as well. I mean, that's a significant cost.
And then I think it was the National School Board Association, I had it on my desk in my office, but just to deal with COVID the way the Department of Health is saying that each and every school district should, you're not talking thousands, you're talking hundreds of thousands of dollars that they weren't planning on. Sanitizing, PPP, the protective gear equipment. How do you get kids from classroom to classroom six feet apart? And how do you house that many children and [inaudible 00:16:57]. And it's just across the board, everything you can possibly think of. And I know you've probably been in tune with it here in Granville. There are lots of meetings at our school going on when they were planning all this, How do you do it, A, and then how do you pay for it?
Doug:
Yeah. That's always the question.
Ken:
And then going back to your comment on the local income tax. I just think we work with another large government downtown that owns parking garages. Right?
Doug:
Wow. Yeah.
Ken:
Think about that. When you used to go downtown Columbus, you couldn't find a place to park. You can go down there right now, anywhere you want to go and find a premier parking spot.
Doug:
Great point.
Ken:
But you take six, 10 parking garages out of the equation that's generating that much revenue every... So, I mean when you really start thinking about your clients, even governments, and the different services they offer, they're all impacted in different ways.
Doug:
Yeah, that's an excellent point. So Zac, if you had to try to pinpoint a couple of things for your clients as we move forward into the next calendar year. Obviously, most of the clients you deal with, they have different fiscal years being government, public agencies. But what are you trying to get them to focus on as we move forward here?
Zac:
I think one of the things that I could say here is a lot of what I would hope and expect, they're all doing. We're getting a lot of communication right now from clients who are looking ahead trying to do those things. Our state auditor's office has done a wonderful job of helping outline what those funding sources are, making resources available to our state and local governments to help them identify what they can and can't spend the monies on, and go through a lot of that, a lot of the process with them. And I think just collectively it's created an environment where the various state and local governments are really trying to help each other. And when one finds something they're using their associations to help others know that it will work and levels of communication have increased and just the information sharing and different things that everyone's doing, knowing that everyone's going to have a little bit different impact, but we're all experiencing the same crisis.
And just [inaudible 00:19:31] just some of the collaboration has created has been very beneficial. And I think we're learning a lot of things right now, learning a lot of things about how our clients are adapting to do things differently, how as a firm we've tried to adapt to do things differently. And I would say most of what I would want to see and would have hoped to have seen, everybody's doing. So I think that's the biggest takeaway that I can [inaudible 00:19:53].
Doug:
That's awesome. Yeah. Great to hear that, certainly public agency level, we're seeing a lot of that collaboration and communication. So speaking of which. Ken, your firm has merged into Rea here effective September 1st, I believe. Correct?
Ken:
Correct.
Doug:
Yeah. So talk a little bit about how that process has been. You talk about collaboration and communication and... Hey, full transparency here. Obviously, that's kind of a whole new world, joining up with our firm, not that you haven't known a number of folks for a long time. But what's that process been like? And what wisdom can you share with our audience out there if they ever go through a transition in their business to think about?
Ken:
Well, I told Zac, I think early last week we were talking. I said, "Have you ever felt like you're trying to get a drink out of a fire hose?" So I have my days like that. But you know what? Overall the process has just gone really well. I mean, just starting from the merger date forward, but you really got to back it up to just how we got there. And from when the discussion started to the pandemic starting, and then still plowing through it. It's just been a great process. And the culture was the biggest thing that Bill Jared and I all we're looking for and Rea's culture just lined up perfectly. And this isn't your first merger. Well, obviously it was our first merger. So, the team at Rea has just been phenomenal trying to help us through the entire process.
So I don't go a day where I don't ask probably too many questions, but as I said, Rea's been through this, and I think probably each time they've gotten better and better at it. But our transition is, I think, exceeding the expectations I had. I thought it would be a lot more painful than what it has been. And I think part of that has been, for a few years Zac and I have actually, I don't know, co-opt or worked together on some projects. And I've gotten to know a lot of Rea people in the government division over the last few years. And that's definitely helped.
Doug:
Yeah. I think that's key, as you said. Really when you look at it, you started several years ago with that. And then obviously Zac, kudos to you for helping build that relationship and help make it more smooth and comfortable for those guys. So that's awesome. Great stuff. And now-
Zac:
[crosstalk 00:22:48] definitely been... And just [inaudible 00:22:51] have been thrilled to have the team join us. And the hardest thing, we talked a lot about the virtual work environment and what everybody's doing. I think the biggest challenge in all of this is just trying to get everyone integrated. And so we've been doing a lot of that through Zoom and in so many different environments, we would have had social hours, we would have had different happy hours. We would have done a lot of those things that we're just trying to find new ways to do and not lose that contact between our teams. So I think we're working through it, but now we're thrilled to have them.
Doug:
Yeah, absolutely. And gents, I really appreciate both of you taking the time to be on today and share your insight. And we'll certainly have to get together soon at Three Tigers and have some adult beverages and enjoy each other's company. So we'll have to work on... Ken, we'll work on Zac and get that done.
Zac:
I was going to say, I know you can count me in.
Doug:
Yeah, absolutely.
Ken:
Sounds good.
Doug:
All right. Well, thanks, gents. If you want more business tips and insight, or to hear previous episodes of unsuitable, visit our podcast page at www.reacpa.com/podcast. And while you're there, sign up for exclusive content and show notes. Thanks for listening to this week's show. Be sure to subscribe to unsuitable on Apple podcast, Google podcast, or wherever you're listening to us right now, including YouTube. I'm Doug Houser. Join us next week for another unsuitable interview with an industry professional.
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