How Baltimore restored opportunities for growth

Baltimore city officials needed to stem a deteriorating financial picture as budgets were getting squeezed by rising costs and lower tax revenues due to a decline in the population. Among other concerns, the city’s existing financial plan had become outdated, a new state law had significantly increased the city’s contribution to the local education system and certain local tax incentives were no longer achieving their strategic objectives.

With combined pressures and uncertainty mounting, the city engaged Ernst & Young LLP to review its 10-year fiscal plan and provide insights about potential opportunities for reform. The project included an examination of the costs and benefits of existing budget policies, which identified more than 100 potential cost-cutting and revenue-enhancing initiatives worth nearly $4.2 billion over 10 years for the city to consider.

The EY-Parthenon report’s analysis demonstrated that while Baltimore had been focusing its attention on fiscal policies affecting revenue and costs, the city could also do more to take advantage of structural reforms and capital strategies as drivers of long-term growth. Structural reforms could include cost-saving measures like increasing the use of shared back-office services among city agencies and streamlining procurement processes. The report recommended making strategic capital investments in areas such as artificial intelligence, a technology-supported “smart city” concept, sustainable energy solutions and monetization of city assets like parking garages.

The work marked the beginning of a trusted relationship to help the city navigate a variety of financial and economic challenges. Along the way, Baltimore engaged with EY-Parthenon professionals to provide diverse capabilities for matters ranging from financial planning to efficient real estate optimization, the maximization of emergency federal COVID-19 pandemic relief, the design of the city’s future-of-work strategy and analysis of the city’s use of tax credits. Throughout these repeated collaborations over several years, the EY team helped the city solidify its budgeting position and build new capabilities for future growth.

“The EY-Parthenon team brought strategic insights and considerations to help city leaders innovate and prioritize options to stabilize its financial position. We were able to show the city many additional opportunities they could consider to achieve their strategic objectives,” said Government Turnaround and Restructuring Partner and project leader Adam Chepenik, EY-Parthenon, Ernst & Young LLP. “The outcome largely depended on close collaboration with the knowledgeable professionals in the Bureau of Budget and Management Research and the rest of Baltimore’s government,” Chepenik said.

Real estate portfolio review identifies savings and efficiencies

Following the initial review of the city’s 10-year plan, Baltimore engaged EY Real Estate Advisory practitioners to help strengthen the economic management of several city properties. In the first phase, the EY team created an inventory database of the city’s real estate portfolio to help identify nonstrategic assets as candidates for monetization. Next, the EY team evaluated future economic options for three buildings, including potential sales and estimated pricing ranges.

Baltimore also asked the EY real estate team to help identify management strategies for 11 properties to reduce a backlog of more than $700 million of deferred maintenance costs. This third phase, which is continuing, involves identifying value creation and transaction options to sell, lease, or maintain and renovate the buildings in ways that would promote efficient use and economic development. As an example, the team recommended bringing some formerly tax-exempt properties back onto the property tax rolls by considering potential transactions and public-private partnerships.

The work included:

• A current-state analysis of the properties to help prioritize maintenance and optimal building use based on strategic value and economic opportunities.
• Creation of a centralized database and dashboard to analyze the real estate portfolio.
• A list of potential value-creation strategies, including a decision-making framework for the city to evaluate possible transaction opportunities.

“It was about finding ways not just to increase revenue and cut costs, but also to use the office space strategically to promote development downtown,” said Chepenik.

The work cultivated a high level of trust from Baltimore leaders and enabled the EY team to develop a deeper understanding of ways to decrease costs and promote economic development and growth.

Federal emergency funding

Baltimore was able to turn to the EY-Parthenon team again for help when the COVID-19 pandemic hit in 2020, an acute crisis with more urgent priorities. The immediate impacts reached far beyond hospitals and emergency services, straining public services and staff throughout the city government and threatening to derail the careful work the city had done so far to stabilize its finances.

Financial help was available through federal programs, including the quickly passed Coronavirus Aid, Relief, and Economic Security (CARES) Act, but to access it, city officials would need to dig through a mountain of paperwork, complicated federal rules and eligibility criteria.

City officials asked the EY Insurance and Federal Claims Services practice for help, including tracking the pandemic-related expenditures and identifying opportunities for federal reimbursement.

Besides $103 million in CARES Act funds, the EY team helped Baltimore collect nearly $200 million in Federal Emergency Management Agency aid, far beyond what officials had expected, enabling the government to expand emergency services to reach a greater number of vulnerable residents and sustain those operations throughout the pandemic.

Additionally, if the paperwork had not been handled correctly, governments that received money faced a risk that the grants could be clawed back a few years later during follow-up federal audits.

“You had all these successive bills passed at the federal level and numerous agencies involved. It’s a maze of things to understand,” said Robert Cenname, City of Baltimore Budget Director. “There was no chance my team and I could manage it all. EY teams have people who know the federal process and can navigate it. I can’t overstate how truly impactful it was for us.”

Coming out of the pandemic, city officials began to grapple again with real estate usage — specifically, potential opportunities to reduce and consolidate office space — as they focused on employees’ post-lockdown expectations that work-from-home options would continue to be available. City officials first needed to understand the flexible or hybrid working arrangements being used in city offices that were becoming important for the retention of skilled and motivated employees. The city needed a new approach that would balance flexible work and office space efficiency while promoting collaboration and productivity and improving customer service. The changes would require new policies and capabilities affecting IT infrastructure and security, HR policies and change management.

Baltimore engaged an EY team to help rebuild its work strategy, including a future-of-work pilot program and real estate space playbook. The multiphase project included:

• Assessment of 1.3 million square feet in the city’s downtown portfolio to identify spaces for the future-of-work pilot and to understand IT infrastructure needs.
• Interviews and workshops with major agencies to understand their work profile and department culture and advise agencies on managing change.
• Creation of a data-driven floor space calculator for city agencies to calculate their real estate needs, including square footage, infrastructure and amenities.
• Development of space and occupancy standards to implement in future designs for city offices based on space types, key features and leading practices.

As a result of the project, the city acquired the tools it needed to implement key standards across its real estate portfolio and enable a potential reduction of selected downtown workspace footprints by up to 50% and operating costs by 40%.