“Spending less in another area.” That phrase captures the operational reality that plays out in school districts, transit agencies, county highway departments and municipal facilities offices every time energy prices move sharply. It is not a risk management strategy. It is improvisation — and it is what happens when governments haven’t done the harder analytical work in advance.
That work starts with a question most budget offices haven’t formally asked: What is our government’s total energy-cost footprint — and what happens to our budget if that footprint gets significantly more expensive and stays that way?
The question is urgent. The U.S. Energy Information Administration (EIA)’s latest Short-Term Energy Outlook projected that gasoline and diesel prices would peak above $4.30 and $5.80 per gallon in April and average $3.70 and $4.80 per gallon for the full year. For retail gasoline, this represents a roughly 20 percent increase over the 2025 annual average of $3.10 per gallon, driven by supply disruptions in the Middle East and tight global inventories that the EIA expects to persist well into the forecast period. For governments with large gasoline- or diesel-dependent fleets, that isn’t a blip. It is a sustained budget shock arriving at a moment when most operating budgets were built on very different assumptions.
The reason the underlying question goes unasked is partly structural. Energy costs in government don’t live in one place. Diesel for the bus fleet sits in the transportation department. Natural gas and electricity for public buildings live in facilities management. Fuel for the highway department’s plow trucks is in public works. Contracted transportation — for special education students, for instance — may be in yet another account. Each line is visible to the person who manages it. The aggregate is visible to almost no one.
In the private sector, energy exposure is typically managed as an enterprise risk: centralized, measured and often actively hedged. Governments operate very differently. Budget authority is fragmented across departments, service levels are operationally and politically fixed, and procurement decisions are constrained by rules designed for transparency rather than flexibility. The result is that energy behaves less like a managed input and more like a distributed fiscal shock — one that few governments measure in full.
That invisibility has a practical consequence. A finance director who can tell you exactly what a 10 percent decline in sales tax revenue would do to the general fund over three years may have no ready answer for what a sustained increase in energy costs would do to the operating budget across all departments. The tools and habits that public finance has built around revenue volatility haven’t been applied with equal rigor to the expenditure side — and energy is the most volatile and widely distributed expenditure category most governments carry.
The total exposure is larger than it looks when viewed one department at a time. Fleet operations, facilities utilities, contracted transportation, snow and ice removal, pumping stations, public transit — add them together and energy costs can represent a meaningful share of total operating expenditures for many governments. The exact share varies by government type, geography and facility age, but the point is that few finance officers know their number. That’s the problem.
Who Carries the Most Risk
Not every government function is equally exposed, and it’s worth being specific about where concentration is highest.
Transit agencies and school districts, as you would expect, sit at the top of the risk profile, their core functions operationally mandated. A transit agency running diesel buses cannot reduce its energy consumption without reducing service. A school district with 200 buses in rural terrain cannot consolidate routes the way UPS or FedEx might consolidate deliveries.
Geography and climate compound the risk. Governments in colder regions carry larger heating loads for public facilities, and those in geographically dispersed service areas pay more to deliver services across distance. A county highway department maintaining roads across several hundred square miles faces a different cost structure than an urban public works department operating in a dense grid.
Facility age matters too. Governments with older building stock, as is more common in Midwestern and Northeastern jurisdictions, operate less-energy-efficient facilities, which means each dollar of price increase produces a larger budget impact than it would in a more efficient portfolio. An older school building that costs twice as much to heat per square foot as a newer one isn’t only an environmental issue; it’s a fiscal exposure that compounds with every price spike.
And then there is the contract timing question. Governments that locked in favorable long-term energy supply agreements several years ago are partly insulated — for now. Those whose fixed-price contracts are expiring in the near term face the prospect of renewing at substantially higher rates, a quiet but significant budget event that may not yet appear in current-year numbers.
The Stress Testing Gap
Here is where the prescriptive opportunity is clearest. The same finance officers who can model revenue shortfall scenarios with precision often have no formal framework for expenditure-side energy risk. The asymmetry isn’t a reflection of competence; it reflects where the field has built its tools.
Pew’s Fiscal 50 project tracks revenue volatility across all 50 states, calculating scores that help policymakers design evidence-based savings strategies and rainy day fund policies. The Government Finance Officers Association (GFOA)’s stress-testing guidance — developed significantly in the years following the COVID-19 fiscal shock — walks finance officers through scenario modeling for revenue downturns, reserve adequacy and long-term structural balance. The infrastructure for thinking carefully about revenue-side risk is well-developed and widely used.
Most budget stress tests begin and end with revenue scenarios. Energy cost volatility, when it appears at all in budget documents, shows up as a line-item assumption — an inflation factor applied to last year’s fuel expenditure — rather than as a cross-cutting risk that touches multiple departments simultaneously.
The mechanics of an energy cost stress test are not complicated, and they don’t require new software or outside consultants. Start with a full inventory of energy-related expenditures across all budget lines — fuel, utilities, contracted transportation and any other category where energy is a primary cost driver. Aggregate that inventory to understand total exposure as a share of operating expenditures. Then model at least two scenarios: a moderate sustained increase of perhaps 15 to 20 percent above current baseline over three years and a more severe scenario in the 30 to 40 percent range. Map the impact across departments and identify where exposure is most concentrated.
That exercise will rarely produce a comfortable number. But it will produce an honest one — and honesty is the prerequisite for management.
From Analysis to Action
Knowing the exposure creates the conditions for managing it. Several tools are available and underused:
Procurement strategy. Many governments purchase fuel on spot markets or through short-term contracts, accepting full-price volatility as the default. Cooperative purchasing agreements through state procurement programs or regional cooperatives can provide better pricing and more predictable costs. Some governments have moved to fixed-price or price-ceiling contracts for portions of their energy portfolios, accepting a modest premium in exchange for budget certainty. That trade-off is, at its core, a risk management decision — and it should be made explicitly by finance officers, not left as a default purchasing practice.
Demand-side management. Reducing consumption is the most durable hedge against price volatility, and many of the most effective interventions require management attention rather than capital investment. Fleet route optimization, idling-reduction programs and building energy management practices can meaningfully reduce consumption in the near term. These are often managed by operations staff rather than finance staff, which means their fiscal risk reduction value tends to get lost in the conversation. Finance officers have a role in framing these practices in risk management terms and advocating for them across departmental lines. Those Missouri school districts monitoring the current price spike and only now contemplating route restructuring are, in effect, absorbing the cost of not having taken those steps earlier.
Capital investment reframing. Fleet electrification and building energy retrofits are increasingly on the table in many jurisdictions, often framed as sustainability or climate initiatives. That framing carries political freight that limits its appeal in some contexts. The alternative framing — these investments reduce energy cost volatility and improve multiyear budget predictability — is a fiscal risk management argument that travels across a wider range of political environments.
Reserve policy. Most governments calibrate their reserve targets to revenue-side risk. GFOA’s fund balance guidance — one of its most frequently cited standards — is explicitly focused on maintaining reserves adequate to weather revenue shortfalls. But few reserve policies explicitly account for expenditure-side commodity volatility. A government with significant energy cost exposure might reasonably carry a modest additional buffer to absorb the midyear budget pressure that sustained price increases can produce, and that buffer should be sized based on stress test results, not on convention.
The Larger Discipline
The energy question is, at its core, about whether government finance has brought the same rigor to expenditure-side risk that it has developed for revenue-side risk. In most jurisdictions, the honest answer is not yet.
That gap matters because the fiscal environment ahead is likely to generate more expenditure-side pressure across multiple categories — energy among them, but also construction costs affected by tariff and supply chain dynamics, personnel costs in a tight labor market, and infrastructure maintenance obligations deferred across years of fiscal constraint. Governments navigating slow revenue growth and rising expenditure pressures have less margin for the kind of midyear improvisation that “spending less in another area” requires.
The practical first step is simpler than it sounds. Find out what your government actually spends on energy, across every budget line, and ask what your operating budget looks like if that number is meaningfully and persistently higher. Most finance officers will find that question harder to answer than it should be.
That difficulty is itself the finding. But unlike most fiscal problems, it doesn’t require waiting for the next price spike to make the case.
Governing's opinion columns reflect the views of their authors and not necessarily those of Governing's editors or management.
Related Articles
