For the past several years, cities and counties have been riding high atop the wave of budget surpluses. Now, local governments are peering down a precipitously steep drop. Many are asking when — and how hard — they will hit bottom.

Unfortunately, counties are poised to receive the hardest hit given their range of programs. But cities also are facing difficult prospects. Both are seeking new ways to reduce internal costs and manage their money more effectively.

The burden of financial woes falls most heavily on those most in need of social services. Local governments now must balance those service needs with economic realities and stretch every dollar as far as it will go. Surviving tough times will demand creative responses, including re-thinking how a budget is financed.

Now is an excellent time for cities and counties to conduct a financial check up. If a local government has worked with a single financial institution for a long time, it should evaluate the costs and benefits of its current banking services. City and county officials should ask their banker's advice about ways to save money and enhance productivity. Some changes to consider include outsourcing non-core financial functions like payment processing, migrating to Web-enabled banking functions and enhancing fraud detection.

A number of new financial technologies are available that can provide cost savings. An electronic access account for employee payroll and other benefit deposits is something that all cities and counties should consider. That program replaces paper checks with an electronic, automated clearing house deposit and a debit card that provides recipients with online access to their funds. Individuals can use the debit cards at point-of-sale terminals or at ATMs.

Considering the internal cost of cutting a paper check can be as high as $25, an electronic account is an attractive alternative. Using an electronic access account will reduce instances of fraud, another expense of a paper-based system.

Migrating to a bill concentration service is another way local governments can trim costs. When so many individuals pay bills online, it does not make sense that so much manual labor is involved in processing payments. A bill concentration service aggregates account information and payments and sends them to local governments electronically, saving staff time and effort.

New financial technologies like those just mentioned may be able to help the bottom line, but cities and counties should evaluate other budget components. Although many local governments may be putting planned, capital-intensive projects on hold, it may not be necessary. Tax-exempt loans provide a cost-effective alternative to bond financing. Entities eligible for such loans include those that are authorized to issue tax-exempt debt directly to the public, including local governments. Entities most suited for tax-exempt loans are those with borrowing needs up to $20 million.

A reduction in financing costs is one of the major advantages of securing a tax-exempt loan when compared to issuing bonded debt, especially for issues of $1 million to $5 million. With a loan, governments can eliminate the fees from the bond issuer, trustee, bond counsel, credit enhancer, underwriter and underwriter's counsel. A more streamlined approval process, including a reduction in loan documentation fees and lower interest rates, is an added bonus.

It is easy to focus on financial woes. But if local governments look at the bigger picture, taking some steps today will help them prepare for the future, increase efficiency and benefit residents in the long term. And by doing so, they will be that much better prepared for the next budget crisis.

The author is senior vice president for the government and not-for-profit markets division of San Francisco-based Union Bank of California.