Local governments have been the first line of public action in the fight against the new coronavirus and COVID-19. They are also the level of government most vulnerable to the fiscal impact of the virus and response.
Smaller towns and counties were already dipping into fund balances for pre-pandemic operations. Now, local governments of all sizes need to consider not just how to get through the near-term health crisis, but also how to prepare for longer-term financial challenges.
Revenues will fall…
Sales taxes are not as volatile as income taxes, but still fluctuate with economy, and provide a significant portion of local-government income. Closed restaurants and canceled events mean entertainment and tourism taxes also take a big hit. New York City could lose up to $6 billion in tax revenue as a result of the coronavirus shutdown. Other entertainment and convention centers will lose large portions of their budgeted revenue.
The risks span nearly every aspect of municipal revenue. College towns have seen population declines six weeks earlier than normal, and every town will lose graduations, proms, and countless other celebrations. Landlords and banks can offer grace for rent and mortgage payments, but that could leave them without enough to cover property tax bills when they come due. Development and impact fees will dry up with fewer new construction plans.
Enterprise funds will also suffer. These cover activities that local governments hope will pay for themselves, such as golf courses, convention centers, hospitals, and utilities. Many municipalities that operate utilities will face a backlog of unpaid receivables since most have generally refrained from cutting off utilities and reconnected utilities disconnected because of missed payments. Convention centers will be empty into June at the earliest, which will also affect the surrounding business districts. Public transit ridership is down, which also means lower revenues. As public hospitals prepare for and treat COVID-19 patients, their charges for other services will also take a hit.
If everyone is lucky, the revenue hit will be temporary.
… And most expenditures will not
Even as tax, fee, and service revenues fall, local governments still must maintain trash pickup, police, and other services. There will be some savings on facility costs and fuel, but nothing close to the lost revenues.
As if that weren’t enough, demand for social services will increase, meaning higher cost for housing, food, mental health, and Medicaid in states where local governments share in cost. Cratering financial markets will demand higher payments over the next five years to maintain pension solvency. Health coverage for local employees will also likely become more expensive.
How to respond
States don’t have the capacity for broad help, and are more likely to either push more costs down or end assistance they’ve been providing in the past.
States don’t have the capacity for broad help, and are more likely to either push more costs down or end assistance they’ve been providing in the past. For cities to recover, changes in policy that reduce both state and local burdens should occur simultaneously:
- A first step: Reconsider the economic incentives that throw money at large companies to move in instead of allowing local companies to grow. These usually involve both state and local funds. States that have not yet imposed a moratorium on incentives for intrastate moves could easily do this.
- Local capital projects funded by the state still often require local expenditures to maintain. A pause would provide leeway for both the state and local government. This may also a good time to get out of the business of convention centers, sports facilities, and performing arts centers.
- Governments, like the businesses in their communities, are learning to work remotely. They should consider shrinking the space they use and what facilities they can sell. Other businesses may be making these same calculations, which could further impinge on property tax collections. Maintaining water and road infrastructure is already a burden, which may lead to more interconnection of local utilities.
- States should encourage municipalities to look for ways to improve quality and reduce cost of back office (finance, IT, HR) by sharing services. Local governments could share a common resource with others in their area or smaller governments could outsource their services to a larger city or county across the state. Few local governments can afford to hire and keep a person with the experience needed for the complexity of protecting even a small town’s IT system or keeping up with GASB financial requirements.
- Cities and states can adjust zoning and permitting to allow more home-based businesses to form and thrive. An Arizona bill would allow “no-impact” home-based businesses anywhere in the state. Now that people have worked at home, more may want to stay home and start a business. They may also consider relaxing rules on food trucks, which are only open for take-out, and other services.
- In times of fiscal stress, there’s a role for additional oversight. States should also consider creating a Local Government Commission like North Carolina did in 1931 after a spate of municipal bankruptcies. The LGC monitors the fiscal health of local governments, approves proposed borrowing, and provides management assistance.
COVID-19 leaves local governments stuck trying to balance budgets without much flexibility in cutting the services they provide. Cities cannot simply raise taxes on their residents and cannot rely on financial assistance from the state.
Change can be difficult at the best of times. But for many cities, the change may be a matter of fiscal survival. Developing a plan around sound, proven policies that have worked in other communities shouldn’t wait for the lockdown to end. The time to act is now.
