A Conversation With…

The Government Finance Research Center works with researchers from a variety of backgrounds to analyze the role that public finance plays in our lives. In the interviews below, we talk with experts to dig deeper into pertinent topics and get their perspective on the past, present, and future of government finance.

“..given the broad economic impact, we know that nearly all cities are feeling constrained, whether it’s a pinch or a tight squeeze..” -Christiana McFarland, Research Director, National League of Cities

Christiana McFarland, Research Director, National League of Cities

We’re dealing with a sudden and deep economic impasse, largely as a result of the coronavirus outbreak. Do you have any general comments about this national experience?

The big question mark is whether everything freezes now and goes back to normal when the economy opens up again. Or whether there will be longer-lasting economic and fiscal implications. Are we just hitting a pause button? Likely not, there are jobs that are not coming back, state, and local revenues that won’t be recovered and consumer behaviors that are changed for good.

The fast drop in economic activity, coupled with an enormous amount of uncertainty about the return of the virus make comparing this to other recessions very challenging. In this environment, projecting revenue shortfalls for cities is not easy, either from the national perspective or for those working in local government.

But we do have some indications about how specific city revenue structures respond to what’s happening in the economy, and that, combined with projected unemployment, is what we use to project how city finances will fare over the next few years.

Any particularly specific findings?

First, the revenue structure is highly variable from city to city, with some relying more on sales or income taxes, some more heavily on property tax revenue. The health and economic impact of coronavirus was also very uneven across the country. Put them together, and you’re looking at $100 to $150 billion in potentially lost revenues this year alone.  That’s roughly 20 percent of cities own revenues and fees.

Also, there are likely going to be big cuts in state aid, as the states are filling their own budget gaps. But our projections don’t include declines in state aid, meaning the fiscal problem may be even worse than we project.

Property tax is still a huge component, but it tends to lag the economy.  So, the vast majority of the shortfall is in sales taxes, income taxes, fees and services. 

That’s right. We’re finding that cities that rely most heavily on sources like sales, income and fees are feeling the brunt of loss of revenue right now. Cities that rely on property taxes are more likely to feel the brunt over the next year. But regardless of structure, given the broad economic impact, we know that nearly all cities are feeling constrained, whether it’s a pinch or a tight squeeze.

Anything more?

Cities are suspending and deferring fees, charges and taxes as economic stimulus. In addition, even when not deferred or suspended a lot of people can’t pay them.

Are raising taxes, to fill budgetary caps, a feasible solution?

From that perspective raising taxes may not be feasible. If, for example, you raise the sales taxes and everything is closed, it’s not going to make a difference. Also, many cities don’t have the authority to raise taxes on a whim, their ability is controlled by the state.

What about user fees?

Many of the activities for which those are used aren’t there at this point. That includes things like library fees and, many parks and recreation activities, that have been closed. Then there are summer camps, which can be a huge revenue generator.  But many have closed.

Just think of all the services cities provide, particularly in the summer months. In addition to the services themselves simply not being offered, we’re finding that cities are more in the mode of reducing financial burdens on residents and businesses, not adding to them with additional fees.

So, then is the only real alterative to be found in cutting services?

Personnel are being affected. Because that is the largest part if a city’s budgetary expenses. And for cities, when personnel takes a hit with furloughs and layoffs like we’re seeing, that equates to diminished services. Not just in parks and recreation, but also in less anticipated areas like public safety include fire, police and emergency medical technicians.

Is there any good data out there to give us a solid idea of the impact of cuts being made?

It’s been an interesting time to collect data! Cities have been very willing to share their experiences with us, from the types of service cuts, impacts on expenditures and budget shortfalls that they are facing. It’s also budget season, so they are trying to figure out a lot of this just as we are. We have a survey out now about local impacts of the coronavirus and will also release our City Fiscal Conditions survey this later summer, which will give us better look at how services and budgets are being affected.

What can cities anticipate from a third coronavirus package?

Federal support is certainly on the minds of state and local government leaders and advocates. We are hopeful that federal support will be available directly to cities of all sizes and be flexible enough to not only cover expenses directly related to corona virus mitigation, but also to help cover revenues lost as a result of swift economic decline. Providing this stability and certainty to cities as they prepare their own budgets will be crucial to a successful recovery.

Until the cash is in hand from the federal government are cities counting on it in forming their financial plans?

While we have good indications that cities will receive additional support, there are a number of questions out there. Most cities are not certain and are not forging ahead assuming they’ll be getting more from the feds

 

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