Public Finance Strategies for the Post-COVID Economy

May 4, 2020

By Girard Miller

Girard Miller is a retired expert in the field of public finance.  He now writes informative opinion columns for Governing on topics relevant to state and local government, and is active in the So Cal startup investment community.  Previously he worked in municipal government in New Jersey and Michigan, then as the director of technical services for GFOA, the president of two national mutual funds, and a consultant in public finance. He served as an advisor to the U.S. Treasury on arbitrage investment regulations.  A CFA charterholder, he is Sarbanes-Oxley and federal-court qualified as a financial expert. His 2019 book, Enlightened Public Finance discusses and quantifies tax reform options, the pitfalls of federal deficits, and better ways to fund infrastructure.

Once this global pandemic is brought under control, the “Post-Pandemic Fiscal Re-Set” will move forward for state and local budgets. Without claiming prescience, what follows are important trends and issues that practitioners and pragmatists in state and local government finance must confront in coming months.

  • Multi-year revenue impairment
  • Telework
  • The future of retail, its impact on land use, and property tax revenues
  • Infrastructure economics
  • Collective bargaining
  • Pension assumptions and budget implications
  • Who pays what for health care in coming years?
  • Rainy day funds
  • Deflation now, inflation later


Revenue impairment. The pandemic hits state and municipal budgets differently. The more income and sales tax a jurisdiction collects, the more it will be impacted in 2020 by the slump in economic activity. The duration of stay-home orders will hurt local sales taxes and state income tax collections the most visibly. Property taxes are the most stable, although there will be long-term damage in the commercial and office sectors, as telework becomes more prevalent. But beyond that, there will be lingering impairment of many units’ multi-year revenue base. State budget officers are better equipped to make projections of these revenues than most local finance departments, but this may be the year for municipal leagues and state GFOA associations to hire some independent expertise to help them quantify and navigate the outlook for 2021-22.


Telework. Now that everybody has learned how to Zoom and many are working from home, it’s very likely that office operations will change forever.  This will affect staffing in both the private and public sectors. Many more workers will opt to telework one or two days weekly. Internal office space utilization will likely change forever. Public sector budgets will need to include some retrofitting expenses. Some large public agencies can rent out their surplus office space, or exit their own leases. One outside-the-box idea:  a national network to convert surplus government office space into mutual-aid business-continuity centers. Another is to offer low-rent or in-kind space to startup business incubators, to foster local economic innovation that strengthens the local employment and tax base.


Property tax base. Non-residential tax revenues in 2022-25 will decline. Brick-and-mortal retail will not recover to 2018-19 levels for years, if ever. Likewise, from a municipal property tax standpoint, don’t be surprised to see the tax assessments of office buildings level off or even decline. As an investor, I bailed out of my office REITs in the nick of time, expecting lower rents to persist for several years. Hotels, car dealerships, shopping malls, convention center businesses, and others impacted by social distancing will soon be appealing their property assessments on an “income basis” regardless of replacement cost.


Infrastructure. I expect Congress to pass a major bill in the next 12 months, but not until 2021. My recent column in Governing online explains why.  , The most important strategy right now is to make sure public works departments all have one or two “RFP ready” plans that can be presented immediately in grant applications for fast-track construction. Also, CFOs should have a financing source lined up for matching funds, ready to go whenever Congress opens the spigot for a cost-sharing requirement.


Collective bargaining and pension costs. Existing multi-year labor agreements may need to be re-opened to avoid layoffs. For new contracts, finance officers must insist that if Congress expands national health care, public employers’ share of any health benefits cost savings will be used to restore services, not increase salaries.


Don’t overlook the almost-inevitable increase in pension contributions resulting from the 2020 stock market slump and corporate earnings deceleration, despite the recent market rallies. Pension earnings assumptions will be further worsened by the dramatic decline in interest rates and bond yields.  Inevitable future corporate tax restorations will impair future earnings and price appreciation. Today’s actuarial assumptions will keep sliding lower -- which requires higher and higher employer contributions.


Who pays for what health care costs, in future years? Depending on the outcome of November elections, it’s a good bet that if Democrats gain seats in Congress, there will be more movements to expand national health care benefits.  Whether it’s reducing the eligibility age for Medicare (which could favorably reduce OPEB costs) or enacting what I’ll call Major Medical for All (MM4A) for hospitalization insurance, public officials should keep an eye open for ways to reduce employer costs that may be borne by federal taxpayers.


On the other hand, don’t be surprised to see increased Medicare payroll taxes on employers, and “Income based premiums” for individual participants that may not find their way onto the pay stub.  The next Congress will be itching to enact some major health-insurance cost-shifting. Where possible, set expectations early that any employer cost savings are not a windfall to pump into payroll. Remind labor negotiators that increased premiums for expanded Medicare may impact employees as well.


Rainy day funds. They will be exhausted by year end, in most places. Don’t let elected officials forget how these reserves avoided an even-worse financial crisis this year.  Repeatedly explain and reinforce the need for long-term planning to replenish them.


Deflation now, inflation later. Expect CPI numbers to go flat or even negative as oil prices remain low from the global glut. Stay-home consumer demand in 2020 is sharply negative for many goods and services. Discounting will abound for the coming year.  But don’t’ fool yourself about these massive federal budget deficits. If Congress keeps kicking the can by endlessly ignoring its budget imbalances, the most likely trend in the next decade will be inflation or stagflation. While inflation is low, avoid long-term contracts with CPI adjustments, extract such provisions where possible, or cap them at 2% or less.