COVID-19 & Cities: Municipal Fiscal Health

Recap by Carly Berke

On Wednesday, May 6, 2020, the Initiative on Cities (IOC) hosted COVID-19 & Cities: Municipal Fiscal Health, continuing the IOC’s ongoing COVID-19 & Cities series. Christiana McFarland, Research Director at the National League of Cities, and Pam Kocher, President of the Boston Municipal Research Bureau, joined IOC Director Graham Wilson to discuss the impact COVID-19 has had on municipal fiscal health and how it will continue to create financial challenges for cities.

“We know that cities are stepping up and filling a leadership vacuum that has been left at the federal level,” said IOC Director Graham Wilson to open the webinar. “But we also know cities have been hit badly by the crisis, not only in terms of the appalling death toll, but also by the fiscal impact. The demand for services from cities has continued or increased drastically during the crisis, but revenues have declined.”

McFarland spoke on a more broad scale about how COVID-19 has impacted cities differently across the country and how a city’s economic and revenue structures influence the virus’ impact on their financial health. Before COVID-19, city finances had last taken their biggest hit during the recession in 2008 and 2009. City revenues began recovering in 2011, and revenue continued to climb until it hit a growth peak in 2015, after which growth stabilized and plateaued (even though expenditures continued to grow).

While revenue growth has been relatively stable for cities across the country, each city’s unique revenue structure determines the timing and severity of COVID-19 on municipal fiscal health. Most cities in the northeast, for instance, rely on property taxes, which means they will not experience the immediate collapse of their fiscal structures. But McFarland anticipates that rising unemployment will hurt real estate demand, and over time people will not be able to pay property tax bills.

“I think there’s this overall sense that, while property-dependent cities will feel the fiscal impacts a little bit later than other cities that are reliant on sales and income taxes, they will still feel those COVID-19 impacts sooner than they typically would,” said McFarland.

The National League of Cities conducts research on cities across the country and has worked with the U.S. Conference of Mayors to survey cities on the impact of COVID-19. They have received responses from nearly 2,500 cities of all sizes, and McFarland emphasized that city economies are different and regional and fiscal structures differ depending on the state. This means economic conditions will play out differently in different cities. Cities with vulnerable fiscal compositions reliant on “elastic” sources will experience revenue declines more quickly than those with alternative economic and fiscal structures. The types of cities facing these more immediate economic challenges are dependent on revenue sources or streams that have been impacted severely already, like mining, oil and gas, transportation, and hospitality and tourism.

“The economy and local fiscal conditions are not one-size-fits-all,” said McFarland. “While some places are doing incredibly well, others are edging toward the next downturn.”

This crisis has also severely impacted municipal workforces, who face increased layoffs, pay cuts, and furloughs, and these impacts will continue. Cities are responding in real time and are working on the frontlines to fight the spread of COVID-19. As a result, they are forced to balance their budgets quickly, which has led to an increase in deep service cuts. According to McFarland, three million municipal employees across the country are facing layoffs, furloughs, pay cuts, and hiring freezes as a result of revenue shortfalls. This is a serious and lasting issue that will impact city governance for years, because municipal employees provide critical services that communities need and are essentially the “bread and butter” of America’s middle class.

Even with budget shortfalls, cities are still working to provide residents and businesses with financial relief, which often take shape as property tax deferments or waiver of business licensing fees. These fiscal decisions serve to benefit local businesses and residents, but they have financial consequences for budgets and financial resources. With little guidance or support from the federal government, cities have to make tough decisions and strain their fiscal resources on their own. McFarland and the NLC are calling on Washington to help cities of all sizes with federal aid to supplant their revenue shortfalls. “These are the hard decisions that cities are being forced to make, particularly in the absence of additional support from the federal government,” said McFarland.

Pam Kocher provided a more in-depth perspective on Boston’s financial health and how city finance officials have predicted COVID-19 will affect Boston. 

Boston has experienced unprecedented growth over the past several years and enormous economic success. In the past six years, since fiscal year (FY) 2013, Boston’s total taxable property value grew 78.4%, by $72.3 billion, an average of 13% a year from FY 2013 to FY 2019. Boston is also recognized by Moody’s as one of the U.S. cities most prepared for a recession. The property tax base expansion is a result of widespread construction and development in the city, like the Seaport District, which has undergone rapid commercial and residential development over the past 10-15 years. Boston is actually at a moment in which it is generating more revenue from new development than it is receiving from existing property tax bases.  

In the COVID-19 era, however, the city of Boston is facing a mix of knowns and unknowns. From a fiscal planning perspective, we know that global economies are in flux and likely headed toward a significant economic contraction; that local state, federal government revenue growth will slow; and that Boston is well positioned to confront this uncertainty, but not immune to its effects. Conversely, we do not know how long the immediate public health measures will remain in place, how long will it take the local and national and global economy to recover, and how state governments and the federal government will react to their new fiscal realities.

Kocher reported that Boston was well-positioned to confront economic uncertainty as of early April, when the Mayor first released his recommended FY 2021 budget to the city council. The city council is now holding hearings on several aspects of the budget, which will conclude at the end of May or in early June, when they will reject the Mayor’s budget and his office will resubmit the budget with adjustments.

This year, the development of the budget is uncertain. While Mayor Walsh released his budget on April 8th, during which several COVID-19 complications were taken into account, the crisis has changed and evolved since then, and it will continue to do so on a weekly and even daily basis. While city finance officials still feel confident about Boston’s underlying fiscal health, Kocher urged that precaution is still needed. 

As it currently stands, Boston’s FY 2021 budget is at $3.65 billion, which includes $3.61 billion in recurring revenue, including $2.6 billion from property taxes representing 72% of total revenue, $473.6 million from state aid (13% of total revenue), and  $188 million from excise taxes (5.1% of total revenue). 

But each of these items are subject to changes and revenue shortfalls, not just this year but for years to come. For instance, if Boston were to experience a decrease in property value, the impact on property tax revenue would not emerge in Boston’s finances until FY 2022, which are based on property values as of January 1st, 2021 and reflect current market conditions in 2020. “Lag time means that market conditions we might see in 2020, as we wrap up this year with the crisis in full blow, only impacts property values in future financial years,” said Kocher. “City finances wouldn’t see that for over a year and a half because of the timing of when the city assesses property and when they implement those updated property values.”

State aid is subject to cuts as well, especially as states grapple with their COVID-19 response plans and have yet to receive adequate aid from the federal government. State aid to Boston has decreased by 30% to 13% of the city’s budget over the past decade.

Excise taxes are also highly impacted by changes in consumption behavior and are thus closely linked to the economy. Local excise tax revenue on things like meals, hotel rooms, aircraft jet fuel and motor vehicles are projected to decline by a collective total of $20 million.

Finally, 8.9% of the city’s revenue, equal to $323.8 million, comes from other sources like investment income, payments in lieu of taxes, parking related fines, building permits, and others. These revenue streams will similarly be impacted by the pandemic. Payment in lieu of profits, for instance, of which the city has requested a total of $49 million for the following year, depends on the financial health of institutions like hospitals, colleges and universities, and cultural institutions, entities that might have fared well during the recession in 2008 and 2009 but are experiencing severe disruption now.                   

Overall, the Mayor’s budget proposal as of early April reflected limited spending growth overall, but major investments to fully fund fixed costs like pensions and debt service, new public health funding to ensure continued robust response, major new investments in education and housing, and targeted investments funded through identified cost savings. Whether the final budget will include these investments is dependent on the shifting nature of COVID-19 and how it continues to impact Boston, Massachusetts, and the entire country.

Kocher expects the final budget to reflect more conservative expectations about revenues. But despite the adjustments city finance officials will make in response to COVID-19 and budget shortfalls, the challenges facing our communities remain, and the city has a lot of recovery work to do to mitigate the threats of food insecurity, housing insecurity, employment insecurity, and access to health care.