How will the coronavirus affect cities and local governments?

By Joe Coletti, Senior Fellow at the John Locke Foundation

Local governments have been the first line of government action in the fight against the coronavirus. They are also the level of government most vulnerable to the fiscal impact of the virus and subsequent response. Smaller towns and counties were already dipping into reserve balances to sustain their operations before the pandemic hit. Local governments need to consider not only how to get through the near-term health crisis, but also how to prepare for the long-term financial challenges that ensue. Below is a snapshot of how the coronavirus will impact local governments, as well as policy suggestions for state think tanks as they help cities address this financial crisis.

Revenues will fall

Sales taxes are not as volatile as income taxes, but still fluctuate with the economy, and provide a significant portion of local government income. Closed restaurants and canceled events mean entertainment and tourism taxes take a big hit. New York City could lose up to $6 billion in tax revenue as a result of the coronavirus shutdown. College towns have lost much of their population six weeks before normal, and other towns 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 money to cover property tax bills when they come due. Development and impact fees will also dry up with fewer new construction plans. If everyone is lucky, the revenue hit will be temporary.

Enterprise funds cover activities that local governments hope will pay for themselves, such as golf courses, convention centers, hospitals, and utilities. In conjunction with stay-at-home orders, local governments have refrained from cutting off utilities and reconnected utilities that had been disconnected because of missed payments. Public hospitals preparing for and treating COVID-19 patients have seen major losses due to the cancelation of elective operations and other non-life threatening medical appointments.

Most expenditures will not

Even as tax, fee, and service revenues fall, local governments still must maintain trash pickup, police, and other services. Localities will see some savings on facility costs and fuel, but nothing in comparison to the lost revenues.

As if that weren’t enough, demand for social services will increase, meaning higher costs for housing, food, mental health, and Medicaid in states where local governments share the 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 state think tanks should encourage local governments to respond

Experienced local government officials and staff know that states do not have capacity to help and are more likely to either push costs down or end assistance they’ve been providing in the past. State think tanks can offer ways to reduce the burden on state and local governments simultaneously.

First, local governments should reconsider 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 economic development 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 be a good time to get out of the business of publicly funding convention centers, professional sports facilities, and performing arts centers.

Now that local governments, like the rest of the country, are learning how to work remotely, they could consider shrinking the space they use and what facilities they can sell. Other businesses may be making these same calculations, just as some state think tanks are, 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 local governments to look for ways to improve quality and reduce the cost of back-office teams (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 Governmental Accounting Standards Board financial requirements.

Looking ahead, cities and states can adjust zoning and permitting ordinances to allow more home-based businesses, similar to an Arizona bill that would allow “no-impact” home-based businesses anywhere in the state. Now that people have worked at home, more may want to stay h ome and start a business. They may also consider relaxing rules on food trucks, which are only open for take-out, and other services.

States should also consider creating a Local Government Commission (LGC) like North Carolina did in 1931 after a series of municipal bankruptcies. The LGC monitors the fiscal health of local governments, approves proposed borrowing, and provides management assistance.

A balancing act

As a result of COVID-19, local governments are stuck trying to balance their budgets without much flexibility in cutting the services they provide. They cannot simply raise taxes on their residents and cannot rely on financial assistance from the state. Ending economic incentives, shrinking the physical size of government, and finding ways to share administrative functions are ways to reduce the cost of government without reducing the quality of services to citizens. Reducing the burden on new businesses can help make a more resilient local economy and prepare for the next round of growth after the pandemic. States should also take a more proactive role in ensuring the financial health of towns and counties with something like North Carolina’s Local Government Commission. State think tanks can and should help local governments get through this crisis with ideas like these that advance freedom and protect taxpayers.

Contact Joe Coletti at jcoletti@johnlocke.org.