With No Federal Help Coming, Cities Cling to the Financial Cliff

No level of government has escaped harm or fiscal damage related to the coronavirus crisis. But the fluctuations in municipal revenue caused by the pandemic — left conspicuously unaddressed by the latest version of a federal stimulus bill — reflect both long-term trouble for U.S. cities and the deeply uneven state of local economies.

As of Friday, the $900 billion Covid-19 stimulus bill, negotiated in tandem with a $1.4 trillion stopgap funding package to keep the government open, includes money for vaccine distribution and schools, $300-a-week jobless benefits, roughly $330 billion in new small business loans, and a new round of $600-per-person stimulus checks. But relief for states and cities that have been hammered by revenue losses does not appear to be forthcoming. 

The lack of direct aid in the deal means that Congress has “abandoned American cities,” said Mayor Greg Fischer of Louisville, Kentucky, president of the U.S. Conference of Mayors, in a statement. “There is no doubt that the pandemic has wrecked the budgets of local governments from coast to coast, and Washington’s unwillingness to help will cost people jobs and make communities less safe. Nearly 1.3 million state and local government employees lost their jobs over the last year — exceeding the total number of public sector jobs lost during the Great Recession. History has shown us that we cannot have a strong economy without strong cities. Congress is now making it much harder for our economy to rebound.”

Those concernshave been echoed elsewhere. “Cities, like states and other local governments, face a one-two punch in every recession,” says Tracy Gordon, a senior fellow at the Urban-Brookings Tax Policy Center. “I’m incredulous that they’re not providing state and local aid, especially since a recent CBO report shows that state and local aid provides the most bang for its buck, in terms of helping the GDP,” says Gordon.

The landscape of fiscal distress across U.S. municipalities varies widely, as do sources of city revenue. In-person economic activity such as restaurants, shops, the service industry and office work has slowed or shuttered entirely, damaging a constellation of small businesses and tanking revenue from sales taxes and parking fees. The virus-driven drop in travel and consumption affected just about every municipality that depends on hotel taxes, air transportation charges, and sales taxes (recent bumps in sales tax revenue, for instance, may just be the echoes of earlier infusions of stimulus dollars). New York and San Francisco have seen steep drops in hotel revenue; tourism spending in cities like Orlando, Las Vegas and Honolulu could take years to recover. In April, Louisvillepredicted a $115 million budget shortfall over the coming 14 months. Overall, a May analysis from the National League of Cities estimated that municipalities stood to lose $360 billion between 2020 and 2022. 

“It’s not anybody’s vision of a city,” says Gordon. “It’s fear, and people don’t want to transact in the marketplace.” 

The pain has not been shared evenly, however. Wealthy professionals, who can work and earn money at home, have enjoyed a far more stable financial situation in 2020. The skyrocketing stock market and run on high-end residential real estate has even led to asset appreciation for many, and helped some areas escape worst-case financial scenarios. 

New York City’s budget tells the same story; while tax revenues between March and August fell by $1.2 billion, the drop was smaller than expected, in large part because of the rise in property taxes (a 3.9% rise to $16.3 billion), which offset a decline in sales tax revenue (23.2% drop, a loss of $918 million). Thanks in large part to great performance in the stock market and securities industry, the city collected $985 million more revenue than expected from July through October.

While such windfalls have led some to say the urban fiscal crisis isn’t as bad, or doesn’t require substantial federal aid, cities still find themselves in a significant bind. Many are struggling to pay for basic services, and need, in many cases, to trim or cut ambitious, long-term, progressive programs.

A survey conducted by the National League of Cities released earlier this month found that cities have seen a 21% revenue decline since the start of the pandemic, and a 17% increase in Covid-related expenses, such as PPE, overtime pay, and remote work technology; 28% of cities admitted that without congressional aid, they will be “significantly impacted.” Unexpected items such as PPE, virus testing, and emergency food services cost New York City $2.4 billion this year, after factoring in robust federal support.

“This will hit the things in the budget that make the most sense for the long term,” says Michael Madowitz, an economist at the Center for American Progress. “Things like pre-K, which have great returns over 20 years, but are expensive upfront, will be among the first things to get cut. This is a huge threat to progressive programs, and a huge opportunity for progressive revenue raising. If the federal government continues to hang cities out to dry, they’ll have to get more and more creative.”

There wasn’t much states could immediately do fiscally in response to the unexpected nature of coronavirus, says Louise Sheiner, policy director for the Hutchins Center on Fiscal and Monetary Policy. Many, in fact, managed to enter 2020 with historically high rainy-day funds after learning from the Great Recession. 

But the big revenue losses this time, which came from dramatically altered consumption patterns and virus-related shutdowns, delivered an exogenous shock that will hurt cities and their near-term financial situation. Michael Gleeson,  legislative manager of finance, administration and intergovernmental relations at the National League of Cities, says there’s worry that the drop in value from commercial real estate indowntown areas all but abandoned by white-collar workers will also put a long-term strain on city coffers, and the potential for structural changes in working habits could really change taxing and revenue. 

“I think we may see a period of financial reinvention once all this is over,” Sheiner says. “People won’t be driving and flying as much, so revenue collection may need to be adjusted to match the new economy.”

But before cities can reinvent, they need to recover, and that’s where significant challenges lie. Once vaccines are distributed, cities and states will need revenue to adequately provide public services, Sheiner says, especially owing to the concentrated nature of unemployment among the hardest-hit communities. 

Cities rely on states to fund many social service programs — state and federal support make up roughly a quarter of city budgets. But many states are also suffering; Gordon says between April and September, state revenue was down 5.3%, and Texas, California and New York are predicting drops in revenue of 15% or more in the upcoming fiscal year.  

How can cities fill the hole? The best solution would be increased federal aid, says Madowitz, something the incoming Biden administration supports. Previous Covid stimulus efforts didn’t go nearly far enough, per the NLC survey: 29%, or an estimated 6,000 cities, towns and villages, did not receive any aid or funding from the CARES Act, and of those that did receive help, only 7% said it “adequately addressed revenue shortfalls.” The CARES Act did deploy a small amount of direct funding to 36 cities, including Boston, San Antonio, and Mesa, Arizona. In each example, says NLC’s Gleeson, this money, which came from the Treasury and wasn’t limited to just Covid-related expenditures, was put to good use. 

“The money helped maintain government operations and help small businesses and residents on the margins who would have been hit by the crisis,” says Gleeson. “You saw some good policy outcomes.”

Other cities have passed tax increases; Nashville boosted its property tax rate by 34%, and Washington, D.C., raised its gas tax and cut some economic development subsidies for tech companies. A big focus has been a variety of wealth taxes aimed at high earners who have escaped much of this year’s hardship. A progressive income tax, which was the subject of a defeated referendum in Illinois this November and has been taken up by state and city legislatures across the country, has been considered by many governments. JumpStart Seattle, which will levy additional payroll taxes on big businesses (who are fighting it in court), may generate up to $200 million in new revenue for the Pacific Northwest city next year.

But such measures likely won’t not be enough, especially with new challenges on the horizon. Service and payroll cuts by cash-strapped cities may impact programs that help feed and protect residents, driving more into poverty and straining the budget further. Transit systems are bleeding cash, and even the billions of dollars in aid that earlier stimulus proposals provided wouldn’t be enough to head off the significant long-term damage that major transit cuts could bring to regional economies. Beyond burdening millions of essential workers with more onerous commutes, slashing bus, subway and rail service risks hobbling transit-oriented development and the greater economy. According to a report by the NYU Rudin Center for Transportation Policy and Management and New York-based consulting firm Appleseed, worst-case MTA cuts in New York may cost 450,000 jobs by 2022. 

Then there’s the dire housing situation that awaits if eviction moratoriums end. The CDC-mandated ban of evictions is set to expire on Jan. 1, setting up the likelihood of a steep increase in renters reaching out for support services and straining the underfunded safety net. The long-term economic shifts of the pandemic may drag down local labor markets, what Gordon calls “labor reallocation shock.” Should restaurants make a long-term pivot to delivery-focused business models, many more servers and workers would be out of work. More than 110,00 eateries have already closed permanently as of the beginning of December — 17% of the total number of restaurants in the U.S., according to the National Restaurant Association.

Sheiner’s especially concerned about the impact on education budgets, already strained by the additional costs of virtual schooling, which had a disproportionate impact on lower-income communities and those who were already struggling. Tumbling enrollments in many urban public school systems are setting the stage for future budget pain, since state funding levels are determined by student enrollment. 

“To me, that’s the biggest worry,” she says. “Cities should be focused on remedial education and making sure virtual education is working. But I’m not sure they’ll be able do that because of budget constraints.”  

The arrival of the Biden administration in January offers urban leaders hope that future pleas for aid could eventually be heard. But with competing crises to deal with and the prospect of an unfriendly Senate, even a White House primed to helprather than punish cities may be delayed for months, if not indefinitely. 

“Can cities just muddle along until the new year?” Gordon says. “Everything depends on the pace of the recovery.”

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