For Cities, Path to Financial Recovery Could Be a Long One

The National League of Cities released its latest annual survey of city fiscal conditions on Thursday. Unsurprisingly, it presents a bleak picture of how municipal budgets are faring in the coronavirus era, with revenues collapsing and finance officers pessimistic about the year ahead.

But along with the headline findings are reminders of how long it took for cities to bounce back from the Great Recession. It was a lengthy slog. The NLC report shows that revenues it tracks took about 12 years to recover to where they were in 2007, before that prior downturn.

“If the Great Recession provides a lesson, it is that it takes years for cities to recover lost revenue,” said Michael Pagano, director of the Government Finance Research Center at the University of Illinois at Chicago, and a co-author of the report.

Meanwhile, Christiana McFarland, NLC’s research director, said a clear message that emerged in this year’s survey is that “the toll of the pandemic recession on city budgets is poised to be as significant, if not worse, than what they experienced during the Great Recession.”

In other words, while cities are scrambling to deal with the immediate financial calamity the virus has caused, the damage to their budgets from the crisis could linger for years.

"This is going to be a long road ahead for us, it's not a V-shaped recovery,” Mark Zandi, chief economist at Moody’s Analytics, said, referring to the immediate bounce-back many hoped would happen as the nation recovered from the sharp, virus-driven downturn that began in February. 

Zandi’s assessment is that the nation’s economy will largely “go sideways” until the pandemic finally abates and an effective vaccine is widely distributed. Until then, businesses are apt to be reluctant to make significant investments or to expand amid all the uncertainty.

There could be pent up demand for travel and other spending as the virus fades, Zandi said. But his view is that all of the economic output eroded by the pandemic won’t be restored even by the end of 2021 and that employment is unlikely to fully recover until closer to 2024.

That’s all bad news for cities that depend heavily on revenue sources like sales, income and property taxes to fund services, pay employees and invest in capital projects like roads and transit.

And it’s reflected in the findings of NLC’s survey, which relied on data from 485 cities with populations over 10,000. 

On average, the report says, cities anticipate a 13% decline in 2021 general fund revenues compared to 2020. And nine out of 10 finance officers expect their jurisdiction will become less able to meet its fiscal needs over that time.

“This is the least optimistic that finance officers have been since the low-point of the Great Recession,” McFarland said.

Because of the timing of when cities begin their fiscal years, the coronavirus downturn in many cases only affected a couple of months of fiscal 2020 budgets and its consequences are expected to become clearer in subsequent budget cycles.

Even so, hundreds of thousands of state and local public employees across the U.S., many in education-related jobs, have already been temporarily or permanently laid off since the virus struck.

Government employment nationwide rose by 301,000 in July but is still 1.1 million below its February level, according to figures the Labor Department released last week.

Sales tax revenues have been taking a big and immediate hit from the coronavirus as people have been staying home more. After initial re-openings this spring, governments have also re-ordered certain businesses to temporarily close or to curtail service to prevent the spread of the virus.

Yet to be seen is how historically high unemployment rates over the past several months will affect income tax collections during the year ahead. Or whether household and business financial hardship could hurt real estate markets and, in turn, property tax collections.

Both of those sources of tax revenue are expected to weaken, based on the NLC report.

With commercial real estate, there are worrisome signs that borrowers are struggling to pay mortgages. In New York City, retailers and restaurants have been closing, unwilling to cover high rents and other costs with far fewer workers and tourists out and about.

And in cities and towns all over America, small businesses, especially establishments like bars, restaurants and entertainment venues, are struggling for survival.

“Many cities across the nation are hurting,” said Joe Buscaino, a Los Angeles city councilman and NLC’s current president.

Buscaino said his city has spent millions of dollars on virus testing and other unplanned costs, while many revenue streams have flattened. Los Angeles is big enough that it qualified for direct federal aid that Congress approved in March, but is still tapping reserve funds.

NLC’s report comes at a time when the group, and others representing states and localities are lobbying Congress for additional financial aid to help them weather the current financial crisis.

Democrats have proposed a state and local government aid program worth about $900 billion. But Republicans haven’t endorsed a similar plan. Talks about a major, new federal coronavirus relief package have stalled in recent days with the two sides at odds on a number of issues.

“A national recovery is not possible without cities, towns and villages also being economically strong,” said Clarence Anthony, NLC’s CEO and executive director.

“It will take time for our communities to bounce back,” he added. “The sad reality is that we have not even hit the bottom yet.”

A copy of NLC’s fiscal conditions report can be found here.