As this year wraps up still in the midst of the COVID-19 pandemic, we wanted to take a look at how cities were affected and how they’re bracing for what could be some difficult fiscal years ahead.

According to the Brookings Institute’s March 31, 2020, article by Michael A. Pagano and Christiana K. McFarland, “When will your city feel the fiscal impact of COVID-19,” it will depend largely on how a municipality receives the majority of its funding: whether from sales and income tax or property tax revenue.

“To understand when cities can anticipate the brunt of COVID-19’s impact on their general fund reserves, we examined the extent to which a city relies on general tax services that respond quickly to economic swings,” the article’s authors write.

The article further states another important factor is if the regional economy is made up of more coronavirus-related employment declines. The writers predicted many heartland cities might feel the impact harder and quicker than other cities.

Cities like Columbus, Ohio, with a general fund that’s 76% comprised from income tax, or Tulsa, Okla., and Lincoln, Neb., which also have a large percentage of revenue from income tax, were all vulnerable to immediate impact. One factor that might have made a difference in how those cities and others like them fared is how Coronavirus Aid Relief and Economic Security Act funds were distributed.

Mesa, Ariz.

For example, in the city of Mesa even though the majority of the funding comes from sales tax and intergovernmental revenue through the state, a few things worked in its favor.

The first bit of good new s— it was the direct recipient of CARES Act funding. The city’s population is approximately 518,000 and the cut off was 500,000, according to Candace Cannistraro, management and budget director for the city of Mesa.

Cannistraro said the city received $90 million toward COVID-19 relief, and it offered community programs through Mesa CARES. It was able to offer rental assistance and utility assistance, paying up to three months.

“And we’re not just doing it for city-owned utilities,” she said.

Mesa CARES has a small business program offering mortgage and utility assistance and a Small Business Reemergence Program that offers technical assistance, helping small businesses learn “how to reinvent in this new world and how to use social media and the internet to get customers coming to them.”

CARES Act funds also allowed the city to offset about $50 million in public safety issues, with the funds being used for fire and medical in addition to police patrol.

Cannistraro said the city didn’t get the impact of COVID-19 until the end of March when the stay-at-home orders were enacted and sales tax revenue decreased, but about two months in, when some businesses started reopening, Mesa’s sales tax revenue was greater than in past years.

“Usually (in Mesa) people leave in the summer — they take off for the beaches or northern Arizona (to escape triple digit temperatures) so our sales tax is generally lower during the summer. Now with everyone staying home and not traveling, it was actually beneficial for the city,” she said.

Most people are shopping locally and shopping online, and since the sales are taxed to the home address, the city received revenue on the online purchases, too. Cannistraro said the August activity was 10% higher than August of last year.

“The spike was in June — now it’s down, but it’s still higher than last year,” she said.

Being proactive at the beginning helped Mesa, with Cannistraro stating, “One thing we do very well is react very swiftly when economic risks arise.”

As Mesa officials reevaluated their financial situation and realized city-operated libraries, museums and theaters “would not be opening anytime soon, we tried to reassign all full-time employees where we could,” but Cannistraro said some staff reductions occurred, mostly with part-time workers, but some full-time employees were cut as well.

“Because of our swiftness in reacting we were able to cut expenses,” she said.

Mesa also enacted a hiring freeze, which is still in effect.

“We don’t know what next year will look like or what the lingering effects will be,” she said, adding the city recently updated its audit, finance and enterprise committee.

Cannistraro said the city of Mesa doesn’t have a primary property tax — just a secondary one for reduction of debt, not operating or public safety, but it’s been good for the city. “We’re the largest city in the country without a primary property tax.”

According to Cannistraro, the state of Arizona limits the assessed value — it can only increase by 5% — but the market value has gone up significantly as Mesa has seen a lot of growth in the housing market.

She said the construction sales tax never faltered and construction did not slow down during the pandemic — even the city’s construction projects had no delays. New construction is up 7%, which is good for residents as new builds take the pressure off them.

In 2017-2018, the city added a public safety tax both for police and for fire and medical.

Another thing that has helped Mesa weather this pandemic storm is its financial forecasting. Cannistraro said Mesa does a five-year forecast, and for the past two years, it has already assumed a recession was coming this year.

“At the end of the day, we were off by six months; we thought January of 2021,” she said, adding the city didn’t know what would be the cause, but “looking at economics and economic cycles, we were due so we already put it in the forecast.”

Forecasting on an ongoing basis allows Mesa to look at whether the economy changed greater than it anticipated, and because it was already planning for a recession, “we shouldn’t have to change our long-term plan greatly.”

With all these unfortunate events, “we were pleasantly surprised we do have revenue to get us through this fiscal year,” she said.

Future forecast

Because of the uncertainty of what lies ahead, officials are looking at a variety of factors affecting Mesa fiscally. Cannistraro said officials feel a factor in the sales tax increase was the expanded federal unemployment. Workers who usually got $200 a week were getting $600 more, “artificially inflating the economy.” So officials really wanted to see how things look since that program ended, and it has come down, but it is still higher than last year.

They’re also considering if behavior will change once everything completely opens.

“If they’ll go back to old behaviors of shopping and traveling outside the city — that’s the unknown when we truly get to a post-COVID economy, which will probably be in about a year,” she said. “Right now we’re not concerned.”

Because of Mesa’s conservative fiscal budgeting, if a department wants to expand or add programs, it will look at the how such a change will affect the budget long term.

“We don’t want to put a project in place that we can’t afford in two years,” she said.

Cannistraro added the COVID-19 relief funds really helped Mesa. It also didn’t have the extra impact that some cities had to deal, such as protests, so it was able to offset its general fund for public safety and keep a higher reserve in the general fund for those “unknowns.”

Mesa was also the recipient of transit money in the amount of $11.9 million for buses; received $11.2 million from the Department of Housing and Urban Development for residential mortgage assistance; and received $6.25 million trickled down from the state and county.

Cannistraro said it’s helpful when the federal money comes to the city because it is closest to the residents and businesses.

“We can put it in the hands of those struggling to keep their doors open and we’re hoping to keep open as many as we can,” she said.

She shared a personal story about a cafe in the city offices building that she patronized daily when the majority of city employees were working from home and said the city council sponsored different restaurants each week to deliver meals to hospitals.

“Hopefully, the bright side is people explored their own neighborhoods and want to continue to support mom-and-pop stores,”
she said. 

NLC shares thoughts

Michael Wallace, legislative director for housing, community and economic development, and Michael Gleeson, legislative manager of finance, administration and intergovernmental relations for the National League of Cities, shared some thoughts on how municipalities were faring during this time and offered some advice.

Wallace forecasted, based on the last great recession, “I’d expect the impact to be about a decade. Last time, particularly property tax revenue had a significant decline, and in many places, the housing market took a long time coming back.”

He said even those cities that fared better still took about a decade to build the level of reserves for employees and spending as they had prior to the recession. He agreed cities and towns that relied heavily on sales and income taxes felt the impact quicker.

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He added where a lot of municipalities are also hurting is utility revenue. With a moratorium on shutoffs to protect public health, they were still spending to maintain operations and cover employees’ wages and benefits.

Wallace also said because there’s about a year lag on property assessments he expects to see a drop in assessed valuations in a year or two.

“If you see an increase in foreclosures, there’ll be a fall in assessed value. That’s what happened last time, so there’s no reason to think it won’t happen again,” Wallace said.

He mentioned maintenance of the physical structures of houses decline during difficult economic times, having an effect on property values. Even a city or town having to reduce trash pickup or street cleaning can have an effect on values.

“Ultimately, there are lots of reasons for a decline — in a difficult economy with unemployment rising, it’s reasonable to expect if people aren’t drawing a salary, they’re (struggling) to keep up with payments or maintenance,” he said.

Another factor is the added pressure on cities and towns to help make up losses suffered by other tax-supported units, like schools, in order to maintain services to students.

Diversity

“Cities tend to do better when they have more diverse revenue sources,” Wallace said.

He acknowledged, however, in some cases states regulate how cities can collect revenue by putting caps on the rate they can raise taxes.

“Even if they have a well-off revenue base, those local officials can’t just go to voters and ask for an increase in equal measure to losses because the state has preempted their ability to do so,” Wallace said.

Gleeson agreed with Wallace’s forecast that this could be another decade-long recovery. He said if one looks at job losses in the government sector from the Great Recession, it took 10 years to get them back.

“If more fiscal help doesn’t come from Congress to get them back on even footing — without it, it could be a decade,” Gleeson said.

Gleeson thought giving that “fiscal injection could be an antidote to making sure we don’t have that long, dragged-out recovery.”

As far as the distribution of those funds, only 36 cities got direct funds. Wallace said the bill gave “all discretion to the state whether to share at all and how to distribute to the cities” — whether through a grant or a reimbursement program, for example.

“In my opinion, the treasury did the best they could to maximize the funds — they wanted to make sure cities could make payments to landlords on behalf of residents and meet utility needs,” Wallace said.

All the money needs to be spent by the end of the calendar year, so he feels they’ll see additional flexibility as the year comes to an end.

“The majority of the funds (needed) to be spent on stability for residents,” he said.

Another fiscal concern is the impact on municipal credit scores and the rate they can borrow. Without federal assistance to close those shortfalls, it’ll hurt cities and towns, driving up borrowing costs at a time when residents need public services more than ever.

Gleeson said one of the rating agencies is being pressured to potentially downgrade cities unable to meet debt service. “There’s a gap between revenue and operating budget,” he said.

How to overcome impact

Wallace said some cities and towns have been able to minimize the impact because they had decent-sized reserve funds. He suggested local officials look at how things are going regionally and whether they are doing well or not.

But, he said, the key indicator for cities and towns is housing stability. Job security, school security and people living paycheck to paycheck are all stressors related to housing instability.

“The key priority for cities to overcome this is to do everything they can to maintain housing stability for residents so when the economy reopens, they won’t have missed out on too many opportunities,” he said.

“If we reopen the economy without housing assistance, we’ll see a huge wave of evictions,” he predicted, noting cities also have to protect those mom-and-pop landlords who use rental units as a retirement income source; it would be a huge loss to communities to lose them “because every city needs more affordable housing.”

He added helping the small businesses who got left out of the federal payroll protection program is also important. “Every day we go without the certainty of federal assistance, it’ll be harder for cities to continue to help out,” Wallace said.