City and county governments across the country face the looming prospect of major budget holes as they confront both massive expenses combatting the coronavirus and sharp declines in revenue caused by lost jobs and tumbling consumer confidence.
Estimates vary, but experts analyzing local government budgets expect the cumulative revenue losses to total in the hundreds of billions of dollars. And if transmission of the virus continues at its new and torrid pace, the cliff could become even steeper.
City officials and budget experts say the federal government must step up to fill the gaps or states will face a catastrophe.
“We’re going to face significant decreases in revenues over the next two to three years,” said James Mueller (D), the mayor of South Bend, Ind. “We’re starting to have some direction on the budget for 2021 and beyond. The big wildcard is will Congress step up and help cities and states fill the hole.”
An initial round of funding for local governments in the CARES Act limited direct funding to cities and counties with more than half a million residents. About $27 billion from the fund has gone to 154 local governments, ranging from $1.4 billion to New York City to $27 million to El Paso County, Texas.
Cities that have received CARES Act funding say it has made a difference in paying for the costly response to the pandemic.
“For us, CARES Act funding really is helping us have a stronger and more robust public health response,” said Kansas City Mayor Quintin Lucas (D). Jackson County, home to the Missouri side of Kansas City, has received $122 million.
But the limit has excluded the vast majority of the nation’s 3,141 counties and almost 20,000 cities. In 16 states, not a single county or city is large enough to qualify for CARES Act funding.
“We’re still waiting for the federal government to provide some level of financial support,” said Bryan Barnett (R), the mayor of Rochester Hills, Mich. “I know when a government needs help, and my local government needs help, it needs support. It needs something that I can’t provide it, which is additional funds.”
Barnett said his city expects to lose a third of the revenue they forecast at the beginning of the year, before the pandemic broke out.
Cities that rely heavily on property taxes for their revenues may not take a hit as severe as those that rely on other, more employment-driven revenue streams.
“Local governments that are highly dependent on income tax or sales tax, they’re going to be in a really tough position,” said Lucy Dadayan, a senior research associate at the Urban-Brookings Tax Policy Center and an expert on state and local budgets. “Consumers are going to restrict their economic activity, that’s for sure, and a lot of the recovery will depend on consumer behavior and consumer confidence.”
Dadayan said the situation will get worse when the extra $600 in unemployment benefits included in the first COVID-19 relief bill expire, driving income tax collections down even further. And while some states have tried to funnel money to their local governments, the states are hurting too.
“States themselves are dealing with a bad situation. It’s time that the federal government needs to step up and provide some help,” Dadayan said. “It feels like the federal government has left out local governments.”
Separate measures up for debate in Congress would help fill some of the anticipated budget gaps.
The HEROES Act, passed by the Democratic-controlled House, includes $375 billion in funding for local governments. The SMART Act, backed by Sens. Bill Cassidy (R-La.) and Bob Menendez (D-N.J.) and Reps. Mikie Sherrill (D-N.J.) and Peter King (R-N.Y.), would allocate $500 billion to state, local and tribal governments; county and municipal governments would share a third of that money, divided through a formula based on population size, infection rates and revenue losses.
Republicans in Congress have been leery of funneling money to state and local governments, in part because those proposals have been cast as a bailout, especially for blue states that levy higher taxes on their residents.
The budget gaps faced by state and local governments present a long-term threat to the economic recovery that will follow the recession, experts said. Those governments make up a substantial portion of the nation’s gross domestic product and employment rolls. If governments have to shed jobs and cut spending, it will act as a drag on the recovery — something similar to what happened in the years after the great recession a decade ago.
There are limits, too, to how much a government can cut. Unlike a private business, governments do not have the option to shut down completely.
“It’s not like we can close. We have to have fire fighters responding, we have to have police officers to keep people safe, we have to have water and sewer,” Barnett said. “We furloughed some folks, we had a couple minor layoffs, but it’s difficult to lay off folks at this time.”