Summary of special briefing on how cities and counties are coping with COVID-19’s fiscal shock

July 22, 2020

On Thursday, July 16, I listened to a Special Briefing on How Cities and Counties are Coping with COVID-19’s Fiscal Shock hosted by The Volcker Alliance and Penn Institute for Urban Research (IUR) featuring the following panelists: Natalie Cohen, president and founder of National Municipal Research; Elizabeth (Beth) Kellar, senior fellow, Center for State and Local Government Excellence and director of public policy, International City/County Management Association (ICMA); and Chuck Reed, former mayor, San Jose, California and special counsel, Hopkins & Carley. This webinar was moderated by William Glasgall, Volcker Alliance senior vice president and director of state and local initiatives, and Susan Wachter, co-director of Penn IUR.

Below is a summary of the speakers’ comments.

Beth Kellar

These are the most challenging times as she has seen in her lifetime. For comparison, during the Great Recession state and local governments reported 720,000 jobs lost over a number of years. So far state and local governments have already lost 1.68 million jobs in just two months. The International Monetary Fund predicts the downturn will be the worst since the Great Depression. We can all agree that recovery may take years. The majority of the job losses are in local governments, with education jobs most affected.

The good news is many local governments had rainy day funds. Congress acted quickly passing the CARES Act with $150 billion in relief for state and local governments. But that was only for direct Covid expenses, not for the expected dramatic revenue shortfall. Only a few cities and counties got direct aid. It has been left up to the states to distribute aid to local governments.

The bad news is the revenue losses are steep with $360 billion revenue losses expected for the cities for next three years.  A June NLC survey found 34 percent of cities of all sizes have already started making cuts with planned layoffs. Water and sewer fees collections have been delayed to avoid service cut-offs. She is concerned that infrastructure and capital improvement projects are being curtailed.   

Counties have lost $115 billion in revenues, including sales tax and fees. Property taxes are the most stable for now because there is usually a three-year phase.

Overall state and local governments expect a 10 percent loss in revenues. State and local government purchasing is 11 percent of overall purchasing.

The pandemic is going to change everything, including the shift to the online world. There is also a focus on social equity issues.

During the questions and answer period, Beth mentioned that property taxes are going to be the next big issue. There may be a delay in effect since assessments happen every three years, but there could be a current issue depending on if people have enough income to pay their property taxes.

Local governments have been able to get through with rainy day funds, but looking at three-year forecasts are pretty scary.

Congress’ next steps relate to the HEROES Act, which passed the House but was dead on arrival in the Senate. National associations of municipal governments are pressing for direct, robust, flexible and quick aid, so more job and service cuts are not as dramatic. Infrastructure investments may come down. The SMART Act attempts to deal with revenue losses.

Mayor Chuck Reed

He was asked what lessons he learned from the last recession. He is grateful that he is not in office now because this is going to be worse than the Great Recession. Governments will cut services, stop hiring, and do layoffs. Capital spending cuts are expected. Borrowing by governments will take many forms, including borrowing from the future. This type of borrowing includes interfund transfers, underfunding pension and Other Postemployment Benefits (OPEB). Pension obligation bonds may also be issued.

There will be deterioration in infrastructure and capital spending. Even in the best of times cities don’t have enough money for infrastructure. These will be the worst of times, second only to the Great Depression. Cities are starting at a relatively low capacity to respond to a financial shock.

Now people are hoping for a quick recession and bailouts from the federal and/or state government. It will take another year for the cities to take on the difficult task of coping and dealing with their loss of revenues. As long as they can borrow they will. When cash gets tight, we will see bankruptcy at the local level.

Optimism is not realistic. Local governments don’t have the capacity to borrow money like the federal governments. We will see a repeat of what happened during the Great Recession, only worse.

States and cities have very few reserves. Most governments handle OPEB on a pay-as-you-go. He believes that within the next couple of years these will be on the negotiating table when negotiating with the unions. When you run out of cash, you do desperate things. So this is an opportunity to re-negotiate these benefits.

Natalie Cohen

We are coming up on a personal fiscal cliff as federal aid is coming to the end, including the $600 weekly unemployment benefit.

This pandemic will have a great impact on the housing market. Homeless shelters are petri dishes for the virus.

In the last few years, young working people moved back into the cities, revitalizing them. Many adults have lost their jobs and moved back home with their parents or moved to cheaper housing.

The municipal market and the equity market are different as the equity market has been soaring.

The municipal bond market in the first half of the year borrowing was up by $25 billion. A lot of municipalities are refunding their debt, even with taxable debt.

When the market was “freaking out” at the beginning of March, the Federal Reserve stepped in with numerous liquidity help. It was the first time they had included the municipal market in that help with the municipal liquidity fund.

Only Illinois has borrowed $1.8 billion. The mere offering of the Federal Reserve liquidity programs calmed the municipal bond markets. The municipal liquidity fund is only for states and large city and county governments. Those governments can establish lending may set up programs for smaller municipal borrowers, but the larger governments have to bear 100 percent of the risk.

States can borrow for unemployment and there are $13.1 billion of current loans. The normal rate is 2.4 percent. All interest has been deferred.

A question and answer session followed the speakers.

Mayor Reed mentioned states and cities did not have much capacity to handle any crisis, much less a crisis of this magnitude. For 10 years Truth in Accounting has been preparing the Financial State of the States and for the last five years we have prepared the Financial State of the Cities. Both reports have highlighted that the vast majority of these governments were in poor financial shape long before the current crisis.

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