The Great Recession from 2007 to 2009 left hundreds of anemic city budgets in its wake – but that long, slow drop is nothing compared to the instant freefall launched by the coronavirus pandemic this year.
COVID-19 is sending municipal budgets plummeting far faster than the Great Recession ever did, according to Michael Pagano, who has written the annual City Fiscal Conditions report for the National League of Cities since 1991. That report found that in just a few months, city revenues fell as much as they did in six years following the Great Recession.
“Most recessions, when they begin, take several months if not a year or two to reach the bottom,” Pagano said. “In this case, we hit the bottom in two months.”
Pagano, who is Dean of the College of Urban Planning and Public Affairs at the University of Illinois at Chicago, spoke to our Economic Mobility Policy Forum in September. He said the unprecedented nature of the COVID-19 economic shutdown means there are still a lot of unknowns – but what is known is that municipalities around the country are already feeling the crunch.
Pagano and NLC’s Research Director, Christiana McFarland, wrote for the Brookings Institution that the outlook for cities depends in large part on their revenue sources.
Cities that rely on sales and income taxes, Pagano and McFarland wrote, will face crisis sooner if not already, as those revenue sources shrink immediately with layoffs and consumer spending declines. Cities relying on property taxes, on the other hand, have a more stable short-term outlook as property assessments are not instantaneous.
The Brookings analysis found that many of the cities most vulnerable to fiscal challenges are in America’s heartland, including Columbus, Ohio; Kansas City, Mo.; Denver, Colo.; Tulsa, Okla.; and Grand Rapids, Mich.
After the previous downturn, it took cities more than a decade to recover those lost revenues. Though many businesses have reopened in the middle of the pandemic, Pagano said he does not expect municipal fiscal recovery to be quick. By 2021, he said, without drastic federal action, most rainy day reserve funds will be gone.
Given this outlook, governments will have to reassess the services they are providing and focus on the essentials.
One promising strategy, Pagano said, is creative collaboration between agencies, regional governments, nonprofits and other service providers in order to continue providing services despite the loss of resources.
The crisis, Pagano said, is also an opportunity for jurisdictions to take a hard look at their revenue structures, identifying areas where taxes are misaligned with a city’s economic base or where they hit low income communities the hardest.
He also recommends even bigger changes: municipalities, for instance, should consider asking state legislatures for more autonomy to develop their own “fiscal architecture,” Pagano said. They should also consider expanding taxation to land (rather than structures) and services (rather than just goods), as well as consider creating public government-owned banks, he said.
“This is not a time for incremental thinking,” Pagano said. “This is a time for rather radical, dramatic change.”