The next looming crisis resulting from COVID-19 — and the one that currently has become the focus of congressional debate — is the impact of both the public health and economic crises on state and local government finances. Absent federal action, state and local government will face near-impossible fiscal choices, ranging from mass layoffs to unsustainable tax increases when businesses and residents can least afford them.
The April unemployment data is evidence of the kinds of cutbacks that state and local government already are starting to make. Local government employment was down by just over 800,000 jobs and state government employment dipped by 176,000 positions.
Unfortunately, in a time of economic crisis, many states impacted by the fiscal crisis often will cut aid to local governments first. In public budgeting, it is a truism that when states catch a cold, local governments get pneumonia. Now we have the extraordinary economic impact of a deadly and tragic real-life public health crisis putting the finances of many local governments on life support.
The impact is occurring in cities big and small. Shortly after the initial emergency declaration, Hutto, Texas — a city of just over 30,000 outside of Austin — announced it was laying off one-third of its workers. Nashville Mayor John Cooper has proposed a one-third increase in the local property tax. Los Angeles Mayor Eric Garcetti has proposed a budget that includes furloughs for 16,000 city employees.
But as Congress considers how to help state and local governments, it needs to avoid the federal government’s tendency of treating all local governments the same. Different local governments are experiencing the public health, economic and financial effects of COVID-19 in very different ways.
The costs of local government response to COVID-19 differ based on the actions taken to prevent transmission or address its spread. New York City’s Independent Budget Office reports that through May 6, total city spending on COVID-19 is close to $1.6 billion.
Many local governments were dealing with fiscal challenges even before the onset of the pandemic. Largely smaller and midsize cities, these were places that the post-Great Recession recovery frequently overlooked. Many cities have suffered through decades of economic and population decline, with high rates of poverty. Their fiscal woes were at least as much the result of benign economic neglect by the federal government as out-of-control spending policies.
And because of the relationship between high rates of poverty and many of the risk factors related to COVID-19, they are feeling the brunt of all aspects of the crisis.
In 1950, more than 330,000 people lived in Rochester, N.Y.; today its population is down to 206,000 residents. Nearly one-third of those residents (32.6 percent) are living in poverty. More than 12 percent are diabetic, and nearly four in 10 have obesity — both risk factors for COVID-19 — according to the City Health Dashboard. Effective May 11, more than 10 percent of Rochester’s workforce will be subject to reduction in hours, furloughs and layoffs. Rochester reportedly faced a $28.8 million budget gap prior to the pandemic.
Differences in sector concentration by place will yield variation in economic and fiscal impact as well. The April unemployment data detail dramatic differences in impact based on the sector of the economy. For example, the unemployment rate for leisure and hospitality was close to 40 percent.
An analysis by the Becker Friedman Institute at the University of Chicago identified six sectors likely to be most impacted by the pandemic — not just leisure and hospitality, but services and certain types of manufacturing as well. Analysis by the Labor Department found that there was wide variation by place on the percentage of jobs and wages attributable to these sectors. Shutdown sector employment had accounted for nearly four in 10 jobs in both the Atlantic City MSA (dependent on leisure employment) and in the Dalton, Ga. MSA (the floor-covering capital of the world).
Finally, the fiscal impact also will vary based on the tax structure supporting local government — an area where local government flexibility is often limited by state law. Las Vegas faces the fiscal challenge because of both the concentration of economic activity in the hard-hit leisure sector and its reliance on the consolidated tax, a combination of sales taxes. Many Ohio cities are primarily reliant on income tax revenue: in Dayton, more than 70 percent of the city’s revenue is from income taxes.
There are nearly 19 million state and local government employees in the U.S. — teachers, first responders, health care workers among them — with a significant impact on local economies. Seeing those jobs eliminated and that household spending curtailed not only would be devastating for the families impacted directly, but also would set back overall economic recovery.
Federal fiscal relief to cities is essential to meet the continued public health crisis and position the nation for an economic recovery. Congress needs to make sure, however, that the solution fully recognizes the unique needs of different local governments.
David R. Eichenthal is a managing director with PFM Group Consulting and the executive director of the National Resource Network, a consortium of urban policy experts working to empower local leadership in economically challenged cities nationally.