The Fiscal Future of American Cities Beyond 2020

In recent history, COVID-19 emerged as one of the biggest threats to not only public health but also to the local, state and federal economies in more ways than one. Although countries around the world are also grappling with the management of their public health infrastructure, the U.S certainly bore the brunt of the issue, and it’s likely to be far from over.

Although there have been discussions amongst local government leaders on preparing for the inevitable recession no one had thought of preparing for something like a pandemic at the local government level.

• All local governments around the U.S primarily rely on consumer spending for their sales tax revenues, which accounts for a large portion of their General Fund revenue structure. This has added a significant budgetary strain on all levels of government

• Unlike the 2008 recession, the property values in the United States have been pretty steady and not seen much of a decline. Although some economists, including Federal Chair Jerome Powell, have expressed their concerns about the near-future for property value, we will have to see if banks will continue to support their forbearance plans that help borrowers defer their mortgage payments. If and when banks stop the forbearance plans, requiring borrowers to bring their mortgage payments current, we may start seeing a wave of mortgage foreclosures similar to 2008. This is certainly worrisome for local government leaders as well, given that property values will lose value, in turn reducing property tax revenues for all levels of government.

• The work-from-home mandate is also very new for a lot of businesses, both big and small. Although we are already seeing large corporations extending their “work-from-home” options to the calendar year 2021. This means that not only will it significantly alter the consumer-spending patterns, some may want to move outside of larger cities – impacting local economic cash flows, local transportation agencies and possibly seeing an increase in both commercial and residential vacancies, which would be detrimental for the local economy.

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In mid-to-large metropolitan cities, America has seen an increased number of civil unrests in 2020. From a fiscal standpoint, the large cities may be more equipped to handle the occasional unrest and emerge from it without significant impact to its finances, but in recent months, the protests and demonstrations have been more frequent and much more intense. For local governments, it takes additional resources to maintain peace and allow the protests to continue without destruction of property.

However, for several small-to-midsize businesses that were already beaten with the impacts of Coronavirus, the further destruction to their property served as a double whammy. This means that these businesses may either never revive or take a longer to build back up, impacting the local government’s ability to generate tax revenues into 2021.

For some local governments, concerts, games and events are one of the biggest ways to generate additional tax revenues and fees. These events not only attract locals to come out and build a local community morale, but also attract people from other areas that add to tax revenues – in addition to the spending from locals.

We have also seen many cities throughout the U.S funding the construction of arenas and sporting complexes with the hope that it will add to the local economy and help lift local businesses. However, as we have already seen, in addition to many of the games and concerts being cancelled for the foreseeable future, many large corporations have decided to cancel their in-person conferences for both this year and next year. This can be a huge blow to local economies, especially for small to mi-size cities.

Furthermore, wildfires on the west coast and the increased number of hurricanes on the east have added to the pre-existing issues for local and state governments in the U.S.

Although the dire need for a COVID-19 vaccine is imperative for public health, it’s also needed to kick-start the process of taming all the fiscal challenges for local governments. Given the complexity of the issues persisting due to COVID-19, the process will take years before we can start seeing local government revenues return to pre-COVID levels.

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Disclaimer: The opinions and statements expressed in this article are for informational purposes only and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned. Opinions and statements expressed reflect only the view or judgement of the author(s) at the time of publication and are subject to change without notice. Information has been derived from sources deemed to be reliable, the reliability of which is not guaranteed. Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professionals and advisers prior to making any investment decisions.