Back to the Sep-Oct 2020 issue

Cities Brace for Financial Impact of COVID-19

By Deborah Lynn Blumberg

Bracing for the financial Impact of COVID-19In Crosby, like in many cities across Minnesota, COVID-19 is taking a toll.

Crosby (population 2,360) is feeling the strain from a significant drop in revenue from fees it usually collects at its community and fitness center, summer camp, and campground. All were closed for about two months because of concerns over COVID-19. The city’s cash flow was also impacted when their county decided to give relief to taxpayers by pushing property tax payments — the city’s biggest revenue stream — from May to July.

But at the same time, with prices for major equip- ment dropping, Crosby has used money saved the last few years to make several large purchases over the last few months — a used firetruck, a street sweeper, and a new snowplow. Like other cities across Minnesota and the U.S., Crosby is grappling with how to maintain and improve services for residents while facing potential steep drops in revenue, increased expenses, and battered financial markets where interest rates remain low.

The National League of Cities estimates that because of the coronavirus pandemic, U.S. cities will experience a total loss of over $134 billion this year, or a 21.6% loss in revenue, and a loss of $360 billion over the next three years. Some cities will face a total revenue loss of up to 40%.

“In the long run, [cities will] realize synergies, and we’ll be able to do business in a more organized fashion.” Lisa Sova, Assistant Finance Director - Outreach League Of Minnesota CitiesLisa Sova, former city administrator of Crosby, recently became an assistant finance director with the League of Minnesota Cities, where she is providing consulting services to member cities. It’s likely that COVID recovery will be a focus of her work for the foreseeable future.

“COVID has definitely affected cities,” Sova says. “But for cities that have been saving for replacement capital, it’s a good time to spend, which seems counterintuitive. As demand wanes for equipment, cities have the opportunity to make their dollars go further.”

Crosby is lucky to be in a strong financial position because the city worked diligently to save and raise its fund balance. “Now, Crosby is able to take advantage of an increase in supply and lower prices as a result,” Sova says.

Many cities, however, face tough decisions on how to manage their budgets and expenses given the growing list of potential financial problems they may face through the end of this year and into 2021, as the pandemic continues.

“Minnesota cities are hurting, and it’s fairly pervasive,” says David MacGillivray, principal and municipal advisor at Baker Tilly. As a city leader, you “really have to demonstrate you have a plan,” he says. “People want to know their local leaders are managing through the uncertainty.”

A widespread financial impact

As unemployment soars during the pandemic, cities across the state are bracing for the likelihood that some residents may not be able to pay their property taxes on time or at all. The City of Plymouth was worried about this, says City Manager Dave Callister, but collections ended up being fine for the first property tax payments of 2020 in May.

“This is good news,” Callister says, “but it remains to be seen whether that will continue for the second half property taxes due on Oct. 15.”

Coronavirus illustration

Brian Reilly, senior municipal advisor and principal at Ehlers, says cities with a non-diverse tax base may have a harder time, including those in which the top 10 taxpayers make up more than 10% of the tax base. Those cities may need to increase their tax rate to raise the same dollars, but there may be apprehension about doing that.

What’s more, future local government aid (LGA) money that many cities depend on could be reduced. Some worry that the LGA already allocated for this year could be cut by the Legislature during a special session or through a process called “unallotment” — which the governor has the power to do after the state’s rainy-day fund has been depleted.

Gov. Tim Walz has said he won’t pull funds, but if the state’s December budget forecast indicates a large deficit, there’s a chance that December 2020 LGA payments could be cut.

With Minnesota having reduced its surplus because of the slew of unemployment claims, possible disruptions to what cities receive in LGA is likely more of a 2021 issue, says MacGillivray.

For Crosby, LGA makes up about 35% of its budget. “I feel reassured that Crosby should be OK for 2020,” says Sova, “but we’re just not sure about 2021.”

Other areas of reduced revenue

Cities are also facing reduced revenue from a variety of other sources. For example, Callister says a slowdown in building permits has put a minor dent in Plymouth’s revenue. His city has also taken a hit from a lack of community and ice center rentals and a drop in traffic violations with fewer cars on the road.

City officials should put together a financial plan going out at least three years to “get a sense of what you can forgo, delay, or eliminate from your budget.” Brian Reilly, Senior Municipal Advisor And Principal, Ehlers

Charitable gambling revenues generated by pull tab sales in bars are also down, Callister says. And for those cities with a local sales tax, revenues from that source have also declined while businesses have been closed or experiencing lower sales. Many cities have also reduced liquor license fees with restaurants closed for a time and still operating at reduced capacity.

In addition, investment revenue is down with short-term interest rates in the financial markets hovering below 1%. “I don’t see the level of rates turning anytime soon,” Reilly says.

At the same time, cities’ expenses have climbed in the form of increased sanitizing supplies, signs, barriers, protective gear like masks, gloves, and plexiglass, and the expense of extra cleaning and sanitizing, plus technology to accommodate telework operations.

Some relief from federal government

To help with these added expenses, cities have been able to get some money from the federal Coronavirus Relief Fund (CRF), provided by the Coronavirus Aid, Relief, and Economic Security (CARES) Act passed in March. All Minnesota cities were eligible to receive $75.34 per capita by applying to the state or their county by Sept. 15.

The federal government provided strict guidelines on how the funds can be used. Eligible expenditures are those that are necessary due to COVID-19 and were not included in the most recently approved budget as of March 27. The funds cannot be used to replace revenue that was lost due to, for example, lower property tax collections. Expenses must be incurred between March 1 and Nov. 15, 2020.

Some examples of how cities can use the funds include building sanitation expenses, pandemic-related business subsidies, telework technology, virtual meeting technology, and city attorney costs for unbudgeted pandemic-related legal guidance.

“The CRF funding has helped soften the blow a bit,” Sova says. “But cities still have a long road to recovery ahead.”

League staff are working to convince Congress to provide more pandemic-related funding to cities and to allow already appropriated federal funds to be used for revenue replacement.

Steps to ensure stability

As the pandemic and resulting economic downturn continue, cities need to take steps to maintain their financial stability.

Heading into the downturn, Plymouth had prepared conservative budgets. The city is also maintaining healthy reserves of 40% and digging into long-term financial planning — honing its 10-year capital improvement plan and relying on a financial forecasting model.

“If you do dip into reserves — and most cities probably will — you have to have a plan to replenish those reserves,” Callister says. But it can be a multi-year plan, he says, adding that “you don’t have to do it overnight.”

Cities would be well-served to reduce costs whenever possible and reevaluate projects, either delaying them or doing them sooner if they can be done at a lower cost now. Plymouth moved road improvement projects up to 2020 from 2021 because of the good bidding environment, and bids over the last few months have come in 15% to 20% below their engineer’s estimate.

“If you do dip into reserves — and most cities probably will — you have to have a plan to replenish those reserves... [but] you don’t have to do it overnight.” Dave Callister, Plymouth City Manager

Plymouth also isn’t automatically refilling positions. If an employee retires or quits, Callister considers whether filling it makes financial sense. Crucial for cities, he adds, is also to keep staff healthy so they can carry out operations.

MacGillivray suggests cities do financial forecasting out to 2023, considering the best-case, worst-case, and middle-of-the-road scenarios in terms of the virus’s possible course, revenue, and expenses.

“There’s uncertainty,” he says. “So, work out scenarios and what you’ll have to change organizationally to match the possible outcomes.”

Reilly adds that city leaders should “get a sense of what you can forgo, delay, or eliminate from your budget.” He recommends planning for at least three years and no more than 10.

“You lose a lot of visibility beyond five years,” he says. “Ask yourself, if we get a resurgence in infection rates, then what levers can I pull to retain financial flexibility without having to eat into my cash balances?”

Communicating to the public

As cities face inevitable challenges over the next few years, communicating with residents becomes more important than ever.

“Provide information clearly and frequently,” says Sova. “Sometimes it feels like you’re being repetitive, but transparency is very important so there aren’t any surprises.”

As a city leader, you “really have to demonstrate you have a plan. People want to know their local leaders are managing through the uncertainty.” David Macgillivray Principal and Municipal Advisor, Baker Tilly

MacGillivray says to acknowledge that there will likely be service impacts because of the pandemic, including possible layoffs. Be candid, he says, and let residents know your policy options on both the expenditure and revenue sides of the budget.

“Planning is central to the whole recovery plan,” he says. “Have your top policy person out there preparing the community.”

“Also, increase your communication between staff and committees so they can get a sense of where things stand in real time,” adds Reilly. And when speaking to the public, “to the greatest extent possible, stick to the script,” he says, and end with next steps. “If you don’t set expectations, you create an information void.”

Looking at the bright side

Although the pandemic presents many challenges, the situation can also bring some opportunities. While low interest rates may not be great for investments, they can be helpful on the debt side. Cities with good credit ratings can issue debt of a decent size at a low interest rate, says MacGillivray, a positive in these trying times.

“Moving forward, there will be even more of a focus on credit quality and ratings driven by the socioeconomics of the city,” he says.

Reilly says contractors are hungry, and with the current low cost of oil, projects like paving roads could make good financial sense now, if a city can swing it. What’s more, prices may have dropped for land that cities were looking to acquire for redevelopment or future development.

Plymouth’s Callister says that now is the perfect time to enhance technology and establish more paperless procedures.

In Crosby, staff are working to make procedures more streamlined, and more residents are paying their utility bills online, increasing efficiency.

Sova says she is optimistic about the future. Before the pandemic, Crosby, a lake town that’s grown popular with sports enthusiasts, had seen significant growth, with Main Street booming. Luckily, “the mountain bikers and kayakers are still coming.”

There have been other silver linings from the pandemic as well, she says. “Cities have learned how to do many procedures more efficiently. In the long run, we’ll realize synergies, and we’ll be able to do business in a more organized fashion.”

Deborah Lynn Blumberg is a freelance writer.