Thanks to the economic fallout from COVID-19, city budgets are in for their worst ride in modern memory.
Revenues from taxes, parking meters, permit fees, bus fares, and practically everything else is plummeting. At the same time, cities face soaring costs to support the healthcare response, buttress local businesses, and make sure seniors, children, the homeless, and other vulnerable populations have food to eat and a roof to sleep under safely. Local governments are on the cusp of an unprecedented liquidity crisis, threatening the ability of some to pay their bills.
Harvard University Professor Linda Bilmes calls the situation “a perfect fiscal storm.” And in an online talk with hundreds of mayors and local leaders last week, she had bad news: It’s only going to get worse.
Already, Bilmes said, cities have endured an economic crisis three times deeper than they faced during the Great Recession in 2008, and in half the time. Going forward, they can expect aid from state governments to dry up, borrowing costs to rise, and a climate of uncertainty to continue as the hunt for a vaccine and effective treatments for COVID-19 goes on.
Despite it all, local leaders still have to produce a budget for next year, and unlike with the federal government, city budgets need to balance. Bilmes offered four things city leaders can do to weather the storm — and perhaps even come out stronger on the other side.
1. Make strategic budget cuts. A typical way for cities to save money is to ask for across-the-board budget cuts of a certain percentage from every agency. That’s not a very strategic way to go about it, Bilmes said. Instead, she urged mayors to ask agencies for an accounting of what they spend on each activity they provide. That way, lower-priority programming can be identified for cuts — and higher priorities can be spared.
Bilmes said mayors can also scrutinize big-dollar contracts. “Go through every contract,” she said, “and figure out where it fits in, whether it could be renegotiated, whether you’re getting good value for money, whether there’s a way your city workers could do that work.” Mayors can put similar line-by-line scrutiny to their capital budgets. If all this sounds more in the weeds than mayors usually get into budgets, Bilmes said, there may be no other choice: “These are unusual times,” she said. “So the usual rules about micromanaging go out the window. You need to go through what’s actually happening in the budget at a level of detail that is much different than the business-as-usual.”
2. Rethink budget forecasting. Revenue forecasts are typically based on past experience — with how real estate values or sales tax receipts, for example, and how they’ve changed over time. For next year’s budget, city leaders can pretty much throw all that away, Bilmes said. “None of the historical stuff is going to work.”
Instead of historical experience, she suggested using microsamples for forecasting purposes. For example, surveys or focus groups can give indications as to how many taxpayers expect to be able to pay their property taxes on time, and whether partial-payment plans may help improve collections. This is what the Congressional Budget Office does to estimate the impact of new taxes and policies, Bilmes said. “They basically take a very small subset of taxpayers and model what their reactions would be to the change that’s happening.”
Bilmes said cities also should do what many private companies are doing, and essentially make two budgets. One is what you expect the budget will look like based on what you see today, and the other is based on a worst-case scenario. Both budgets should be regularly updated — at minimum, quarterly — to account for new information.
3. Ask community members what they need. Engaging community stakeholders is more important than ever in a time of austerity. They can help identify priorities for which programs to shield from budget cuts and help design relief programs that solve real problems. Bilmes suggested using micro-samples of stakeholders to learn how to best target resources. “If you’re thinking about small businesses, they’re not a monolithic group,” she said. “Understanding what it takes in the restaurant sector, in the hairdresser sector, in the small-shop sector, before we design programs can be very helpful.”
4. Look for opportunities to transform the future. Bilmes urged mayors to look ahead to strengthen their cities’ fiscal situations and local economies in recovery when it comes. One is to play an active role in public finance as the cost of issuing municipal bonds goes up. “You’re in a position to engage your investor community,” she said. “You can be laying the groundwork for new issues now, which means going out and talking about what you’re doing to maintain the financial integrity of the city.”
Mayors can help shift resources from Wall Street to Main Street, Bilmes said. One way is to encourage local investors to buy new municipal bonds, rather than using secondary markets, which saves both sides money. Another is to encourage state treasurers to transfer cash they manage from big investment firms to local community banks that tend to do the most lending with local businesses.That’s what Massachusetts did in in 2008, Bilmes said, and it “was a win-win and a role model for where you can play a role.”
While it may be hard to see it now, Bilmes said, good things can come out of crises. Previous pandemics, she noted, led to the rise of indoor plumbing, sewage treatment, public parks and other things we take for granted today. “This is an opportunity to transform,” she said, “if you can make budget cuts strategically, and if you can lay the groundwork for a better tax base and help support the community banks who support small businesses, which are the lifeblood of the community.”
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