Local governments--cities and counties--rely on two major sources of revenue, property taxes and sales taxes. See the 2016 blog entry, "The real lesson from Flint Michigan is about municipal finance."
The basic problem is that the system of finance for local governments was created during a period of rapid growth in the United States. It doesn't work well when growth stops, businesses close, etc.
These problems are only accentuated by the drumbeat of tax reductions, and limits on how much communities and states can build "rainy day funds" to be drawn on in times of crisis and penury.
Local governments are required to run balanced budgets. With most retail and hospitality outlets closed as a result of public health orders aimed at "flattening the curve" of the coronavirus, local tax revenues are down severely and are likely to be for much of the rest of the year.
This is already leading to furloughs and RIFs in some communities (e.g., "Coronavirus leads to staff reduction in one of Utah's biggest cities," Salt Lake Tribune).
The Washington Post ("More than 2,100 U.S. cities brace for budget shortfalls due to coronavirus, survey finds, with many planning cuts and layoffs") and Wall Street Journal ("Coronavirus Hits State and City Budgets" and "Smaller Cities Cry Foul on Coronavirus Aid") have articles on the issue.
State governments have the same issue. Requirements for balanced budgets and revenue reductions and many states are already addressing the likely budget shortfalls ("Coronavirus deals one-two financial punch to state budgets," Associated Press; "Northam freezes new spending in the state budget amid coronavirus pandemic," Washington Post)
The Federal coronavirus stimulus bill has some provisions for providing aid to local and state governments, but the demand for help will probably be much greater than the amount allocated.
It gets better.
ReplyDeleteThe fed will be buying muni debt form larger cities and counties, but not larger cities. DC is lucky as I'm not sure it is big enough but the fed will buy their debt.
We've talked about this before -- this could be a real driver for consolidation as any city under 500,000 now effectually will be priced out of the debt market.
DC is probably looking at a fiscal gap between $600-$1B.
Remember Meredith Whitney's predictions?
WRT MW, she was wrong before.
ReplyDeleteBut I guess I just couldn't fathom things becoming so f*ed like a world war or a pandemic, so then she'd be right.
Alternatively, maybe she was right anyway, that it was just a matter of time (but on a longer trajectory) given the economic trends of austerity and continued tax cuts despite economic conditions, thereby eliminating any budget flexibility.
Important point you make about local government consolidation because of debt acquisition policies.
Not being able to be up with the FT and suffering a lag in my access to the WSJ too, I didn't know.
https://www.ft.com/content/e2d20041-0d86-4dea-8016-d1cfcc01f4c0
(But over the weekend I came across a new to me browser extension that appears to provide access to the FT and WSJ, which is why I linked to those articles in this piece.)
Thanks for calling my attention to this. The program is pretty limited. Only ten US cities are 1 million population, and only 15 counties have 2 million or more residents.
On further reflection, except on the margin (like Baltimore City and County) consolidation wouldn't make much difference.
But if they extended the population limit for counties to 1 million, that would make 45 counties eligible. OTOH, there are over 3000 counties.
OR REVERSE MERGERS. While a city-county merger of St. Louis or Allegheny-Pittsburgh wouldn't hit 2 million as a county, they'd be over 1 million population as a city.
joke: first rule of analyst school don't ever assign a date to a price target.
ReplyDeleteHer basic thesis is correct -- people will move from high tax/high pension areas to low tax/low pension areas.
Like SALT reductions, part of a trend.
I won't even open the pension hole problem but it is going to be potentially large in the next 2-3 years.
The argument against the fed buying smaller cities is they are basically junk at this point, and the investors are going to take a bath.
https://www.brookings.edu/research/even-before-coronavirus-census-shows-u-s-cities-growth-was-stagnating/
https://www.brookings.edu/blog/the-avenue/2020/03/31/when-will-your-city-feel-the-fiscal-impact-of-covid-19/
Sort of like strong market vs weak market but even more pronounced.
although I can see the SALT deduction restored, the reality is that the pension overhang isn't going away, and I tend to forget that, because DC's legacy pension obligations were covered by the federal government.
ReplyDeleteBut still, the Fed move doesn't go very far. And it could probably go further -- counties of one million population?, top 50, 75, or 100 cities?
But your point about brokeness and junk ratings... I wrote about (because I was shocked) about how Bay City, Michigan has so little money that instead of repairing a couple bridges, they sold them to an infrastructure firm (for $6MM) with the agreement that once fixed, the purchaser can toll the bridges. (And I guess this firm is doing the same in other places.)
To not have the money for a couple bridges... you can't sell off a pension obligation.
I was going through a pile of clippings and from one of the weekend WSJ's there was a roundup on the LT impact of the pandemic.
ReplyDeleteOne was about the nation-state and I was thinking about your previous comments on this (e.g., Germany not sending stuff to other EU nations).
Is it about good vs. bad times, which is what I said, or about "surpluses"?
Surpluses were the reason behind the growth of countries, trade, etc. (That PBS series on ancient cities, the episode on Mesopotamia was instructive. Because they were at the edge of the monsoon area, they got two big rains each year, allowing them better agriculture, hence significant food surpluses.)
The problem with just in time is that it isn't built for surpluses, for obvious reasons, as "inventory costs money/ties up resources."
So now we work societally with limited resources, and it makes it hard for people-businesses-nations to be "generous."