Cities’ Coffers Hit by Pandemic: A Look at Where Municipal Revenue Comes from, and COVID-19’s Impact

Ben Brown, NCLM Communications and Multimedia Strategist

Governments at all levels have a tough balancing act – expected to keep residents’ costs low while delivering all the in-demand services that keep communities not just running but structured for a fine quality of life, too. That takes planning and consensus, but at the end of the day it’s the resources that bring it all home — revenues that cover the operations of police and fire response, public works, utilities, amenities and more.

In the mix, local governments, like others, keep “rainy day” funds on hand to keep essentials running in emergencies or after natural disasters, like hurricanes.

But COVID-19 is another story.

The response to the deadly coronavirus brought about measures to guard public health and safety, including stay-at-home orders and limitations on business operations. But the circumstances opened up revenue chasms that have turned new focus to how the governments closest to the people function and provide for their communities.

“People think cities have deep pockets; most have lint in them,” said William Pitt, outgoing League president and a longtime member of the Washington City Council. In his city, like many others, the biggest chunk of the municipal budget goes into public safety, a 24-hour operation that pretty much anyone would agree is essential.

The funding for these must-have services — understand subsequently that most of a municipal budget covers employees who deliver those services — isn’t meager and comes from sources including the property tax and sales tax.

In North Carolina, sales and use taxes make up the largest amount of tax revenue outside of the property tax, bringing in more than $1.2 billion in annual revenue. For the median North Carolina municipality, 28 percent of municipal revenue is sales tax, according to the League’s latest Projections for State-Collected Local Government Tax Revenue, published in March as the pandemic was on the rise. Typically, the report forecasts what cities and towns can expect, based on analyses of economic conditions and adjustments that may sway here and there year to year. This time, “if there is one common thread that runs among recent analyses, it is that this period of economic activity is unlike any seen in recent decades,” League Research Strategist Caitlin Saunders and Director of Research & Strategic Initiatives Chris Nida wrote at the outset of the document.

With consumers staying home to avoid the virus and businesses limited in what they can do, budget impacts are certain but, as of this writing, untold in extent.

While some might point out that spending continues on grocery food as households shift from restaurant dining to home-prepared meals, and while online spending are subject to local sales tax, it’s unlikely they’ll make up for what’s lost in consumer spending.

Council Member Pitt expects his city to deal with COVID’s budget shockwaves for fiscal years to come. He said he’s already heard from some local businesses that are having to close for good due to lack of traffic.

“It’s very hard for small businesses, and we don’t have major industries in a small town like Washington,” Pitt said. What’s tougher is the city’s biggest industry — tourism, a driver for so many North Carolina communities — depends on people not only being out and about but in a good position to spend.

With transactions dropping off, taxes aren’t being collected that fuel government coffers. The only tax that municipal governments get to set themselves is the property tax, which local boards aspire to keep as low as possible, keeping the pressure off of it with best use of other, though lesssubstantial resources available.

Other state-collected revenue sources distributed to local governments are the electricity sales tax, local video programming tax, telecommunications sales tax, piped natural gas sales tax, solid waste disposal tax and alcoholic beverages tax, which were all the subject of projections in the League report from March.

A number of authorized governments also depend on occupancy taxes, like from hotel stays or vacation rentals, often in support of a tourism industry that fuels the economy but requires government services. An industry report published on said that sector’s challenges under COVID restrictions and consumer behavior was making for a “severe decline” in revenue collected on rooms. Coldwell Banker Richard Ellis, the world’s largest commercial real estate services company, estimated a 37 percent decline in 2020. Prior to COVID in the U.S., the company had forecasted a 0.1 percent decline.

Back in Washington (and all other communities), the coronavirus pulled a hard turn for the city’s spending plan, having landed right in the middle of budget season. Council Member Pitt said his board had to rethink and cancel a number of initiatives it wanted to put out there, now unsure of how to support them, not to mention any new responsibilities unforeseen.

Clearly an issue, the Raleigh News & Observer wrote a lengthy piece in early April about COVID-19 and local government revenue struggles, quoting heavily from League Director of Political Communications & Coordination Scott Mooneyham.

“Ultimately, the only way even larger cities are going to be able to weather this without some federal or state help is going to be by making cuts in their budgets,” he told them as the newspaper also pointed out that utility budgets like for water, sewer and electric services — running 24 hours a day and core to public health — have also seen declines under the pandemic. It may be especially difficult on those utilities run by small or rural towns — distressrelief measures implemented under executive orders have given customers a grace period to pay their bills.

Mooneyham emphasized, however, that North Carolina has some of the most financially responsible local governments around, and their leadership over the years has put them in decent standing to weather the crisis, in part with available emergency funds. “…but for how long?” Mooneyham posed in the N&O article. “That’s the question.”

Hurricane season begins June 1.