In March 2020, as the coronavirus pandemic took hold, the U.S. economy went into free fall. Retail sales plummeted, unemployment skyrocketed, businesses shuttered, uncertainty abounded. The fiscal impact of these swift economic changes were felt immediately in cities across the country. Sales and income tax revenues were the first to be hit, and cities that rely on these sources were forced to take immediate draconian actions. Even property tax revenues, which typically take longer to respond to economic changes, started showing signs of weakening as economic hardship dampened real estate demand and the ability of many to afford their mortgage.
Given that most cities’ FY 2020 budget captures only a couple of months of the pandemic recession, FY 2020 more closely represents a pre-recession baseline of city fiscal conditions for most cities. FY 2021 budgets (which start for many cities in July 2020) begin to more fully capture the fiscal impacts felt by cities across the country. As the virus persists, the toll on city finances is set to be more severe than that experienced during the Great Recession.
Now in its 35th year, the City Fiscal Conditions survey of 485 cities reveals the breadth and depth of challenges facing city budgets, including:
- Nearly 90 percent of cities will be less able in FY 2021 than in FY 2020 to meet the fiscal needs of their communities. This widespread sentiment about lack of fiscal capacity has not been reported since the low point of the Great Recession.
- Current estimates for FY 2020 put year-over-year general fund revenue growth at near zero.
- All major local tax revenue sources slowed in FY 2020, with severe year-over-year declines in sales (-11%) and income tax (-3.4%) receipts.
- On average, cities anticipate a 13 percent decline in FY 2021 general fund revenues over FY 2020.
Looking beyond 2020, cities continue to face economic and fiscal uncertainty while trying to keep their communities safe from the public health crisis. As states face their own fiscal challenges and the federal government provides only minimal fiscal relief to cities, cities are once again in a position to largely go it alone. In this environment, cities’ balanced-budget requirements and revenue-raising restrictions have translated to severe service cuts, extensive layoffs, furloughs and hiring freezes, and rollbacks in capital projects. These decisions are necessary but not without consequence. Government investment in the economy is exactly what is needed during downturns, meaning that the future economic health of our nation relies on fiscally strong cities, towns and villages, along with state and federal investments. Without them, the road to recovery and reopening will be long and tenuous.