Faced with declining tax revenue on top of expensive new service burdens, local government budgets have experienced extraordinary strain since the start of the COVID-19 pandemic.
Fortunately the recently approved $1.9 trillion American Rescue Plan offers them a lifeline: the $350 billion “Coronavirus State and Local Fiscal Recovery Fund,” $120 billion of which is earmarked for local governments. Our cities and counties can use these dollars to fill in some budget holes, of course, but they can even do more. They can invest this one-time windfall in ways that catalyze inclusive growth and address persistent equity gaps.
How badly have local governments suffered this past year? I conducted a a nationwide COVID-19 fiscal and service impact survey last fall and found that that 87 percent of the local governments that responded had up to a 19 percent budget revenue loss due to the impacts of the COVID-19 pandemic. This finding is shown in the pie chart below.
Detailed analysis of the survey responses also show 50 percent of the local governments had up to 9 percent revenue loss in sales tax due to the COVID-19 pandemic, and 52 percent had up to a 14 percent revenue loss in income tax due to the COVID-19 pandemic.
These in some cases severe revenue shortfalls forced governments to take measures aimed at operational efficiency and cost savings. Positions have been eliminated, services cut, capital investments postponed. The fiscal distress on local governments is exacerbated by the fact that county and city governments had to carry a higher financial burden in dealing with the public health crisis, as they struggled to provide support for their vulnerable citizens at the time when their own-source revenue plummeted.
According to the federal Bureau of Labor Statistics, about 1.4 million state and local government workers — many of them employed by schools — have lost their jobs since the beginning of the pandemic. Forty nine percent of the survey respondents’ governments reduced funding for police in FY 2020 and 42 percent did the same for fire, health care and mass transit services.
The $120 billion appropriated by Congress for local government will not make up for all lost revenue, but it will help considerably. In addition to the resources to stabilize government budgets, the American Rescue Plan also provides funding to invest in infrastructure, education, small businesses, transit and workers. With this massive federal aid, local governments should strategically facilitate immediate financial relief to needy small and micro businesses, and invest in inclusive long-term growth and prosperity that will strengthen public health infrastructure, positively impact workforce productivity and substantially improve their long-term revenue generation. No wonder 22% of local governments are counting on federal transfers to account for up to 10% of their budgets in this fiscal year (up from 15% the previous year).
LOCAL RESPONSE AND THE NEED TO INVEST IN INCLUSIVE LONG-TERM GROWTH
With this one-time infusion of federal funds, local governments will need to be strategic and make investments beyond budget stabilization to ensure long-term inclusive growth that will enhance local government “own-source” revenue. Lessons from the 2020 Cares Act suggest that many minority-owned microbusinesses did not have equal access to funding under the Paycheck Protection Program.
It is therefore important for local governments to set up coordinating entities to liaise with the federally mandated “Community Navigators” under the American Rescue Plan to enable equitable and inclusive access to funding to help grow local economies. COVID-19 has also made it abundantly clear that public health infrastructure of many jurisdictions is incapable of withstanding severe stress of future pandemics. Localities should therefore take advantage of the American Rescue Plan funding to make productive, sustainable, revenue-generating investments, strengthen their public health infrastructure, and upgrade their workforce development to help move those displaced by the pandemic to available jobs.
Federal American Rescue Plan funding represents a one-time opportunity for many cities and counties to address longstanding barriers to creating healthy and equitable communities. Given the magnitude and the multi-faceted nature of the American Rescue Plan funding, it is crucial for local governments to coordinate all spending efforts to enhance efficiency, avoid waste and derive maximum benefits. Our municipal leaders must do more than plug budget holes: they must coordinate regionally and across sectors to identify investment priorities, set goals, oversee implementation and monitor results for long-term sustainable and inclusive growth.
Stephen Aikins is associate professor in the USF School of Public Affairs, and director of the USF Master in Public Administration. This column was submitted as part of a partnership with the Scholar Strategy Network.