Local governments brace for budgetary impact of coronavirus

The Great Recession was devastating for local governments. County and city governments cut slashed budgets for things like parks. School districts laid off teachers and sent class sizes skyrocketing. And the recovery didn’t come quickly or smoothly. It took years. And finally, local governments in the last few years have mostly been able to return to their pre-recession spending levels.

But now, whatever we end up calling this current pandemic-linked financial crisis, it could wreak the same amount of damage as the previous economic collapse in 2008, if not more, on local governments.

The largest chunk of most city governments’ funding comes from sales tax and transient occupancy tax (hotel) revenue, and while those are smaller portions of San Diego County’s $5.6 billion budget than they would be for cities, they’re still important.

And both of those are funding streams that are going to be decimated by the sudden drop in activity brought on by the coronavirus and the stay-at-home orders the state and the county urgently imposed to counteract it. Property taxes are also a portion of the county’s revenue, and that may be affected, too, but that won’t be known immediately.

In unincorporated Fallbrook, where the county is the main local government, there’s no telling yet where the impacts of sudden declines in revenue will be felt.

“There will certainly be a financial impact,” San Diego County spokesman Michael Workman said. “Across the board. Including sales tax. We are still assessing to restructure our budget.”

The budget for the coming year will be delayed at least until August, Workman said.

The North County Fire Protection District, which covers Fallbrook, is funded primarily by property taxes and service fees, the agency said in a statement, so it may not feel the effects of a pandemic-related recession immediately. But it’s still a possibility.

“Our department could see a significant financial impact as our community members may not be able to pay their mortgages in the next coming months,” the fire district’s statement said.

The district went on to say that it’s already being affected by continuing to need to purchase medical supplies.

“Our fire department has seen an economic impact due to the continued purchases of more masks (surgical and P-100), isolations gowns, disinfection equipment, gloves, etc. as well as an increase in vacancies,” the district said.

Perhaps the worst part is that for many local governments, it’s not even clear yet how bad the numbers are going to look.

To illustrate, Temecula Mayor James “Stew” Stewart described the current status of the unfolding financial crisis as being in “the embryo stage.”

“We’ve got our chief financial officer, Jennifer (Hennessy), who is starting to make some projections, but she can’t even make a projection without knowing what that first reported number coming in is,” Stewart said, describing a financial situation that is almost certainly shared by every municipality in the region.

There’s about an eight-week delay between when the state Board of Equalization collects sales taxes and distributes them back to city and county governments, Stewart said.

Sales taxes accounted for $37 million of the city’s $78 million general fund budget in the 2018-19 fiscal year — almost half.

“That’s gonna be a huge impact on our fiscal budget,” Stewart said of the likely drop in sales tax revenue this quarter. “We’re gonna have to make some midyear adjustments to stay our course and hope for the best.”

The city isn’t in any immediate danger of going broke, Stewart said. But it will certainly be keeping its options open.

“A lot of the stuff that was budgeted was really budgeted with real money that we had right then, so we still have real money,” Stewart said.

He said he couldn’t yet say if there was any danger of the city having to dip into reserves.

“I don’t know that yet bc we don’t have the numbers that we’re not going to receive, so as far as that’s concerned, we’re making adjustments right now on the fly to in anticipation of the lack of sales tax revenue,” Stewart said. “We’re kind of making adjustments now so we don’t have to basically make adjustments later.”

Temecula is just one local government in Southern California, but other cities in the area were hardly any different.

And the uncertainty local governments were already feeling was compounded by even more uncertainty about what the consequences could be of a proposal made by Gov. Gavin Newsom Thursday, April 2.

Newsom called for letting small businesses keep up to $50,000 in sales tax receipts for the next year, something that will certainly help those businesses but would leave cities in the dust.

“That’s a huge impact for cities if that happens,” Lake Elsinore City Manager Grant Yates said. Sales taxes accounted for about $10 million of Lake Elsinore’s $43 million general fund in 2018-19.

Yates, like Stewart, said the impacts won’t be apparent for some time. But when they are, they will be felt in local budgets next year, both in Lake Elsinore and elsewhere in the region.

“Every city is in the middle of putting together their budget,” Yates said. “Those impacts are still to be determined and it depends on what’s going on with the science and how this virus is going to continue to impact our daily lives. It’s too early to say it’s going to be ‘x’ because I don’t think anybody has any idea.”

Yates said right now, the city is just trying to do its best to respond to the coronavirus pandemic and its immediate aftermath — recovering is several steps ahead of where we are currently.

“It’s really early right now, we’re very much involved in the active response in dealing with the issues,” Yates said. “The COVID-19 pandemic is like any other emergency where you go through a cycle, so right now we’re in the response cycle.”

Part of that response includes helping local businesses by co-hosting webinars with the Lake Elsinore Valley Chamber of Commerce “to allow businesses to understand what their options are as far as getting (government) aid.”

Temecula is similarly trying to help local businesses by compiling resources from the federal government and state government on its website and social media.

Neither can afford the types of measures some larger municipalities can, like the city of San Diego’s emergency fund to provide microloans to small businesses.

“We’re a small city,” Stewart, the Temecula mayor, said. “Just like Murrieta, Wildomar, Menifee Lake Elsinore, we basically have enough money to keep our roads, infrastructure up to speed.”

But it’s not like larger cities are immune, either — in fact, San Diego Mayor Kevin Faulconer told hundreds of city employees that they should not show up to work Monday, April 6, essentially furloughing workers deemed nonessential.

More information on the state of local budgets will start to be known in the coming weeks. Local fiscal years start in July and governments will be continuing to plan their new budgets, so you can bet they will take a close look at what coronavirus is doing to their revenue sources.

Will Fritz can be reached by email at [email protected].