With COVID-19 Expected To Cut Into Local Budgets, Cities Consider Cuts, Furloughs

May 5, 2020

File photo of a bus stop in Chapel Hill during the coronavirus pandemic in March 2020.
Credit Chuck Liddy / For WUNC

As federal politicians argue about pandemic relief payments for state and local governments, more than 600 North Carolina cities, towns, and counties are trying to develop budgets for the fiscal year that begins July 1.

They’re trying to do it without really knowing how much money they’ll have.

The money will pay for things that directly affect safety, health, and daily life -- schools, teachers, police, firefighters, garbage collection, neighborhood parks.

With the COVID-19 pandemic expected to cut into nearly every source of local government revenue — from utility payments to taxes on retail sales, hotel rooms and restaurant meals — many municipalities are considering budget cuts and furloughs.

“It’s going to impact the funding of those who teach, those who protect, and those who otherwise serve, and that's why it's such a serious issue to me,” said N.C. State Treasurer Dale Folwell, who as the leader of the state’s Local Government Commission monitors the finances of all those towns, counties and school systems.

It's going to impact the funding of those who teach, those who protect, and those who otherwise serve, and that's why it's such a serious issue to me. -N.C. State Treasurer Dale Folwell

The City of Durham may reduce a planned pay increase for its workers and is putting off a tax increase for affordable housing. Wake County has put off a bond vote and asked department heads to come up with seven percent cuts from current levels.

Both governments are expecting eight-figure budget shortfalls.

Asheville Assistant Director of Finance Tony McDowell has worked on budgets there for two decades. He says he’s never experienced this kind of uncertainty while trying to put one together.

“The decline in some of our revenues - in the short term at least - are going to be beyond I think what any of us have ever seen before," he said. “We just don't know how long this is going to go on and how quickly the economy is  going to recover after this.”

At the North Carolina League of Municipalities, executive director Paul Meyer said the picture has changed quickly.

“We were anticipating 25 percent decline in sales tax receipts for cities and towns. That was three weeks ago. Now that number we’re thinking is probably closer to 30-35 percent, and sales tax makes up about a third of the average city budget,” Meyer said.

Nationally, the first quarter of 2020 showed the sharpest drop in economic activity since the Great Depression. Municipalities don't yet know how much their sales tax revenue declined during the quarter, because it takes about three months for tax money to work down from the state to local governments.

Wake County saw a 40 percent drop just in March.

Meyer said whatever the final numbers, the hit from lost retail sale tax will be sharp.

“And then in 2020, 2021, we’ll see unpaid property taxes start to kick in,” he said.

An empty park in Durham during the coronavirus pandemic in March 2020.
Credit Chuck Liddy / For WUNC

Property taxes are the main source of revenue for local governments.

Meyer said that without help replacing lost revenue, the effects of the pandemic will likely exceed those in the last major economic downturn, a decade ago. Revenue problems could drag on for years, and local governments could shed employees and spend less on job-creating construction.

“That’s where local governments end up extending the recession,” he said.

"That was the pattern that we saw in ’08 to 2010. Same thing.”

Others are looking to the Great Depression for lessons about what to expect. In the 1930s, 62 counties and 152 North Carolina towns and cities couldn’t pay their debts, and many went bankrupt.

Ironically, because North Carolina’s local governments fared so badly then, most are better positioned to face this crisis than their peers in almost any other state. That’s because in response to the Depression, the state took control of prisons, schools, and roadbuilding.

It also formed the Local Government Commission to keep a close watch on the health of local governments’ finances. The Commission decides if their budgets are healthy enough for them to borrow money, then controls the sale of bonds.

“They literally review in detail the external financial statements and other reports that every government in the state has to provide," said Gregory Allison of UNC’s School of Government. “And it gives them the ability to catch, potentially, problems.”

Even before the pandemic, the Commission had put dozens of mainly small towns on a watch list - many because of aging utility systems they can’t afford to maintain.

“Now we're faced obviously with a pandemic where the expenses of a lot of these municipalities are staying the same, possibly even going up, but the revenues are going to collapse,” said Folwell.

In what some fear is a preview of the fallout from the pandemic, the Commission last year took over the finances of one town on the list, Eureka in Wayne County. It was struggling to pay for its wastewater treatment.

“We're approving the putting up of Christmas lights in Eureka, we're approving the taking down of Christmas lights, everything dealing with that town is now under the purview of the Local Government Commission,” Folwell said. “But we have over 540 towns in North Carolina, 100 counties and 112 school districts. So our small staff at the Local Government Commission is not in a position to take over all these towns, and that's why this is very concerning.”

Especially of concern, he said, are those communities that rely on visitors for much of their economic activity.

“Many of these towns, especially the tourism towns — both in the east and the west, because North Carolina is known as Variety Vacationland —  depend on that tourist revenue,” Folwell said. “And that's gonna dry up pretty dramatically this year.”

Among other things, the Commission requires local governments to build savings to cushion against unexpected problems. As a result, local governments have become much less likely to fail, and they can issue bonds at lower interest rates than their peers in nearly every other state. That saves the state’s taxpayers millions of dollars a year in interest and helps the governments recover from unexpected events like hurricanes. It’s no accident that municipalities along the coast often carry larger fund balances.

But Meyer said even fund balances regarded as healthy only represent two or three months of operations and could quickly be used up in a major downturn.

“Once they eat into that, there are only two options," Meyer said, "and that will be cutting services, which equals personnel, or raising taxes on what's left.”