The CP Edit: Over the COVID cliff

As our state and federal governments desperately scramble to create a financial safety net for families and businesses, injecting billions of dollars into the economy through grants, loans and enhanced unemployment benefits, cities across the state and nation are bracing for their own fiscal tsunami.

Cities are on the front lines, providing critical public services like police and fire protection, electric and water service, road and sewer infrastructure, trash pickup and more. Sustaining these essential services is about to get much harder as key municipal revenue sources buckle under the strain of a COVID-induced economic downturn. Many cities, including Lansing, are ill-prepared to weather the approaching storm. Budgets are already under considerable strain for longstanding reasons, especially the rising tide of legacy costs for retiree pensions and health care that together consume nearly one-third of Lansing’s general fund resources. Pension fund losses due to the stock market crash make the situation even more precarious.

The coming COVID fiscal cliff represents a formidable challenge for Lansing’s leadership team. There is zero chance, for example, that Mayor Andy Schor’s commitment to rebuild the city’s reserve funds will be possible for the foreseeable future. Already, the dangerously low level of rainy-day funds is likely to have a negative impact on the city’s credit rating, making it more expensive to borrow money for infrastructure projects and other vital needs. City employees should brace themselves for the gathering storm, where layoffs loom large and further reductions in benefits like health care and retirement are all but inevitable.

Lansing relies on a three-legged stool of revenue streams to make ends meet: property taxes, income taxes, and state shared revenues. All three are likely to be crunched by COVID, but not all at once. Like the financial wreckage that followed the Great Recession, the full impact will play out in the city’s bottom line over the next two to three years. Income taxes will be the first to go due to skyrocketing unemployment, followed by a second shockwave over the next two years as property tax collections decline in tandem with a softer real estate market.

Property taxes account for $43 million — nearly one-third of the city’s general fund budget — and income taxes bring in a similar amount. State shared revenues add another $20 million. The latter will likely take a major hit as Governor Whitmer and lawmakers look for ways to divert resources to the COVID crisis response and make up for their own budget shortfalls driven by the loss of state sales, income and business tax revenues. It is possible, if not probable, that Lansing will soon face a budget deficit of $30 million or more — nearly one-quarter of its general fund.

Faced with similar circumstances on the heels of the Great Recession, the Bernero administration was forced to downsize the city workforce by nearly one-third, from more than 1,200 employees in 2008 to just 850 by 2011. For the most part, that leaner staffing level remains in place today — a “new normal” for city government where a lot fewer people do the same amount of work. Another round of downsizing the city workforce will be difficult, if not impossible, while still maintaining essential government functions. To further complicate matters, the police and fire departments together make up more than half of the city budget, making it nearly impossible to deal with major revenue losses without impacting both departments.

There are some glimmers of hope to be found amid the gloom and doom. A robust rebound in business activity and employment (assuming small businesses survive and reopen) should bring sales and income tax revenues back relatively quickly. The dire financial circumstances that will soon hit cities across the state may also spark a long overdue conversation about allowing more options for cities to generate their own revenue, which is constrained by the state’s statutory caps on both income and property tax rates. Local or regional sales taxes, commonplace in cities across the country, should certainly be on the table, so long as they require local voter approval. Mayor Schor should also consider negotiating an increase in the Lansing Board of Water & Light’s return on equity payment, which has been static for more than five years.

While the federal government is directing some COVID relief to cities like Lansing through the Community Development Block Grant (CDBG) program, these revenues are likely to amount to peanuts compared to the mammoth revenue losses careening toward municipal governments. The first tranche of federal aid to cities, approved as part of the CARES Act, excluded cities with a population below 500,000. We urge Michigan’s congressional delegation to right this wrong by including smaller cities like Lansing in the next round of federal relief.

Avoiding an all-out financial catastrophe will depend on the willingness of city leaders to make the tough, painful and unpopular decisions that will be necessary to reduce spending and enhance revenues. Failing to make the hard choices now may push Lansing to the brink of the ultimate fiscal cliff — municipal bankruptcy.