Cities, towns confront unprecedented budget challenges

The COVID-19 pandemic and the state’s assertive response to protect public health have turned what looked in January to be a routine municipal budget season into one of unprecedented uncertainty and turmoil.

The impact of the public health crisis on the economy and state and local finances is expected to be severe, and may mark the start of a recession.

Fiscal 2020
With just three months to go, the outlook for local revenues and spending needs this year has taken a sharp turn for the worse. Revenue counted on to balance fiscal 2020 budgets is certain to fall short of expectations, and unplanned spending on local public health – for first-responders and other COVID-19 needs – will be substantial.

With a state stabilization fund total of about $3.5 billion, there isn’t talk yet of municipal or school aid cuts to close out fiscal 2020, and cities and towns have tools to finance emergency spending, with added flexibility in rules included in new legislation to help them get through the year.

Fiscal 2021
Cities and towns are facing even more extraordinary challenges putting together revenue and spending plans for fiscal 2021, further complicated by the unexpected challenge of how and when to convene citizens to debate and approve municipal and school budgets for the fiscal year that begins on July 1.

Town meetings scheduled for early spring are being postponed due to limits on gatherings and uncertainty about revenue estimates. Legislation is in the works that would set new rules for how towns can start fiscal 2021 without a final budget approved by town meeting. There are already rules in place for cities and regional school districts.

The state budget plan filed by Gov. Charlie Baker in January, including municipal and school aid recommendations, will certainly be revisited. Rep. Aaron Michlewitz, chair of the House Ways and Means Committee, has said that it is highly unlikely that the House will have a budget done in April, as is usually the case. The governor’s chief budget officer and the chairs of the House and Senate Ways and Means committees have been talking about re-convening the “consensus revenue” group that met to advise state budget writers on the economy and state finances in December, when economic circumstances were very different. The expert advice they hear would inform their decisions on the shape of a fiscal 2021 state spending plan.

There is some help coming from Washington, D.C. The CARES Act approved by Congress and signed by President Trump on March 27 provides $2 trillion intended to boost various parts of the economy and stem further decline. The stimulus package includes some help for states and local governments and will provide a measure of relief for the state’s fiscal 2021 budget. Details on the amounts available for Massachusetts and how they might be used are still under review.

Economic outlook
In mid-March, as the COVID-19 outbreak worsened and the governor declared a state of emergency, Eileen McAnneny, president of the Massachusetts Taxpayers Foundation, wrote, “The impact on the Massachusetts economy and the state’s finances is unknown at this point but significant. In the coming months and years, the state will be pressured to increase spending to respond to the crisis while revenues decline as a result of dramatically reduced economic activity.”

She said that state policymakers should consider the following points as they manage the crisis:
• Tax collections for both fiscal 2020 and fiscal 2021 will be materially decreased compared to previous estimates.
• The Taxpayers Foundation’s initial estimate is that fiscal 2020 state revenue will fall between $300 million and $500 million below benchmark from the loss of economic activity.
• There is a significant likelihood of an economic recession the length and depth of which cannot yet be quantified. Should fiscal 2021 revenue fall by 3% to 5%, the tax revenue impact would range from $2 billion to $3 billion.
• Lawmakers should take steps now, such as revising the consensus tax revenue amount, to prepare for a downturn, while tracking the revenue impacts over the next three months.