The Great Recession was devastating for local governments. Cities slashed budgets for parks. School districts laid off teachers and sent class sizes skyrocketing. And the recovery didn’t come quickly or smoothly. It took years. But in the last few years, it felt like local government in southwest Riverside County had finally been able to return to where it was before the financial crisis. Many cities were finally able to hire new positions, purchase new vehicles and pay for anything else they had been putting off during the recession.
But now, the current pandemic-linked financial crisis could wreak the same amount of damage as the previous economic collapse in 2008, if not more, on local governments.
The largest chunk of city governments’ funding comes from sales tax and transient occupancy tax (hotel) revenue. 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 smaller portion of cities’ revenue, and that may be affected, too, but that won’t be known for years.
Perhaps the worst part is that it’s not even clear yet how bad the numbers are going to look.
“We’re kind of in the embryo stage,” Temecula Mayor James “Stew” Stewart said. “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.”
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 2018-2019 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 because 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 city in southwest Riverside County, 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 2018-2019.
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 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 as though 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.
And counties are similarly not immune.
Riverside County Chief Financial Officer Don Kent said while sales tax and transient occupancy tax, two revenue streams most likely to be impacted by coronavirus, don’t make up as big of a chunk of the county’s budget as it does the cities, an especially large loss of those streams would still be devastating.
Another area that will be impacted is lost interest earnings on investments, due to the Federal Reserve ordering interest rate cuts, Kent said.
“When all the dollars are collected, they come into the county treasury for a period of time,” Kent said, “and only a portion of that stays in the county, but that’s lost interest earnings for the county treasury fund.”
Like city officials, Kent said it’s much too early in the game to know the full financial impact of the coronavirus and what things may need to be cut.
“It’s very preliminary to give out numbers, but easily, it will be in the tens upon tens of millions for the County of Riverside,” Kent said. “It could easily approach $50 million for the county.”
That’s not as huge of a chunk of the county’s general fund revenue — which reached nearly $800 million last year — as it would be for cities, but it’s still a lot of money.
“As more time goes on and we know more of the true impact and the length, the county board of supervisors will be making some tough decisions in the near future,” Kent said. “Right now, we’re gathering and preparing information for next year’s budget.”
That’s essentially the position other local governments are in, too. Local fiscal years start in July and governments will be continuing to plan their new budgets, so they will likely be taking a close look at what the coronavirus is doing to their revenue streams.
Will Fritz can be reached by email at firstname.lastname@example.org.