Relief Needed as Crisis Batters Local, State Budgets

This blog post was originally published on IEDC's EDNow.

Economic development organizations (EDOs) face an uncertain future as plummeting revenue streams and rising costs for health care, emergency response and unemployment benefits sparked by the coronavirus pandemic squeeze the budgets of cities and states.

State and local government employment has plunged to levels that are lower than any point since the Great Recession. In April alone, those governments cut nearly 1 million positions, two-thirds of which were in public schools and colleges, according to the Bureau of Labor Statistics. Moody’s Analytics estimates state and local governments will need to make $500 billion in cuts over the next two years due to the economic impact of covid-19, reported the Wall Street Journal.

EDOs will not be spared as local governments impose spending cuts to fill revenue shortfalls primarily resulting from a drop in sales and income taxes, but also from lower fee and property tax revenue. Following the Great Recession, the categories of spending the nation’s largest cities most commonly cut were debt service payments and housing and economic development, said Donnie Charleston, director of state and local fiscal policy engagement for the Urban Institute.

But depending on how they are structured, EDOs rely on other revenue streams as well which may be in jeopardy. Organizations with a public-private partnership model likely will face funding gaps from the business community as a result of the pandemic. And more broadly, other local economic development entities — including chambers of commerce, university-based organizations, workforce investment boards, small business development centers and community-based nonprofits — depend on revenue from a variety of sources, including state and federal governments as well as the private sector.

“It’s more than likely one or more of those funding streams will be affected in some fashion.” Charleston said.

“This is the most difficult funding situation I have ever seen for economic development organizations ever,” said IEDC President and CEO Jeff Finkle. 

“There will be a desperate need for funding for some entities to get over the hump,” Charleston said.

Coalition calls for federal relief

On May 20 IEDC, along with more than 170 businesses, associations, and community organizations, sent a letter to congressional leaders urging them to provide direct federal assistance to America’s cities, towns, and villages in the next federal recovery bill in response to the overwhelming strain the crisis has imposed on budgets of cities of all shapes and sizes.

“Without a lifeline to recover and restore local economic activity, cities will be forced to make cuts to essential services that will have a ripple effect across the public and private sectors,” the letter states.

The coalition calls for:

• $500 billion over two years of federal aid for local governments;
• fair and direct funding allocations to each and every local government, with no exclusions based on population;
• equal funding overall for municipal governments and county governments; and
• maximum flexibility for the eligible use of funds to address the budget consequences of the pandemic.

“We need the federal government to come through with a local and state government support package and additional money for economic development recovery,” Finkle said.

Deficit projections balloon

Across the nation, cities, towns and villages will absorb a total of $134 billion in revenue loss in 2020, representing a 21.6 percent drop, according to an analysis by the National League of Cities (NLC). Through 2022, cities nationwide will experience a total loss of $360 billion.

“With significant restrictions on raising new revenues, cities are turning to their options of last resort, which are to severely cut services at a time when communities need them most, to layoff and furlough employees, who comprise a large share of America’s middle class, and to pull back on capital projects, further impacting local employment, business contracts and overall investment in the economy,” the NLC analysis stated.

The estimated shortfall at the state level is even greater, with the Center on Budget and Policy Prioritiesprojecting state budget deficits will total $765 billion over the next three years.

At this point, Congress remains deadlocked over the next emergency relief bill in response to the pandemic. House Democrats narrowly approved a $3 trillion measure on May 15 which included about $1 trillion in aid for state and local governments. Senate Republicans and the White House have dismissed the bill as a liberal wish-list, but they have yet to craft a competing proposal.

In March, Congress allocated $150 billion as part of the CARES Act to cities and states to pay for unexpected health costs. The money was limited to coronavirus-related expenses that governments did not anticipate, however, narrowing its use. The administration now is considering allowing states more flexibility in how they can use the funds, reports Governing.