An Extended Lockdown May Devastate California Cities

Marc Joffe
Senior Policy Analyst, Reason Foundation

The COVID-19 pandemic is placing severe fiscal pressure on California cities. Federal aid is unlikely to offset the large losses city managers are anticipating. Before cities enter a state of service insolvency, or even Chapter 9 bankruptcy, California’s state and local governments should reconsider their approach to the coronavirus.

The League of California Cities recently released a member survey that projected total revenue losses of $6.7 billion through June 2021 — if shelter in place orders would remain in force through May followed by a gradual resumption of business activities thereafter. The biggest financial losses are expected to be caused by decreases in sales tax revenue and transient occupancy tax revenue, but a variety of other revenue sources will be impacted. Cities are also incurring additional costs for cleaning and disinfection services and the acquisition of personal protective equipment.

While the League of Cities advocates for federal and state aid to cities, such support could only replace a small fraction of lost revenues and added expenses. The state government is suffering its own revenue and expenditure crisis and will likely lack the resources to help local governments. At the federal level, The Coronavirus Aid, Relief, and Economic Security Act included $150 billion in state and local aid, but most of the money went to states; only cities with over 500,000 people received any funding at all.

Another federal aid bill, phase five of the economic stimulus packages, is now working its way through Congress. It will almost certainly pass the House but could face a steep climb in the Senate, where Majority Leader Mitch McConnell has expressed opposition.

Whatever ultimately passes is likely to be especially unsatisfactory for California for three reasons. First, the current legislative draft doles out aid to local governments across the country by population. While California could get the most per capita, the aid would go much less further in high cost states like California than it will in states with lower costs of living.

Second, aid will probably not vary based on a state’s coronavirus response either. Southeastern states such as South Carolina, Georgia and Tennessee are starting to allow businesses to open, which enables local governments to begin collecting sales tax revenue. California, by contrast, has no date for reopening non-essential businesses. The League of Cities’ estimate for economic damage included the assumption that the state would reopen by June 1.

An extended shutdown would slow the ultimate economic recovery. More businesses, unable to meet their fixed costs without sales, could shut down permanently—extinguishing the jobs they created. And the longer potential patrons hear political leaders and media figures tell them to remain at home, the more reluctant some will be to start visiting stores after the shelter-at-home order ends.

Fear of patronizing shopping malls, theatres, fitness clubs, salons, restaurants and hotels is being reinforced by the selective story California political leaders are offering. We know as of April 28,   Californians had died from coronavirus. But, unlike other states, California does not report the number of COVID-19 deaths in nursing homes, nor does it break down fatalities by age range.

By contrast, Massachusetts provides detailed mortality statistics by deaths and other characteristics. Through April 25, the state reported that, of the 766 deaths classified by age, only 3 were suffered by individuals under 50. This group experienced a case fatality rate of under 0.002%. The state also reported that most COVID-19 fatalities occurred in long-term care facilities and that 98% of categorized deaths befell individuals who had underlying conditions. The takeaway for Massachusetts residents is that younger, healthy people have very little risk of dying from COVID-19 if they get it.

If California were to provide similar information to the public, many individuals in less vulnerable demographic groups might have the confidence to patronize local businesses when they reopen.

Third, and finally, the federal aid package is unlikely to significantly help some California cities that were unprepared for an economic downturn. While most cities entered the current economic crisis with strong general fund reserves, several did not. Indeed, some cities reported combined assigned and unassigned general fund balances below zero on their most recent Comprehensive Annual Financial Reports. Among these cities are Compton, Lindsay, El Cerrito and San Gabriel – all of which were also included in the state auditor’s list of high-risk cities.

Unless revenue collections recover rapidly, these cities could be staring at municipal bankruptcy sooner rather than later. El Cerrito, for example, faces insolvency if it is unable to roll over a $9 million bank loan coming due on July 8.

While other cities can initially deal with revenue losses by drawing down reserves, many will be compelled to cut costs. With personnel costs accounting for a high proportion of expenditures in most cities and pension contributions enjoying strong legal protections, furloughs and layoffs could be widespread. Staff reductions would force service reductions, potentially adversely impacting the quality of life in many communities.

Rather than hope for federal aid, which is likely to be insufficient, California could take steps to help minimize local governments’ fiscal problems by giving residents the public health information they need to fully evaluate their risks of resuming participation in the economy and relaxing restrictions on businesses that can safely serve their customers.

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