By Eric Demas, CFO
This pandemic has required everyone to adapt from what was our normal way of life. Our lives six months ago were very different from where we find ourselves today. Covid-19 is not only a global health crisis, but it is also an economic crisis. Every country, industry, and individual has been and continues to be dramatically impacted, and our great City is certainly no exception. Quite frankly, this pandemic was unanticipated and uninvited by all. A result of this pandemic is the ambiguity of many things, but most notably the uncertainty of what the City’s financial state will be in FY21. The one thing that is clear is that the Mayor recognizes that fiscal responsibility, while always a top priority, is even more important during this uncertain time that we find ourselves in. Across the Country, many state and local governments are balancing their budgets through increased taxation; however, this is a path that the Mayor is seeking to avoid at all costs.
The City’s strong financial condition is a result of many things, including, but not limited to conservative revenue forecasts, long-term planning, a balanced approach to expenditure budgets, and our ability to adapt to challenges. Over the past few months, our state legislature has provided many tools to cities and towns to help municipal leaders navigate and adapt during these unprecedented times. Examples include the delaying of tax payments through the end of June, as well as the waiving of interest on late payments. These local options, which were adopted by the Mayor, provided much needed relief to our residents during the peak of this pandemic, but also delayed the City’s ability to analyze the economic impact on our residents. Understanding the local economic impact on our City is a critical piece to building this year’s budget. Additionally, the federal government has failed to provide guidance as to what, if any, federal aid will be provided to states, cities and towns to address revenue shortfalls moving forward. Unlike the federal government, states, cities, and towns must create balanced budgets, and cannot simply print money as we navigate through this crisis. As a result, the state has been forced to move forward with 1/12th spending plans and have yet to provide cities and towns with estimated state aid, which is a significant portion of how the City balances our budget.
Due to this uncertainty, some communities have passed budgets with somewhat arbitrary percentage reductions from the prior year; one community cut their budget by 20% from the prior year, but based on what information I ask? Every community is unique, but we all face a lack of financial information right now. If a community cuts too much, services that residents rely on may be reduced more than necessary, and if you do not cut enough, more severe cuts may be required during the tax rate setting process in the fall to avoid increased taxation and possibly new or increased fees. This is the reason the Mayor has also embraced another tool provided by the state, which allows for the Mayor to submit three monthly continuing appropriations to the City Council during the start of our current fiscal year. This process allows the City to examine the local economic impact on our City, potential revenue assistance from the federal government, as well as how our state aid will be adjusted moving forward. The additional time also allows us to adjust our five-year capital plan to ensure that we are able to continue to invest in our infrastructure. We cannot lose the ground that we have made from a capital standpoint, as it will cost the City more money in future years if we allow our infrastructure to deteriorate.
This process is an administrative nightmare, nearly tripling the work from a normal budget process, but it is the most financially prudent and what our residents and businesses deserve. This approach also allows us more time to see how our country and state continues to grapple this pandemic from a health perspective. Our state and region have done an unbelievable job at battling this horrible virus, but I watch in horror and disbelief as to how other parts of the country appear to be losing their grip on the situation. It may only be a matter of time before the gains that we have fought hard to win locally, may be jeopardized by the unfortunate actions from other parts of the country.
During the financial crisis of 2008 – 2009, state aid was drastically reduced, and took nearly five years to recover to previous levels. It was a period of economic pain felt by all, but one thing that was vastly different, the economy remained open. What we are facing now is much different as our economy came to a grinding halt and is struggling to redefine itself. Many businesses that were once flourishing may unfortunately find these current economic pressures too great to overcome. Latest estimates from the state indicate a potential $6 billion shortfall, which will certainly trickle down to cities and towns. While I am optimistic that we will come together as a country and get ahead of this issue from a health perspective, I fear that the economic impact will be felt for at least the next three to five years. To think otherwise would be short sighted.
Eric Demas is the City of Everett Chief Financial Officer.