Guest Contributors: Hai (David) Guo and Can Chen
What is the most significant fiscal challenge for the municipal governments facing the unexpected outbreak of the COVID-19 pandemic? It is no surprise that Florida city managers placed the forecasts for the pandemic’s impact on local revenues as the top priority, as local governments are revenue-driven entities. The tradeoff between revenue growth and stability has always been a concern for local governments. With procyclical fiscal policy, local governments usually face abrupt revenue shortfalls and high demand for public service during economic recession. The COVID-19 pandemic-induced recession is no exception. Furthermore, there is tremendous uncertainty regarding the duration of the pandemic, the magnitude and requirement of federal government aid, and the public’s behavioral change.
Collaborating with the Florida League of Cities (FLC), we endeavored to provide a simple and practical revenue forecasting strategy to help cities in Florida plan and prepare for the potential impacts of the COVID 19 pandemic on their budgets. We started reviewing the revenue structures of all municipalities in Florida from 2008 to 2018, considering recession exerts different impacts on each revenue source. The revenue structure varies greatly among 411 municipalities. Whether the revenue structure is diversified or concentrated on specific revenue sources may result in different fiscal impacts and various fiscal responses to the COVID-19 pandemic.
The challenge of simplicity and practicality has two folds—an easy-to-understand model and easy-to-access data. The unemployment rate drastically increased as the cases of COVID-19 surged, which kept on the news media headlines. The National League of Cities (NLC) forecasted the aggregated revenue changes in response to the rise in the unemployment rate following the Upjohn Institute model. We adapted this approach to a broader range of 21 municipal revenue categories and controlling the time trend to provide our forecast.
Furthermore, we calculated the revenue responsiveness coefficient in response to the county unemployment rate instead of the Florida state unemployment rate or the municipal unemployment rate. Applying Florida statewide unemployment rates may not differentiate the regional differences. Our analysis reveals that municipal government revenue responds more to the county unemployment rate change rather than the municipal unemployment rate. Although using the county unemployment rate provides variability, it requires an extra step of calculating the county unemployment rate based on the forecast of the Florida state unemployment rate. Based on the real monthly updates on the Florida state and county unemployment rates in 2020, we estimated each county’ unemployment rate in 2021 and 2022 to forecast the revenue impact for FY 2022 and FY 2023.
The key findings of our analysis include the following:
- Reductions in revenues from 2019 pre-pandemic levels for Florida cities in fiscal years 2021 through 2023 are forecasted to total $5.11 billion.
- Even with a rebounding economy, Florida municipal government revenues are forecasted to be significantly less than their pre-pandemic levels for at least the next three fiscal years. For FY2021, the percentage revenue decline for Florida municipalities is forecasted to be 3.54 percent. The decline in FY2022 is forecasted to be 4.02 percent and in FY2023 to be 3.29 percent.
- The revenue impacts of the COVID-19 pandemic are predicted to vary by region.
- Cities with populations greater than 100,000 are forecasted to experience the largest revenue declines.
A key takeaway of this project is the importance of the revenue structure in a city’s resilience to economic shocks. A crisis offers an opportunity for local governments to assess whether their revenue structures are aligned with their economic structures. The COVID19 pandemic is not fully over yet; its fiscal impact will be enduring.
Another lesson learned while conducting this project is how to deal with the uncertainty in revenue forecasting. On the one hand, we can be creative in utilizing available data and making plausible assumptions to produce practical and straightforward revenue forecasting models. On the other hand, our model needs the flexibility to accommodate alternative scenarios as the key economic indicator changes.
The forecasts of the revenue decline will be helpful to local governments choosing their policies to address the revenue shortfalls, requesting state and federal support, and, more importantly, to adjust their revenue structures to enhance the revenue-generating capacity. Although the residential housing market continues to be hot, the commercial property might be a concern in the future as a result of the possible working modality change. As concluded in the article, a continuing effort is needed to examine the revenue structure and the fiscal relationship with upper-level governments. It presents a challenge to both scholars and local government professionals to align the municipal revenue structure with the changing economic environment and achieve fiscal resilience in times of crisis.
This is adapted from an article by Hai (David) Guo and Can Chen titled “Forecasting Revenue Impacts from COVID-19: The Case of Florida Municipalities” in the State and Local Government Review. https://journals.sagepub.com/doi/abs/10.1177/0160323X211012056?ai=1gvoi&mi=3ricys&af=R
Hai (David) is an associate professor of public administration at the Department of Public Policy and Administration, Steven J. Green School of International and Public Affairs at Florida International University. His scholarship focuses on state and local public finance, budgeting and financial management. His publications and ongoing research fall into four interrelated tracks: 1) budgetary institutions and fiscal policy outcomes; 2) public engagement in the budgetary process; 3) local government financial management under fiscal stress; and 4) Local government strategic interaction and fiscal competition. Please click here for more information on his research or email him at firstname.lastname@example.org
Can Chen is an associate professor in the Department of Public Management and Policy, Andrew Young School of Policy Studies at Georgia State University. His core research agenda is developing and promoting innovative, efficient, and effective infrastructure financing to support critical infrastructure that is sustainable and resilient in its financing and funding, use, performance, and maintenance. His substantive research topic interests include infrastructure (transportation) finance and policy, disaster finance, fiscal transparency, and financial accounting. He can be reached via email@example.com