A year after major cities across the country went into pandemic-related lockdowns, their governments continue to struggle with budget challenges caused by the decrease in economic activity.
To assess how these governments have been faring, The Pew Charitable Trusts looked at budgets in Philadelphia and 12 other cities, chosen because all but one of them share Philadelphia’s budget calendar. The fiscal years end June 30 except in Kansas City, Missouri, where it ends two months earlier. This analysis involves only the general or operating funds in each city. Although individual governments have different responsibilities and structures, general funds typically represent the money that covers most essential services.
Among its conclusions, the analysis found:
- In planning for fiscal 2021 last spring, officials in these cities projected budget shortfalls ranging from 1.9% to 17% of the prior year’s general fund adopted budget. Philadelphia estimated its shortfall would be almost 15%, roughly $749 million.
- Cities with a stronger reliance on property taxes for revenue generally faced smaller projected shortfalls. About 15% of Philadelphia’s general fund revenues typically come from property taxes, on the lower end among the comparison cities.
- Officials took multipronged approaches to closing shortfalls and creating balanced budgets, as local laws require. They leaned heavily on accumulated fund balances and dedicated reserves—an approach that will be difficult to replicate in the coming fiscal year. For that reason and others, cities are likely to find fiscal 2022 daunting as well, although new federal aid will help.
Size of general fund budget shortfalls
Last spring, after the pandemic arrived, the cities in this analysis faced the immediate challenges of closing budget shortfalls for fiscal 2021, which for most of them would begin July 1, 2020.
Those shortfalls—how big projected deficits would be if officials made no changes in expenditures or plans to raise revenue—ranged from less than 2% to 17% of the prior year’s total general fund spending. Philadelphia projected a $749 million-dollar gap, or 14.7% of the prior year’s general fund spending. This placed Philadelphia on the higher end of shortfalls among the cities studied. (See Figure 1).
But these projections involved more guesswork than usual, especially on the revenue side, given the unpredictability of the pandemic and its economic impact. Last July, as the fiscal year was starting, Pew hosted a virtual convening of budget officials, who noted these difficulties and the need for regularly updated revenue projections.
In recognition of the uncertainties ahead, Philadelphia agreed to submit monthly rather than quarterly budgetary monitoring reports to its state oversight agency, the Pennsylvania Intergovernmental Cooperation Authority (PICA), throughout fiscal 2021 as a condition of PICA’s approval of the city’s five-year plan. Other cities in this analysis, including Louisville, Kentucky, are also providing more frequent reports and projections. Some, such as Los Angeles, have revised revenue projections downward for the current fiscal year, thereby increasing the size of their projected budget holes for the coming year.
To some degree, the size of the budget challenge depended on each city’s revenue mix, with those relying more on property taxes having smaller initial problems. (See Figure 2.) That’s because real estate tax revenues tend to be relatively stable from year to year, even during economic downturns, as opposed to revenues from sales or income taxes. For example, Boston, which relies primarily on property taxes for its revenues, anticipated only a 1.9% budget shortfall. Cities more reliant on other sources such as wage taxes—including Philadelphia—faced larger shortfalls.
Decisions made to close the budget shortfall
Cities have taken differing approaches to making up revenue shortfalls for the current fiscal year, such as drawing on reserves, cutting expenditures, and in some cases raising revenues. Most, if not all, of the cities studied tapped reserves, whether from dedicated rainy day funds or general fund balances accumulated from previous years. Philadelphia, for example, used $229 million from both sources.
Similarly, officials in Detroit withdrew $50 million from the city’s rainy day fund and did not make a scheduled $30 million deposit for fiscal 2021. New York City, meanwhile, closed one-third of its $8.3 billion shortfall by drawing on reserves.
This approach will be difficult to replicate moving forward. Some of the cities where reserves may still exist have requirements and standards that could limit their use, including minimum amounts that must be kept on hand. And the aid in the federal stimulus bill is one-time revenue as well.
To reduce expenditures for fiscal 2021, many cities paused or delayed new initiatives, eliminated vacant positions, implemented hiring freezes, placed workers on furlough, or used a combination of these strategies. Baltimore, for example, deferred planned general fund pay-as-you-go capital projects (saving $10.7 million), defunded 240 vacant civilian positions and four contractual positions (saving $15.4 million), and negotiated pay freezes or furloughs across all bargaining units (saving $15.6 million).
Few of the cities included in this analysis have developed new sources of one-time or continuing revenue, in part because many don’t have authority to do so without state or voter approval. Philadelphia imposed a one-year hike in its parking tax and marginally raised its wage tax on commuters. In Nashville, the city raised property tax rates by 34%. Several cities adjusted fees. Kansas City, for instance, increased its ambulance charges to better reflect the costs the city typically incurs for the service.
As cities undertake the fiscal 2022 budget process, officials anticipate continued uncertainty and challenges stemming from the downturn, knowing that some of the one-time budget-balancing strategies employed for the current year may not be available for the next.
Some city officials anticipate shortfalls for the entirety of their long-term budgeting timeline. New York City, for example, in January projected budget gaps of over $4 billion for fiscal years 2023 to 2025. In February, Philadelphia announced a projected shortfall of $450 million for the upcoming fiscal year.
City revenues also could be affected by employer decisions about the future nature and location of work. Philadelphia, for example, faces a revenue loss of an undetermined magnitude from its nonresident wage tax, depending on the degree to which suburbanites continue to work from home after their offices in the city fully reopen.
Then there are the questions related to additional federal funding, particularly how it will be used. Even with it, however, the budget challenges remain as officials worry that spending cuts will harm the city’s economy and the residents who rely on city services.
Elinor Haider is director and Jason Hachadorian is a senior associate with The Pew Charitable Trusts’ Philadelphia research and policy initiative.