HOSPITALS AND HEALTH CARE WORKERS in St. Louis and across the United States are fighting to limit the spread of the coronavirus pandemic.
What they unfortunately cannot limit are the economic shocks to businesses, households and local governments caused by the mass shuttering of schools, shops, restaurants and some offices. On March 21 St. Louis Mayor Lyda Krewson and St. Louis County Executive Sam Page issued “stay at home” orders. Their actions follow similar steps in Illinois and around the country.
Economists now predict a U.S. recession. Investment bank Goldman Sachs forecast on March 20 a catastrophic 24% decline in GDP in the second quarter and a 3.8% decline for 2020 as a whole, with unemployment peaking at 9%. In response, federal lawmakers are ramping up plans for a new, massive stimulus package that would provide aid directly to hospitals, consumers and businesses of all sizes. The federal government may also provide more direct cash to states.
All of this will help. Still, local authorities that have been scrambling to manage the public health aspects of the crisis will eventually need to turn their attention to the economic fallout.
How vulnerable are St. Louis city and county?
In financial terms the city is normally considered the sick man of the metropolitan area, compared to the more affluent suburbs surrounding it. Ongoing population decline and stretched budgets have left the city occasionally struggling in recent years to keep up with even basic services like garbage collection.
During the anticipated “Coronavirus Recession,” however, St. Louis County government could be more vulnerable, at least in the immediate term. This is because the county government in Clayton depends far more on sales taxes to fund itself than the city does.
Brokerage firm Charles Schwab noted the threat to sales tax revenue across the U.S. in an analysis published on March 18.
“We expect the finances of local governments that are reliant on sales taxes to suffer more the longer coronavirus concerns persist,” Schwab said, adding that property taxes will be less affected. “Depending on how the equity markets perform for the rest of the year, some local governments may be faced with higher pension costs. This too could pressure their finances.”
Paying the bills
St. Louis County voters generally take a dim view of property tax increases to pay for county-wide services, so in recent years higher sales taxes have filled the gap. Prop P, a new sales tax passed in 2017 to support police and public safety, is one example. (City voters approved their own similar sales tax later that year.)
Over the past decade sales tax collections for county government have more than doubled to $388 million. In 2018, the most recent year for which audited records are available, they comprised two-thirds of the general revenues that fund the county’s “governmental activities,” compared to just under half in 2009 (see chart below).
Governmental activities are everyday services including county administration, elections, policing and courts, highways and transport, the health department, and parks & recreation. Many of these departments raise money through various licenses, fines and fees, but taxes pay for the bulk of their operations.
St. Louis County is not in trouble financially. Its credit rating is still generally in the triple-A range, well above the single-A range for St. Louis City. But county government faces serious challenges. Its budget for 2020 mentions that sales tax collections slipped in 2019 from the previous year. Looking ahead, operating deficits loom in the county’s general revenue fund. Moreover, recently disclosed overspending of Prop P funds means cash reserves in the general fund could sink to uncomfortably low levels in the next several years.
In February Page, the county executive, cited “a very tight budget” when he disclosed plans for selling bonds to help pay a $10.25 million settlement in a high-profile legal suit. The suit was filed by a county police officer who had alleged homophobic discrimination in the police department.
A spokesman for Page did not respond to McPherson’s requests for comment.
Taxes and reserves
St. Louis City, by contrast, has a more diversified revenue stream funding its governmental activities. This is thanks to the 1% earnings tax it levies on individuals and most city employers, plus a separate payroll tax. In fiscal year 2019 (which ended June 30), these taxes brought in $231 million, or one-third of the general revenues the city used for its governmental activities. Sales taxes contributed another third; their share of the city’s revenue mix has increased only marginally over the past 10 years.
In an economic downturn, earnings and payroll tax collections would undoubtedly take a hit, although in a Coronavirus Recession the effect would be delayed versus the immediate fall in sales tax collections. Another factor working in the city’s favor: It has far higher cash reserves in the general fund (the main fund for day-to-day operations) compared to the reserves it had during the Great Recession over a decade ago.
Paul Payne, the city’s budget director, told McPherson that general fund reserves hit $42.8 million at the end of fiscal 2019 on a cash accounting basis, more than doubling from a year earlier (see chart below). This was due mainly to an unexpected budget surplus last year, as well as a one-time $10 million contribution from the city’s Parking Division, which operates separately from the main city budget.
In addition, Krewson’s administration instituted a policy of setting aside a fixed contribution to reserves each year based on the city’s payroll. This policy contributed $3.4 million in fiscal 2019, according to Comptroller Darlene Green’s annual financial report. City officials had been expecting a similar amount this year.
“We’re in a better position going into this unknown period than we have been in recent years,” said Payne, although he cautioned it’s far too early to know how long or severe a downturn could be.
Where did we park that cash?
The city spent $18 million of its reserves to sustain operations during the last recession, according to the Budget Division. This suggests the current level of reserves may be enough to weather the economic storm now gathering, if the city is lucky.
If not, attention is likely to turn once again to the Parking Division, which in most years generates net profits from its street meters and parking garages that would be the envy of many private-sector CEOs. The division is overseen by Treasurer Tishaura Jones.
Even after its annual payments to the city and the special $10 million transfer, last summer the division was still sitting on over $14 million in unrestricted assets, meaning money not pledged for anything in particular, according to the most recent annual report. (A separate $8.9 million is already reserved for payments on the division’s debt, in case parking revenues crater.)
Benjamin Singer, a spokesman for the treasurer’s office, avoided answering directly when asked whether Jones – who is expected to run against Krewson again for mayor next year – would consider another one-off transfer to the general fund.
In an e-mail to McPherson, Singer said “the situation is complex and changes what those numbers look like, which is why we are seeking guidance from our financial advisor.”
Such words provide little reassurance for the future, although they do an excellent job of capturing the unsettled spirit of the times. Residents and businesses across the St. Louis area, whether they’re in the city or the suburbs, can probably sympathize. — McP —
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