A DAO in the Life July 2021

By Michelle Casciato, Prince William Deputy County Executive

STAYING STRONG IN UNCERTAIN TIMES

Virginia local government employees have ably demonstrated their many talents in response to the COVID-19 pandemic, continuing to provide direct services to residents and businesses for more than a year despite challenging conditions and personal hardships. From the DAO perspective, this experience has validated the notion that all emergencies are local – we all had lots of work to do to keep our communities healthy and safe while waiting for national action on community support aid and vaccines.  

The pandemic also created unusual financial pressures on local government.  Most Virginia local governments were deep into the annual budget process when the country shut down in March 2020.  With uncertainty reigning across the state, FY21 budgets were characterized by caution as large initiatives, special projects and employee raises were largely deferred.  Localities also reduced operating expenses, suspended existing projects and instituted hiring freezes to finish out FY2020.  These budget control measures are usually the first tools employed to increase cash and decision flexibility during times of fiscal stress.  And, indeed, the US economy was rocked by an abrupt descent into recession in 2020.

Typically, recessions are caused by reductions in tangible goods – manufacturing, construction and agriculture. The Great Recession (2007-2009) was initially caused by excess housing supply and exacerbated by financial deregulation and subprime lending, eventually leading to the collapse of major financial institutions. Millions of people lost their life savings, their jobs and their homes.  The Great Recession created widespread loss of real estate and stock values, which took years to recover.  Real estate valuations across the commonwealth plunged, creating significant revenue issues for local governments that rely on real property taxes to support ongoing operations. Federal aid through the American Recovery and Reinvestment Act of 2009 (ARRA), but the ARRA funding was in the form of tax relief for families and state grants for infrastructure, education and healthcare. Local governments did not receive any direct aid.

In contrast, the 2020 COVID recession was the first recession caused by a contraction in the services sector. We now know the characteristics of a services-based recession – abrupt unemployment and income loss, both business and personal.  Due to the contagious nature of the pandemic, the most devastating impacts were felt in the arts, tourism, retail, restaurants, travel and childcare – all businesses that require close physical contact.  On the whole, these businesses tend to be smaller and less capitalized and provide lower wages and fewer benefits like healthcare.  With a crushing loss of business income, their employees were the first to lose their jobs and were most in need of government assistance to survive. This time, federal aid arrived via the Coronavirus Aid, Relief, and. Economic Security Act of 2020 (CARES), providing fast and direct economic assistance for American workers, families, small businesses, and industries with greatly expanded unemployment benefits and direct financial aid to localities.  The Consolidated Appropriations Act of 2021 continued the direct federal aid to fight the effects of the recession.

The direct federal funding to localities was well-received and quickly distributed into communities, as intended.  The unforeseen effect on local governments was an unprecedented amount of grants management and accounting to meet the reporting requirements for the local funding.  Localities large and small struggled with the amount of time and resources needed to properly account and report the funding, and that will continue to play out in year-end audits and financial reports not just in FY 2021, but for several years to come.   

The FY2022 budget process was tricky for local governments.  The American Rescue Plan of 2021 (ARP) was signed into law on March 11, 2021. ARP is providing more than $350 billion to state and local governments for emergency response and to bring back jobs. Localities have some flexibility with this round of recovery funding and have the opportunity to make potentially historic investments in their community to address longstanding disparities in access to housing, infrastructure and services.  The limiting factor there are the ongoing costs to maintain those investments once the one-time funding runs out in 2024.  The One Virginia equity and inclusion policy intended to reduce disparities across the state is likely to play a major role in determining how the Commonwealth will make federal funding available to localities.  Again, creative local government public servants are thinking and planning furiously to figure out the best possible way to use this funding to help their communities survive and thrive, and those choices are likely to vary widely across the Commonwealth.

Looking ahead, there are some additional tools available to local governments that didn’t exist before.  Prior to the pandemic, the General Assembly equalized the ability of counties to enact taxes with cities, which does provide some capacity to create ongoing streams of funding to support ARP investments.  While raising taxes, particularly real estate taxes is never easy, the taxable populations for the admission, cigarette and meals taxes do differ from homeowners and business owners.  Diversifying and expanding tax bases is always a good outcome for local governments and provides additional capacity and flexibility into the future. For those jurisdictions that are unable to avail themselves of new tax capacity, adding more tax auditors is a low-cost way to help increase revenues of existing taxes in a fair and equitable manner. Any locality that has experienced the heated real estate market will be under pressure to reduce real estate taxes next year and enabling new taxes and enhancing revenue audit activities will give localities more options.

The fast development of effective vaccines is truly a “shot in the arm” for the American economy, and localities across Virginia will experience this in different ways. A rapidly expanding economy combined with the ARP funding provides each local governing body with a unique opportunity to enhance and remake their community. Likewise, local government professionals have the career opportunity to help shape the future. This is why we do what we do, and why we love public service. Let’s help our communities be the best that they can be!

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Virginia Institute of Government Update July 2021