Why Gateway Cities Could Be Headed for a Fiscal Emergency

Why Gateway Cities Could Be Headed for a Fiscal Emergency

Michael Pagano and Christiana McFarland have estimated the fiscal impact of the COVID-19 crisis for cities across the country. Their model predicts cities in Massachusetts should fare relatively well, primarily because they don’t collect local sales or income taxes. However new figures from the Federal Reserve Bank of Boston suggest we shouldn’t let our guard down just yet.

It’s true that Gateway Cities don’t generate much revenue locally from volatile sources.

While the state has given municipalities more latitude to adopt local option taxes in recent years, and Gateway Cities jumped at the opportunity, these remain rather anemic funding streams. All of the Gateway Cities adopted the meals tax and most imposed the full local option occupancy tax after they were authorized in 2009 (at the depths of the Great Recession). In addition, many Gateway Cities were counting on much needed revenue this year from recreational cannabis. But these local option taxes only generate about $23 million annually for the 11 Gateway Cities combined. No Gateway City relies on local option taxes for more than 1 percent of their budget. Shutting down the economy will cost cities local option revenues; however the budgetary impact will be minimal, as Pagano and McFarland indicate.

But Gateway Cities rely more heavily on unpredictable state aid.

On average, Gateway Cities fund more than half of their annual budgets through state aid. They are largely on their own with this level of exposure to the whims of the state budget. (Boston receives just 13 percent of its revenue from the state, which is right around the average for Massachusetts municipalities). The state does rely heavily on the sales and income taxes Pagano and McFarland warn will fall most precipitously. A recent estimate from the Federal Reserve Bank of Boston suggests Massachusetts’ collections will drop by between $4 and $6 billion next year.

Property tax revenue is also at risk.

Gateway Cities generate more than one-third of their revenue from property taxes. Generally, these collections are relatively stable because assessments adjust to market changes slowly over a period of years. More importantly, people will forego other expenses when times are tight before they stop paying their rent or mortgage. But this crisis is different with unemployment rates in Massachusetts skyrocketing up to 20 percent almost overnight.

The Federal Reserve Bank estimates one-third of renters and close to one-fifth of homeowners in Massachusetts will be unable to make their monthly housing payments. While the Fed model suggests unemployment insurance expansion and CARES Act provisions could reduce the number of households unable to make housing payments to around 10 percent of renters and just 3 percent of homeowners, there’s good reason to believe this will not be enough of a buffer to keep Gateway City property tax collections from declining significantly and fast. More than half of Gateway City households are renters and in all likelihood the most vulnerable renters are further concentrated in these cities. The eviction moratorium will reduce payments to landlords and many will respond by forgoing property tax payments.

Gateway Cities don’t have much of a cushion.

The Pagano and McFarland model didn’t consider the present financial health of communities. A quick look shows Gateway Cities have few reserves to fall back on when collections decline. For the average municipality in Massachusetts, including Boston, free cash and stabilization fund balances amount to approximately 13 percent of the annual operating budget. Gateway Cities have just 6 percent of their operating budgets in cash and reserves.

Gateway Cities are getting direct federal help, but not nearly as much as Boston.

The first federal stimulus package included a swift diffusion of Community Development Block Grants, along with resources to support transit, education, housing, and homelessness. These dollars will be very beneficial. But it’s notable that cities with populations over 500,000 will also receive direct financial assistance through the Coronavirus Relief Fund. This program alone will provide Boston with more than $100 million in federal funds.

Gateway Cities would be better off with more local option taxes, even if they expose them to greater volatility in theory.

It’ll be interesting to see how Gateway Cities weather this crisis compared to peers in other states purely in financial terms. Gateway Cities might not have their own sales or income taxes, but they rely heavily on the state and lack the political clout to protect state revenues when times are really tough. And even in the best of times, they have difficulty setting aside reserves.

In the past, we’ve criticized Massachusetts’ excessive limitations to home rule, particularly those that involve revenue. If cities can’t raise funds, it is extremely difficult for them to counter industrial decline with transformative investments. Depending on the state’s largesse for economic development projects generally means that either each city gets a relatively paltry sum or they receive larger awards based on political dynamics, rather than an objective assessment of return on taxpayer investment. We shouldn’t use economic downturns as an excuse to keep tying the hands of municipal leaders.

Meet The Author

Ben Forman

Research Director, MassINC

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