COVID-19’s Next Target? Municipal Budgets

Uncertainty drives conservative approach to budgeting

As impacts from the ongoing COVID-19 pandemic continue to percolate through almost all aspects of life, county and municipal budgets will not be spared. Local officials are bracing for a drop in revenue that could lead to declining services, delayed projects and deferred maintenance.

The county began implementing a furlough of 59 employees this week. Although employees’ benefits will be maintained, many roles cannot be carried out under restrictions on mobility and in-person contact, and county administrators hope the furlough will help to conserve funds for other essential county services.

“Everyone is looking at their budgets,” said Dave Lienau, who serves as president of the Village of Sister Bay and chair of the Door County Board. “At the village, we are looking at cutting back capital projects and routine maintenance that we can put off for a time.”

“We will be taking a deep dive into the capital-improvement project and prioritizing those based on grant funding and previous priority,” said Ryan Heise, Egg Harbor village administrator.

Counties and municipalities in Wisconsin do not have many revenue streams to begin with, and they are being stressed by COVID-19.

Sales Tax

Sales-tax collections are expected to decline significantly as long as the state mandates the closure or restriction of business activities. Though municipalities generally don’t receive any of the sales tax directly, the county receives one-half percent of the 5.5 percent sales-tax collection.

In Door County, March collections still saw an 8.7 percent increase compared to the same month in 2019. However, with the most severe state restrictions on business activity taking place during April and May, the county is not in the clear yet. A 10 percent decline in sales-tax collections in April and May would cut the county’s revenue by approximately $50,000, according to 2019 collections and adjusted for expected growth. That same decline in July and August would mean a $100,000 hit to the county’s budget.

The Village of Sister Bay’s Premier Resort Area Tax also takes one-half percent of sales-tax collections on most goods sold in the village. Lienau said the village is looking at getting ahead of an expected shortfall by cutting back some projects and pushing back any maintenance that can be held off.

“A lack of tourism and travel will be a big hit for Sister Bay in particular,” Lienau said.

Room Tax

As people across the Midwest continue to shelter in place, there will be fewer heads in beds in Door County’s lodging establishments. Room-tax collections are particularly sensitive to declines in travel, and municipalities are trying to manage the impacts.

Municipalities receive 30 percent of the room-tax revenue that their lodging operators generate. That money can go toward anything – roads, festivals, salaries – but many municipalities use room-tax revenue to fund their tourism-related programming. If large, in-person festivals and events continue to be restricted, the loss in room-tax revenue may not result in a large budget hit because expenses for large events will be reduced as well.

“We will be looking at expenditures funded with room tax and making decisions with decreased revenue anticipated,” Heise said in an email. “Some decisions may be easy because the dollars fund events that draw large crowds.”

As reported in the preliminary February 2020 room-tax report from the Door County Tourism Zone Commission (DCTZC), February collections were down 10.9 percent year over year, but DCTZC administrator Kim Roberts said the reduction was likely due to late collections. The deadline for lodging operators to pay February room tax was March 31, just as concerns about COVID-19 and subsequent business shutdowns were rising.

State Aid

The most significant impact to local budgets – and also the most uncertain – will come through a possible reduction in state aid given to municipalities. Counties and municipalities receive approximately 25 percent of their entire annual budget from state aid. Unfortunately, state revenues are perhaps the most exposed when it comes to the pandemic because income, sales and gas taxes plummet while demand for unemployment services skyrockets.

“Our economic situation is pretty miserable,” said Rep. Joel Kitchens. “A month ago, we were arguing about how to spend the surplus, and now that’s long gone.”

The vast majority of state aid given to municipalities is in the form of road funding. Lienau said the Village of Sister Bay receives more than $100,000 from the state for roads, or more than 5 percent of its entire budget.

“A lot of areas will be taking hits,” Kitchens said, expressing uncertainty about which programs will be cut. He added that the legislature likely will not convene again before the regular session next winter, when legislators will develop a budget-repair bill to patch holes that will grow wider over the months.

The state also plays a big role in how money from the federal government’s stimulus packages is deployed.

Federal Stimulus Money

The $2 trillion federal stimulus package to address the pandemic included approximately $150 million for the Coronavirus Relief Fund, which is distributed to governments to help maintain services while revenue declines. Some of that money is intended to trickle down to local governments, but the state largely decides who gets what.

“Federal stimulus money is coming in, but how [that is] allocated to counties will play a large role in where we’re seeing the fiscal impact,” County Administrator Ken Pabich said.

The legislation does not explicitly require any money to be distributed to counties, but Pabich said the Wisconsin Counties Association is lobbying to secure 30 percent of those stimulus funds for county governments.

“The stimulus packages go to the governor, so it would be up to the governor to do that,” Pabich said.

It’s rare for the federal government to circumvent states by giving money straight to local governments, especially rural areas. This federal stimulus therefore gives the state further control over which local governments receive funds.

Property Tax

At both the municipal and county levels, property taxes generate the most significant share of revenue, at approximately 40 percent. Although this reliance on property tax is often a point of criticism for Wisconsin’s local government finance structure, in this case it may help to insulate local governments from the most severe effects.

Unlike income tax or sales tax, the property tax is not expected to decline much because most properties still have much the same value as they had before the pandemic. Additionally, local governments received the first half of property-tax payments in January 2020. The second half is normally paid in July.

“A lot of the payments are made up front, and people pay all their taxes,” Pabich said. “From a cash-flow standpoint, the county should be OK.”

The state passed legislation that allows counties and municipalities to adopt a program that would essentially extend the property-tax payment deadline from July 31 to Oct. 1. Pabich said the county has not considered adopting such a program yet, but it may decide to do so in the future.

Lienau is preparing for the possibility that property-tax payments will come in late or not at all.

“If you can’t pay your credit card, you’re not going to make a tax payment,” Lienau said. “But I don’t expect that will be too bad just yet.”

In all of these categories, counties and municipalities will be living with uncertainty for months. Even if the state lifts restrictions, tax-revenue reports for these months will not be out until July. Meanwhile, the precise level of state and federal funds will still be largely uncertain for months. Municipalities will face difficult decisions about providing services as they navigate communities that are stressed further over time.