During the pandemic, state governments in the U.S. have experienced dramatic declines in revenues. The Center for Budget and Policy Priorities (CBPP) reports that all states project fiscal year 2021 revenue shortfalls with amounts ranging from about 5% to 35% of revenues, and fiscal year 2022 shortfalls ranging from 3% to 26%. In addition to the current budget situation, the states face economic uncertainty in future fiscal years about the path of the economic recovery. The uncertainty stems from several factors including:
- Ongoing outbreaks,
- Vaccine discovery,
- Stimulus packages,
- Labor markets and consumption, and
- The Presidential transition.
CBPP estimated that Illinois revenue would fall $4.6 billion (12%) in fiscal year 2021. This shortfall is less than that of other large states such as California, New York, and Texas where CBPP projects revenue to fall 21%, 15% and 15%, respectively. However, Illinois had already been running structural deficits over several years prior to the outbreak. The combination of that structural deficit and pandemic driven revenue shortfalls have created extreme fiscal stress for the state.
For local governments, one of the main concerns is that the state may cut state aid as a part of its budget balancing strategies. Thus far, the state has not considered cutting aid to local governments. Despite this, many local government officials are concerned about fiscal stress and are searching for ways to maintain good financial condition in both the short-and long-term. While there are some basic principles of maintaining strong financial condition (such as conducting good revenue forecasting, adopting strategic planning to aid spending decisions, and controlling expenditure growth to be similar to that of property value and population growth), in times of financial stress some are more important than others. And given the differences in local government fiscal capacity, they need a customized set of recommendations that they can execute to address their unique fiscal challenges. In this post, we suggest a set of bespoke strategies for Illinois local governments.
Earlier this year, we collected financial and economic data from the State Comptroller’s Office for 834 Illinois cities from 2010 to 2018. We then ran a statistical procedure to classify the cities based on their financial profiles. We used data on six factors including (1) community needs and resources, (2) total government size and growth, (3) revenue structure and trends, (4) the ability of cities to collect and raise revenue, (5) fiscal condition, and (6) budget flexibility and obligations for long-term liabilities such as pensions. The six factors were measured through 26 financial indicators.
The statistical procedure suggested that there are six distinctive city groups.
- The first group has only one member, Chicago, as it is unique compared to any other city in Illinois.
- The second group consists of two “Industrial Towns” in Cook County: Bedford Park and McCook. These are business districts with few residents. We did not analyze this group further.
- We called the third group “College Towns and Capitol City Region Cities”. This group includes cities such as Champaign, Urbana, Peoria, Quincy, Taylorville, and Chatham.
- The fourth group includes Springfield, Aurora, Rockford, and Bloomington, and we call this the “Capitol and Strong-Economic Base Cities” group.
- The fifth group includes “Small Communities with Declining Population” such as Macon, Mason City, Mt. Pulaski, and Tamaroa.
- We call the last group “Small Communities with Stable Population”, and this includes Augusta, Olmsted, Rochester, and Witt.
Property tax base erosion is a common problem for all groups except for the Chicago and Capitol/Strong-Economic Base groups. Chicago’s property tax base grew 7% in the last eight years while the property tax base in the Capitol and Strong-Economic Base group was stable over the same period. In both small community groups, tax bases fell over the last eight years. These groups include most of the municipalities in Illinois. So, it is fair to say that most Illinois cities are small communities with declining property tax bases.
Moving to problems and solutions for each group, although its property tax base grew, Chicago has not seen a substantial increase in property tax revenues. This could be a result of either unwillingness to maintain property tax rates over time or poor property tax collection capacity. The City has many serious problems including chronic structural deficits, lack of an emergency reserve fund, and high and growing pension liabilities. Based on this, Chicago should work to cut deficits and on improving property tax revenue yield.
The College Town and Capitol City Region group relies relatively heavily on sales tax revenue (it makes up about a third of total revenue for this group). This revenue source grew at about 2% during the analytical period. This growth was offset by declines in these cities’ property values. Although the cities in this group show operational surpluses, their emergency reserve funds are falling. Because of these characteristics, we recommend the cities in this group focus on building reserve funds through the combination of increasing operational surpluses and expanding local property tax bases through a focus on economic development.
The Capitol and Strong-Economic Base group relies heavily on property taxes (about 40% of total revenue) and have the highest property tax rates. This group also faces erosion in reserve funds, but also faces large and growing pension liabilities. Since the cities in this group may have little room left to increase property tax rates and are experiencing decreasing sales tax revenues, they should consider diversifying revenue sources between taxes and fees, and also expanding their economic bases through economic development efforts.
The Small Community with Declining Population group appears to have done a good job controlling their revenue and expenditure growth rates. Sales tax revenues have been increasing in this group’s cities. However, the cities in this group rely on state aid for a substantial part of total revenue (about a third). This increases fiscal risk as the state may cut its aid in response to economic and fiscal stress. In addition, cities in this group have seen the fastest declines in their reserve funds. Our recommendation for this group is to continue their fiscal conservatism and using surpluses to rebuild reserve funds.
The Small Community with Stable Population group also is fiscally conservative, with balanced budgets and strong growth in reserve funds. Two major issues for this group are a high and growing reliance on state aid (accounting for about 40% of total revenue) and shrinking property and sales tax bases. This group faces a serious revenue problem – they have little capacity to generate their own revenue. Thus, the first and foremost strategy for this group is to generate local economic development to expand property and sales tax bases, while at the same time maintaining operational surpluses and reserve funds as much as possible. For this group, the economic development policies should focus on expanding residential properties since the group’s cities appear to be bedroom communities.
As seen in the description above, the six groups need different financial management strategies to handle their unique challenges. Prioritizing approaches to fiscal stress is extremely important. And community leaders should develop those priorities through an analysis of a community’s financial condition. The bottom line is that customized solutions are needed instead of “one size fits all” approaches.
References
National Conference of State Legislature—NCSL. 2020. State Actions to Close Budget Shortfall in Response to Covid-19. Available at https://app.powerbi.com/view?r=eyJrIjoiZjhmODk1MjctOTc3Ni00MDE3LTgyNGUtZjNkYTk3NTQ1OTU5IiwidCI6IjM4MmZiOGIwLTRkYzMtNDEwNy04MGJkLTM1OTViMjQzMmZhZSIsImMiOjZ9
Center of Budget and Policy Priorities—CBPP. November 6, 2020. States Grappling With Hits to Tax Collections. Available at https://www.cbpp.org/research/state-budget-and-tax/states-grappling-with-hit-to-tax-collections
The Conference Board. November 14, 2020. Economic Forecast for the U.S. Economy. Available at https://www.conference-board.org/research/us-forecast
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Dr. Arwi Srithongrung-Kriz is a Visiting Research Fellow in the Illinois Institute of Public Finance at the UIS Center for State Policy and Leadership. Dr. Srithongrung-Kriz received her Doctor of Public Administration (DPA) from University of Illinois-Springfield. Prior to joining Illinois Institute of Public Finance, she was an Associate Professor (with Tenure) at Wichita State University (2013-2018) and University of Nebraska- Omaha (2006-2013). Dr. Srithongrung-Kriz has expertise in public budgeting and finance, fiscal policies, economic growth, and performance measurement.
