Just as businesses have had to make dramatic changes to their models in the wake of the COVID pandemic, local governments will also need to change the way they do business for the long term.
That might mean reducing government services and raising taxes. It’s a new reality, and the sooner we plan for it the better.
Mankato City Manager Pat Hentges warned the City Council at a recent meeting of the coming financial pain and advised the council stay ahead of the storm by planning now. Councilmember Karen Foreman thought out loud that the city would have start prioritizing needs over “nice-to-have” things like July 4 fireworks.
Cities and counties received some $600 million from the state last week to help shore up budgets and pay for COVID related expenses. And there will be federal funds available as well, but the funds will not be easy to secure and cities will have to show a pandemic-related need.
The three-month shutdown of Mankato’s food and retail business has already had a big impact on the city budget and the amenities the city can provide.
The city of Mankato’s budget is projected to decline by $7 million to $9 million per year for the next three years. That would lead to the layoff of about 18 employees from the city’s total work force of 309.
Hentges, who plans to retire, suggested “flattening” the management structure with his departure. That’s a good place to start.
Revenue from the city’s sales tax is expected to decline by $1 million a year or about 20 percent. The loss of sales tax money from downtown bars and restaurants and other activity will starve things like the civic center, which is designed to bring business to downtown.
Mankato has relied on a good mix of revenue sources with the local option sales tax, bar and restaurant tax and lodging tax. All were a piece of a diverse revenue stream. The new reality, of course, takes a big chunk out of those revenue streams and creates more reliance on property taxes.
In fact, revenue from local option sales tax in Mankato has typically risen about 8 percent a year over the last decade or so. The increases were smaller more recently.
The food and beverage tax perhaps will take the biggest hit, with an estimated decline from $700,000 to about $400,000 annually, a falloff of about 45 percent. The premature end of the Minnesota State University hockey season in March caused the city to lose about $1.4 million in food and alcohol sales.
All told, civic center revenue is expected fall to about $3.5 million this year compared to an original estimate of $6.28 million.
The tax situation will likely change dramatically as well. As business property values declines, the burden will likely shift to homeowners. Hentges noted that almost every piece of major commercial property is contesting its assessment value.
Property tax increases of 4 percent and 5 percent will be needed just to balance the city’s budget. Should business values decline even further, the taxes on homeowners may go up even more.
In this new era, cities and counties will have to rethink everything they do. It may make more sense to go to user fees so a cost-conscious consumer of government services feels the real pain of paying for what they use.
It may not make sense to subsidize government services like utilities, wastewater, street repair or even neighborhood lighting.
The COVID pandemic poses enormous challenges for the future of civic life and will require a re-thinking of what government does and who pays for it. The sooner we figure that out, the better.