Municipal Nightmare

The COVID-19 pandemic has brought municipalities across southwestern Pennsylvania face to face with the prospect of steep financial losses as stay-at-home orders, business closures and soaring unemployment choke off streams of revenues vital to paying their bills and providing the day-to-day services their residents rely on, such as police, garbage pickup and road repair.

The crisis is made worse by the fog of uncertainty that has hovered over the pandemic from the start, leaving municipal officials to prepare for the economic blow they know is coming without knowing how severe it will be. How long will social distancing restrictions be required that have slowed tax-generating commerce to a crawl? How severe will the loss of tax revenue be? How long will it take the local economy to recover to pre-pandemic levels?

“Places have already taken a hit and those earnings are not recoverable. It’s forgone revenue,” said Brian Jensen, Pennsylvania Economy League. “Some places are in better shape than others. Some will weather this better than others. But there are lots of questions about what is going to happen. It all depends on how long this lasts, how long the pain keeps going.”

Revenues at risk

Allegheny County alone is home to 130 municipalities large and small, rich and poor. They rely on dozens of revenue sources to pay for the services they provide.

Their main revenue engines are property taxes and local earned income taxes. But for many, more than one-third of their income depends on dozens of smaller revenue streams, including cable franchise fees, state reimbursements, fines and a host of fees for such things as permits, licenses, parking, garbage collection and rental of public property.

How much each municipality relies on a particular revenue source varies, sometimes greatly. Some depend on property taxes for more than half of their revenue, while other municipalities count on them for less than one-third of their annual income. The same goes for local earned income taxes, which can make up anywhere from 40 percent to less than 10 percent of total revenues, depending on the municipality.

In the short term, property tax income expected to remain fairly stable. A longer-term economic crisis, however, raises concern that even that income would be at risk in some municipalities if the number of tax delinquencies increases.

But most municipalities face potentially severe losses in local wage tax revenue due to the swift, historic jump in unemployment that rippled across the region when much of the economy was shut down to slow the spread of the coronavirus.

And even beefier unemployment compensation checks for those furloughed during the pandemic won’t help. Unemployment compensation isn’t subject to state and local taxes in Pennsylvania.

Local earned income tax accounts for the most municipal revenue raised by Pennsylvania Act 511 taxes, which include deed transfer taxes and local services tax charged to people who work within a city, borough or township. All three are vulnerable to losses as the pandemic casts workers into unemployment and stifles the sale of property.

In Forest Hills, $1.1 million from local wage taxes accounted for 18 percent of the borough’s $6.2 million total revenue in 2019. A 20 percent drop in earned income tax revenue would cost the borough nearly four percent of the income it reported last year. In Dormont, a similar drop in local wage tax revenue would cost the borough more than $258,000, or nearly three percent of the income officials were counting on this year.

Wage tax losses threaten to take a bigger bite out of the budgets of other municipalities. In Fox Chapel, local wage tax generates 40 percent of the borough’s revenue. McCandless has been counting on wage tax to provide 38 percent of its income this year.

A 10 percent drop in local wage tax income would cost Fox Chapel $320,000, or four percent of its revenue. A 20 percent wage tax loss would take an eight percent bite out of income the borough expected this year. “It gets significant pretty quickly,” said borough manager Gary Koehler.

Slumping sales

Municipalities are also at risk of losing some of their share of the one percent Allegheny Regional Asset District sales tax. The county and its municipalities receive half of the sales tax revenue, which was projected to rise to $103.5 million this year before the coronavirus. Now revenues are expected to fall precipitously.

A decline in RAD tax revenues will disproportionately hurt some municipalities. East Pittsburgh is relying on the tax to provide seven percent of its total revenue this year. RAD accounts for five percent of revenue in Swissvale and Elizabeth boroughs. One the other hand, it amounts to only one percent in Fox Chapel and two percent in Hampton Township.

It’s unclear how deep the decline of sales tax revenues will be. But RAD revenue heavily relies on the sale of big-ticket items, such as cars and appliances. “It doesn’t take a rocket scientist to see that those sales have all but stopped,” said Richard Hudic, executive director of the Allegheny Regional Asset District. “It’s temporary. Their funding will eventually go up again. But, when I look at some of the small municipalities, this could be devastating.”

How well municipalities are able to weather the crisis will depend on how healthy they were before the coronavirus reached U.S. shores, and what options each has to raise enough revenue to carry it through recovery. For many southwestern Pennsylvania municipalities, the road ahead appears treacherous.

Stressed already

Fifty six Allegheny County boroughs and small cities rank among Pennsylvania’s most financially stressed municipalities, according to a recent Pennsylvania Economy League study that found growing weaknesses among a startling number of boroughs, townships and cities.

They were already struggling to pay for basic public services, such as police protection, with tax bases that held dim prospects for growth due to low property values and low household incomes. Many can only afford a few part-time police officers to patrol the streets. East Pittsburgh did away with its own police department and instead relies on state police to maintain safety.

Municipalities will have to raise more money or cut expenses—or both—to shore up budgets damaged by the pandemic. Borrowing money is an option, for those able to do so. Raising taxes is another, however reluctant public officials may be to use it.

The healthiest municipalities are clearly better positioned to navigate the pandemic fallout without much harm to public services. Some, for example, have low property tax rates that yield millions in revenue. In McCandless, local property tax is only 1.23 mills, but it brings in $3.2 million. In Fox Chapel, a 2.95-mill tax earns the borough $3.5 million in revenue.

But that option is less appealing to other municipalities already saddled with high taxes that offer meager earnings. In East Pittsburgh, a 13.45-mill real estate tax is expected to earn the borough only $461,124 this year.

“I think there are real concerns about how a number of municipalities will come out of this,” Jensen said.

Bracing for trouble

Meanwhile, municipal officials are taking steps to shore up their budgets not knowing the extent of the trouble that lies ahead.

Fox Chapel has furloughed its part-time employees for six weeks, and the borough expects to scale back road work for the rest of the year. Dormont expects to cancel several capital projects and won’t hire part-time maintenance workers this summer, said Benjamin Estell, borough manager.

Tiny Whitaker Borough hopes a $40,000 reserve fund will smooth over any gaps in the $120,500 in wage taxes it budgeted for, and allow officials to avoid laying off borough employees, all of whom are part-time, including the police chief and eight officers. Another month of economic data will give officials a better sense whether that is possible, said Jean Warren, borough secretary.

The loss of local wage tax revenue in East Pittsburgh will mean rolling back or cancelling some economic development projects, including efforts to reduce blight, said Seth Abrams, borough manager. To stave off property tax delinquency, the borough took advantage of the new state Act 15, which allows them to offer a moratorium on property tax penalties and extend the discount period for several months.

Forest Hills Manager Steve Morus said anticipated losses in income tax revenue have led officials to reduce the borough’s road paving program by 20 percent this year. Municipal officials don’t know whether such steps will keep the wolf from the door. Most suspect not, particularly if recovery is slow to come. “Everybody is uncertain, everything is up in the air,” Morus said. “We’re all trying to do our best in a situation that is brand new to us.”