Kalamazoo risks financial crisis as D.C. ignores local government needs

Even before the first case of COVID-19 in Kalamazoo County was confirmed on March 10, the goal of local governments has been the same as everyone else working to stifle its spread: stop people from contracting the virus and dying.

Looming large, however, is another all-but-certain casualty: the finances that Kalamazoo county and municipal governments rely on to operate.

That’s a concern, city and county officials say, that will extend well beyond the mounting costs to curtail the pandemic itself.

“Since the city of Kalamazoo does not operate front-line hospitals or medical facilities, our increased costs are mainly limited to increased staff/overtime costs and extra supplies at this time,” Jeff Chamberlain, a deputy Kalamazoo city manager, said in an email interview.  

“For cities like Kalamazoo, our basic city services are mainly funded from revenue from property taxes and state revenue,” he said. “If revenue declines, we must decrease our expenses to match the revenue. While we strive to maintain services, at some point the decline in revenue may impact service delivery.”

Just like the city, Kalamazoo County government is bracing for a drop in revenue from property taxes and the state’s distribution of revenue sharing to local governments.

“Our biggest question right now is the impact of our shared revenue through the State of Michigan,” County Administrator Tracie Moored said in an email interview. “Will the State be able to continue to fund that piece of our budget — for the County that is a $5 million concern.”

The county government plays the role of a safety net for its two-dozen municipalities, Moored said, covering unpaid property taxes “and then our treasurer has to collect the delinquencies. What size number will that be next year? The impact for us may really be felt in our 2021 budget.”

Adding to revenue concerns, local governments also are missing out on income from various fees, from pet registration to park entrance tickets, to other licensing and records because facilities and buildings are closed.

No help yet from Washington

Since state governments are facing similar financial pressure and are also required to have a balanced annual budget, the only feasible backstop is the federal government.

Of the three financial relief packages approved in Washington, D.C., the first two were “almost surely inadequate,” said Tim Bartik, senior economist at the Kalamazoo-based Upjohn Institute for Employment Research. “Economic decline from tax revenues will eclipse the money given to state and local governments. It will create a huge revenue hole.”

The most recent bill “is lousy on state and local public finance positions,” Bartik said of the funding stream recently allocated for small businesses, which has already dried up and did not go solely to small businesses.

There isn’t enough money, Bartik said, and the money that is allocated to state and local governments is restricted to solely pay for new COVID-19 related expenses. It can’t be used to plug COVID-19-created holes in local budgets, for example. It can be used for new pandemic spending, such as additional health care workers, but only if local budget decisions took place after the federal funding bill became law on March 27.

“It is really, really important for people to understand because unless … we have a fourth stimulus bill that passes that gives more money and more flexible money to state and local government, it is going to be a problem because state and local governments have to balance their budgets,” Bartik said. “At some point this year, state and local governments will be faced with a major fiscal hole, requiring they either raise taxes or cut spending, or both.”

Since NowKalamazoo interviewed Bartik for this story, Washington has begun talking seriously about a fourth financial relief bill. Commenting on a news story over the weekend that the White House and Congress are nearing agreement on a deal that maintains the local funding gap, Bartik wrote on Twitter: “This omission of state/local aid is insane.”

Hidden costs

While they wait for the other, larger financial shoe to drop, Kalamazoo county and city governments are paying for new expenses they didn’t predict when they set this year’s budget.

Between staff, technology, supplies, and services related to the pandemic response, the county’s costs as of April 16 were nearly half a million dollars, Moored said. That only accounts for the expenses that had been reported by that date, she said, and doesn’t include likely future expenses, which, in turn, are pending requests for state, federal, and nonprofit grant funding before allocation is finalized.

County staff costs are coming from the annual salary budget along with overtime, and the rest is coming from operating budgets and grants, Moored said. The City of Kalamazoo’s expenses are paid for from the city’s general fund, Chamberlain said. Exact costs to date and details of those costs were pending a Freedom Of Information Act request, which was still being processed as of publication.

Aside from the state’s decision on redistributing revenues from sources including gasoline and sales taxes, the extent to which the local governments’ revenue streams will shrink will not be fully known until sometime next year, when the impact on local property taxes will be better understood, Chamberlain said.

And then there are hidden costs, which will reveal themselves as Governor Whitmer’s “stay-at-home” executive orders are lifted.

“We anticipate increased expenses to ensure the health and safety of the public as they seek services at the County,” Moored said.

According to Bartik, there needs to be a nationwide plan to restart the American economy that balances the need for generating  revenues that fill public coffers with the burden that inevitably falls heaviest on local governments.

“On a local level, what is the county health department’s plan to restart the economy in a safe way?” Bartik asked “What is needed?”

This plan will ultimately determine another hidden expense: the cost of doing this all over again if an attempt at a return to normalcy happens too quickly, and a second wave of the COVID-19 pandemic is triggered.