With COVID lag effects looming, these proactive steps may prepare your municipality for revenue shortages
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Municipal entities that depend on tax revenues—from the largest airport to the smallest water district—face the potential for painful revenue shortages when COVID lag effects hit next year’s fiscal budget. For example, in Texas, the appraisal period is the calendar year with new appraisals affecting calculated taxes as of October 1 of the following year. So, for Texas entities, we are now looking at 11 months to get ready. The question, then, is what to do with that time? Here are a few ideas for municipalities searching for creative solutions to address revenue shortages.
The first step, of course, is taking stock of the situation. Poorer and more tourist-reliant communities and districts are likely to get hit harder from a revenue perspective. How hard? No one knows yet, but as time marches on, it’s increasingly possible to estimate aggregate appraised values and, therefore, the revenue shortages likely to flow from them.
With a clear-eyed view of the situation, the next step is to work closely with your municipal advisors and other professionals to identify your strengths and weaknesses. Focus on finding where you are resilient in addition to where you are challenged.
Then, start exploring avenues for proactive steps. Some of these may, historically, have a stigma attached to them. No one wants, for example, to dip into bond-payment reserve funds to pay current obligations. Other, less drastic measures may have some lesser stigma attached to them. Yet some of these smaller measures may be just the ticket to help you avoid something worse.
Consider advance refundings on a taxable basis during today’s low interest rate environment
Your credit situation may be strong enough to enable you to access the credit markets with a refunding that helps you restructure your payment patterns, shifting more payments to later dates when, presumably, assessed values will have recovered. Under the 2017 tax reform, tax-exempt refundings are no longer permitted as tax-deductible instruments, but you may be surprised by how well issuance of taxable bonds has worked for some entities, given exceptionally low Treasury rates and, for now, spreads that seem fairly modest given the level of economic uncertainty.
But what if refundings aren’t a fit? What about some of those less-drastic measures to consider? Here is a list of possibilities, with some comments drawn from our own experience working with municipalities and their advisors:
- Create, if needed, and tap special-purpose reserves such as for equipment replacement, computer replacement or building replacement.
- Similarly, create (if needed) and tap a rate stabilization fund. This may be a fit for water, wastewater and sanitation districts as well as hotel/motel or other special-purpose revenues.
- Seek bank financing for one-time capital expenditures. This approach could be a fit for equipment or buildings with a life expectancy beyond the bank financing term. Examples include fire, garbage and other special-purpose utility trucks. Bank financing may also be a fit for leased vehicles such as heavy construction equipment and as administrative, police and maintenance vehicles.
Now’s the time for realism combined with open-minded creativity. Your particular situation may have a completely different solution than anything I’ve touched on here. The main need, now, is to get started taking a close look at next year, because the next 11 months—whatever they hold—are likely to go fast.
UMB Bank Public Finance is committed to helping institutions fulfill their quality-of-life and growth aspirations. Visit umb.com to learn more about how we can support your organization, or contact us to be connected with an investment banking team member.
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