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The COVID-19 Pandemic and Financial Impacts on Small Cities

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.

By Erin Mullenix
February 14, 2021

Communities across the United States are challenged with managing fiscal stress and developing response strategies and policy in real time to address the ongoing COVID-19 pandemic. Working in tandem with their state and federal authorities, small cities in the United States face new and looming questions about how the pandemic continues to affect their residents, local financial solvency and the overall future of their communities. Emerging data suggests that neither small nor large cities are shielded from the economic impacts of COVID-19.

While it may be challenging to predict the future based on analysis of past recessionary periods, financial data allows for understanding how previous economic downturns have impacted municipal budgets. This data allows communities to have some frame of reference with which to glean some insights from looking back in time. While previous economic recessions and the resulting financial impacts provide valuable lessons, it is important to keep in mind that the root cause of each recession is unique. Thus, the circumstances, recovery and related insights may not directly apply to such scenarios in the future. This article uses Iowa as an example to show how the Great Recession of 2007-09 affected city budgets across the state.

Financial Recovery Post-Great Recession in Iowa Communities

Iowa is a relatively small state with approximately 3.2 million in population. It is a state of small cities, not unlike the United States as a whole. In fact, 52% of Iowa’s 942 cities have less than 500 in population; this compares to 42% of the incorporated places across the United States, according to the United States Census.

In a recent study from Iowa State University Extension and Outreach, Community and Economic Development, financial data for all 942 cities, from 2007–2015 was used to observe the effects of the Great Recession on city finances. Examining data by breaking cities into 6 sub-groups based on total annual budget, the study was able to identify the impacts on major revenue sources and spending across major categories. The smallest communities in Iowa with annual budgets of less than $500,000 experienced stagnant or declining total revenues across major revenue sources. Overall, these small communities did not recover financially to pre-recession levels within the 8-year period. Those cities with slightly larger total annual budgets ($500K through $1.5 million) were able to recover to just about reach pre-recession revenue levels, not adjusted for factors such as inflation/the rising costs of providing services or the cost of growth. The lack of growth in the housing market further exacerbated the already precarious financial situation. Because Iowa’s city revenue structure relies heavily on property taxes, the reliance increased over time, with property tax revenue growth remaining largely stagnant. Debt amounts, used for long-term capital improvements for these small communities, remained low.

While most cities in Iowa struggled to recover during this period, small cities trailed in growing their tax base, especially property taxes, local option sales tax, intergovernmental revenues and other allowed user charges and fees. Those cities with decreasing populations generally weathered financial stress relatively poorly compared with growing city peers.

Impact on the Economy

Like any recession, the Great Recession brought spikes in unemployment to Iowa and the United States. During the Great Recession, unemployment rates rose to 6.6% in Iowa, compared with 10.6% nationwide. As of now, the unemployment peak since COVID-19 began came in April at 11.0% in Iowa, compared with 14.7% nationwide. While these numbers far exceeded rates during the Great Recession, they have recovered more quickly, to date. The volatility is due, in part, to the changing nature of the response to the root cause of the recession. Until there is a lasting solution to the virus; consumers, producers and government will continue to experience uncertainties that will be reflected in main economic indicators.

Looking to the Future

For states like Iowa, whose communities rely heavily on local property taxes as a source of financial stability, predicting future economic impact due to the pandemic is challenging. As property taxes are a much more inelastic source of revenue, for example, the local property tax assessments conducted now (January 2021) will not be effective until July 2023. The assessment cycle is an 18-month-plus cycle. In turn, property value declines seen in future assessment years will likewise be delayed. Thus, the economic impact may partially lag real time. Similarly, the retail sector, which has borne a heavy impact due to the pandemic, plays a significant role.

The possibilities of the impacts experienced and projected in almost every aspect of communities remain unknown. Cities will continue to work through policy changes, public health protocols, economic stimulus, etc. Among others, they may see changes related to:

  • Vulnerable populations
  • Demographic shifts
  • Public policy changes
  • Technology & digital business
  • Broadband & accessibility
  • Transportation/mobility
  • Business & industry
  • Tourism

Small cities may wrestle with the desire to either grow or simply maintain their population while protecting quality of life for their residents. Thus, recovery looks different for each community based on its unique circumstances.

It will be important for all communities to pay close attention as the economic environment and recovery progress. Adapting to new or changing ways of doing things and keeping in mind the community’s goals can help cities weather these unprecedented conditions.

Author: Erin Mullenix directs research at the Iowa League of Cities and provides community data analysis to the Community and Economic Development Program at Iowa State University Extension and Outreach. In her role, she provides local government finance research and support to local communities. Her areas of study were in public administration, industrial engineering and Spanish. Erin can be reached at [email protected].

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