Horizons Fall/Winter 2020

Income taxes are expected to continue to decline as the pandemic wears on, especially in sectors that have been stimulated by programs such as the Paycheck Protection Program, or for entities aided by the Coronavirus Relief Fund (CRF). The net loss of 13 million American jobs over the course of the pandemic will impact future income tax revenues for states and other entities that rely on state funding. While there have been some modest gains in employment in the past few months, a significant number of those 13 million workers are unemployed in food and beverage, retail and other industries that are unlikely to rebound in the near future unless there is a significant change in the regulatory environment or a breakthrough vaccine. In addition, property taxes, which on average comprise 30% of the revenue budgets of local governments, are also expected to be disrupted. While a significant portion of the current calendar year’s property tax collections have been received by governments, thanks to mortgage escrows and other prepayments, the next few calendar years are expected to be difficult. In the near term, residential property tax collections could suffer in 2021 as difficulty collecting property taxes is expected with many citizens unemployed and unable to pay rent or mortgages. Commercial real estate holders, such as malls, are losing brick and mortar stores at a high rate. In addition, office rents are down due to increases in work-from-home policies. These factors create a potential increase in uncollectible property taxes up to 25% in some local government budget projections. The good news is that property assessments generally take a while to catch up with economic conditions, so governments can implement long-term budget solutions. In the Great Recession of 2007 – 2009, property tax assessments in most states rose by 2-9%. It wasn’t until 2011 – 2013 when assessments turned negative, and property tax collections decreased. This indicates governments will have a few years before the recession impacts property tax valuations.

State and local governments are experiencing revenue shortfalls while expenditures are rising, especially in areas of public health and social welfare. These expenditures are expected to increase significantly in years to come as response to the pandemic continues. Additionally, the cornerstone of the federal response package for governments, the CRF, is only available for specific pandemic expenditures and cannot be used as a replacement for budgeted revenue shortfalls. If more federal funding is not made available, this may cause a long- term ripple effect in economic conditions of the country. During the Great Recession, federal grants increased the Gross Domestic Product (GDP) in direct proportion to the amounts given to state and local governments in areas that received them; however, by the time those programs ran out in 2010, GDP had significantly contracted, leading to several additional years of difficult recovery. Without additional federal support and follow up from Congress in the near future to cover budgetary shortfalls at state and local levels, it might be another long recovery on the horizon for the public sector.

PUBLIC SECTOR SERVICES

Through our extensive list of clients, including many cities and governmental entities, RubinBrown understands the issues unique to the public sector.

Renita Duncan, CPA Partner-In-Charge Public Sector Services 314.678.3546 renita.duncan@rubinbrown.com Max Haberkorn, CPA Manager Public Sector Services 303.952.1262 max.haberkorn@rubinbrown.com

Fall/Winter 2020

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