Elk Grove stares down $13.7 million budget shortfall as COVID-19 wreaks economic havoc

Several weeks into an economic shutdown, some California cities can now see the wreckage on the fiscal horizon. For the city of Elk Grove, the price is a staggering $13.7 million — and counting.

The city will facedown the shortfall in May when budget-making begins as sales and other taxes have dwindled under the stay-at-home order put into action to slow the spread of the new coronavirus.

As people avoid public places, except for a few essential businesses, it will mean less revenue from sales, hotel, gas and other taxes cities rely on to function. Elk Grove’s city manager said the impact on the city’s spending could last for years.

“Like all other government agencies, the city expects significant revenue declines this year and in future years,” Jason Behrmann, the city manager told council members during a meeting Wednesday. “The current estimated reduction in revenue in the next fiscal year is approximately $13.7 million, of which approximately $5.6 million is from the city’s general fund.”

More than one-third of the city’s general fund comes from sales taxes which have taken a blow after most retail establishments closed except some restaurants and grocery stores, Behrmann said.

Elk Grove, a suburban community, is less reliant on hotel taxes than most bigger cities and it accounts for less than 5 percent of the general fund. Vehicle licensing taxes — about 18 percent of the fund — will also take a hit. Behrmann, in an interview with The Bee, said property taxes should remain steady.

Still, the overall dip in incoming cash will force the city to begin belt-tightening that is not likely to affect city services, Behrmann said. But Elk Grove will cut back on what he called “discretionary” spending by freezing unfilled positions and will stop paying extra money to overfund pension liabilities.

Earlier this month, the League of California Cities warned about the cascading effects COVID-19 response decisions could have on local budgets after Gov. Gavin Newsom granted small businesses to defer paying up to $50,000 in sales and use taxes.

The aftermath could leave cities and towns holding a financial fireball, the organization said.

“While the Governor’s announcement today to allow the deferral of sales tax payments to local jurisdictions will provide needed relief to small businesses and protect workers, as a former mayor, we know the Governor understands the essential local services these resources are used to fund in our communities,” Carolyn Coleman, executive director, League of California Cities, said in a statement earlier this month.

“These resources pay for the firefighters, police officers, code enforcement officers, and others who are working around the clock to protect Californians during this pandemic.”

Hope for stimulus, prepare for recession

Behrmann said Elk Grove is not looking at the kind of dire cuts made during the Great Recession sparked in 2008 and 2009, which sunk the values of homes nationwide. He told the city council the final impact is based on the length and severity of the recession and how long the economy is battered by COVID-19.

“We rely less on property taxes than some other cities. The significant downturn in the value of homes didn’t have as big an impact on us as it did on others,” he said. “We expect this one to be worse for us because we rely much heavier on sales tax which is a bigger percentage for us.”

There is a chance the federal government could step in with another financial bailout for local governments but they’re not waiting on it, Behrmann said. The first round targeted cities with populations greater than 500,000, leaving many small- and mid-sized places on the sideline.

The city of Sacramento, which has an estimated population of 508,000, received a federal stimulus check for $89.6 million this week. But it can’t be used to plug budget holes, Sacramento Mayor Darell Steinberg said.

In the meantime, Behrmann said they can get through it but the outlook could change.

“We’re trying to go into this thing with our eyes wide open,” Behrmann said. “We don’t know at this point but it’s certainly possible that there is long-term damage to the economy as a result of this pandemic. We are preparing as if that is the case.”

This story was originally published April 23, 2020 at 2:37 PM.