With business closures across the state, local governments prepare to take a revenue hit
Casinos on the Las Vegas Strip and in downtown Reno shut their doors. Gyms sent notices to their members that they were closing. Small businesses that form the backbone of the economy — restaurants, coffee shops, bars, salons, tattoo shops, bookstores — shut down, many forced to lay off their employees and others transitioning to only offer takeout, delivery and pick-up.
For local governments, a halt in non-essential commerce means one thing: a dip in taxes.
As companies comply with Gov. Steve Sisolak’s order to close non-essential businesses for 30-days, local governments across the state are bracing for a reduction in the revenue they rely on to fund public safety and social services. And it could come at a time when local services might be needed the most, with governments on the frontlines of fighting the novel coronavirus.
The question is not whether there will be a drop in revenue, but by how much.
“That’s the million-dollar question,” said Jeff Cronk, the chief financial officer for the city of Sparks.
The tax implications might not be known for months. Nevada’s consolidated tax, known as a C-Tax, for local governments is disbursed on a monthly basis, but lags by about 60 days. For instance, the distribution of tax for March will not be known until the end of May. The C-Tax largely comprises sales tax, and it will take a sizable hit. Local officials can only guess.
That makes budgeting difficult because Nevada statutes require local governments to file their budgets by June 1. Cities are working on their budgets, and they are facing a big unknown.
“Right now, we are probably like everyone in the nation — you pick the industry, you pick the company — and we're flying a little blind right now,” Cronk said of the economic impact.
But there is little question that the moratorium on travel and the shuttering of casinos in a state reliant on visitors and gaming revenue, is going to hurt local revenue, and some more than others. Local officials are attempting to figure out how sharp the drop will be and for how long.
“I can tell you that sales tax is one of the primary revenues that supports county government and there is no doubt that sales tax collections will be impacted,” said Dagny Stapleton, the executive director for the Nevada Association of Counties. “And that will, in turn, impact the funds that counties have available to provide critical services to Nevada's residents."
Clark County and the Las Vegas metropolitan area could be among the hardest hit. Officials from Las Vegas municipalities said they are already bracing for the impact on their revenue.
The closures of dine-in restaurants, bars and casinos will send a shockwave through the local economy. Clark County’s taxable sales have been about $4 million in recent months, according to the UNLV Center for Business and Economic Research. The center estimates about 300,000 people are employed by the hospitality and leisure industry across the metropolitan area.
Jeremy Aguero, a principal analyst at Applied Analysis, said the impact will ultimately depend on how long the shutdown lasts and how deep it ripples into the economy. Aguero’s firm is currently running models on the effect of losing sales tax and room tax revenues from the shutdown.
He said local governments have done a “good job of putting money aside to weather a storm.”
But he did not sugarcoat the potential effect on government revenues.
“We are among the least diversified economies of our size in the United States today,” Aguero said, discussing Las Vegas. “It means our disproportionate reliance on tourism-sourced tax revenues and revenues in terms of our economy puts us at acute risk for this type of crisis."
Not only will closures cut funds from Clark County’s budget, but it will affect other governmental entities that also receive sales tax. The Southern Nevada Water Authority has a quarter-cent sales tax and the Las Vegas Metropolitan Police Department receives some sales tax funding.
An organization like Metro could be hit especially hard. It receives funding both directly from the sales tax and indirectly from sales tax, a main funding source for local government budgets.
“The longer the coronavirus situation continues, the greater the impact on our ability to pay for the delivery of services,” Erik Pappa, a spokesperson for Clark County, said in an email.
Other agencies could be hit by a loss in room taxes, which go to the convention authority and schools. Clark County gets about four percent of its general funds from room tax, about $60 million a year. And if more people are staying at home, counties could see fewer fuel tax funds.
“Needless to say, city leaders have been taking a very hard look at our financial situation, especially since the impacts of the coronavirus outbreak have been so stunning and dramatic here,” city of Las Vegas spokesman Jace Radke wrote in an email Tuesday. “Our goal is to be as prepared as possible should our visitors be forced to stay away for some time.”
Radke said the city has issued a hiring freeze and is considering fund transfers and creating more reserves. He said city officials are expecting “downward revisions in the city’s budget.”
“At this time it’s very hard to predict how deep those will be,” Radke said.
For the city, the biggest concern is a drop in sales that drives a decrease in the C-Tax.
The same is true for the city of Henderson, but officials are still assessing the impact.
"With people not going out and shopping, we are going to see an impact on our sales tax, which is a large portion of our revenue as a city,” said Kathleen Richards, a spokesperson for the city.
Still, local governments have accounts that they can pull from in the case of a shortfall. Most local governments budget contingency funds or reserves that it can pull from in an emergency.
The City of Las Vegas maintains a minimum fund balance of about 20 percent as a stopgap measure. Henderson had more than 10 percent in reserve for their general fund at the end of 2019, in addition to reserves in a financial stability fund. Dylan Shaver, the chief of staff for Reno, said the municipality has about two months of reserves on hand. Sparks budgets with the goal of having a minimum fund balance that is at least eight percent of its total expenditures.
Christine Vuletich, Washoe County Assistant Manager, said stabilization funds are an option but would usually be used as a last resort since governments want to keep their reserves stable.
“Washoe County wants to maintain healthy reserves,” she said.
Other sources for cities and counties could include contingency funds. Local governments could also potentially defer projects, Vuletich said. Under emergency declarations, governments might also be eligible for funding reimbursements from the Federal Emergency Management Agency.
But the potential loss of revenue because of the coronavirus comes as cities and counties are just starting to recover revenues from the economic hit they took during the Great Recession. And they remain challenged by the state’s property tax structure. Because of how the property tax is formulated, tax revenues have not risen at the same rate that the economy has grown.
“This might be the opportunity for the Legislature to look at the way local government is funded across the board and say maybe this might be a time to make a change here,” Shaver said.
Shaver said the city is preparing to take a cautious approach to its budget. His comments echo the sentiment from local government leaders as they prepare to recalculate their budgets under scenarios where there is uncertainty around how much revenue they will collect from sales.
"We also know that people are going to have to start looking at their budgets again and making adjustments," said West Wendover Mayor Daniel Corona, who leads the League of Cities.
Although most local governments are preparing for a dip, the scope could depend on the local economy. In a smaller, rural economy like the one in West Wendover (with a population of about 4,000), a lag in tourism or the closure of even one casino, could have an outsized impact.
“If even one casino were to decide to shut down, that would hurt us,” Corona said on Tuesday. “And it would hurt really bad. Where do we make cuts? And where do we scrimp and save?”