With sales taxes down sharply due to COVID-19, Utah cities face painful budget choices

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Cities throughout Utah face hiring and wage freezes, postponed improvement projects and, in some cases, layoffs as they rush to trim their budgets in light of tax losses from the coronavirus pandemic.

Just how deeply those cuts will go varies city by city.

The fiscal year for towns and cities starts July 1, which means local governments need to have proposed budgets in place for public comment in June. City administrators and elected officials found themselves scrambling this year after the spreading coronavirus forced the sudden closure of offices, retailers and restaurants.

Budget planning steps that are typically predictable are suddenly plagued with unknowns. And hopes for a multibillion-dollar federal bailout of local government are dimmed because talks in Congress have stalled, for now.

“Everything I know today is so much different than two weeks ago, and that’s different from four weeks ago,” North Salt Lake Mayor Len Arave said. “All we can do is plan for something we think will be rather dramatic.”

All those unsold automobiles, locked storefronts and empty restaurant tables during the March and April shutdowns followed by restricted openings in May have meant heaps of lost tax revenues for Utah’s 248 municipalities.

A recent analysis commissioned by the Utah League of Cities and Towns forecasts that municipalities could see an average 25% decline in sales tax revenues for the pandemic-slammed months of March, April, May and June.

The good news is that the previous eight months of the current fiscal year were strong, offsetting some of that hurt. Some Utah cities, however, are more dependent on sales tax than others.

‘Like jumping off a cliff’

“Park City has been really negatively impacted by COVID,” said Cameron Diehl, executive director of the Utah League of Cities and Towns. “Their ski season was cut short by over a month. That’s over a month of [lost] sales tax revenue from ski lift passes, restaurants, hotel rooms.”

Park City is forecasting an immediate 21% revenue loss as it begins its budget year, and city staffers for the popular resort community see further reductions ahead, according to budget documents.

St. George is mothballing a $20 million remodel of its city government campus to help make up for a projected 30% decline in sales tax receipts and a 13% loss in revenue from fees on building licenses and permits.

“We’ve cut just about everything in our budget that’s discretionary,” said City Manager Adam Lenhard. “We’ve postponed millions of dollars in projects until times are a little better.”

Like most cities around the state, St. George is also hitting pause on new hires and cost-of-living raises.

In Moab, where crucial hotel visitations were all but canceled for March and April, a handful of city positions has been eliminated, Mayor Emily Niehaus said.

“It was a very, very sad last week for Moab,” Niehaus said.

It’s not just Utah’s tourist towns that rely heavily on sales tax.

Orem serves as a retail hub in Utah County and beyond, with its University Place Mall and State Street shopping corridor. Sales tax has accounted for more than a third of the city’s total general fund revenue in recent years. But for the coming fiscal year, City Manager Jamie Davidson is projecting the city will lose as much as a fifth of that income.

“A lot of our sales tax comes from automobiles, clothing and apparel, furniture sales,” Davidson said. “Those aren’t things people gravitate to during an economic crisis.”

While the city made it through budget cuts during the Great Recession, Davidson said the changes that city managers are planning in light of the pandemic seem more dramatic.

“This decline has [happened] in a matter of months, whereas the recession ran from 2008 to 2013,” he said. “We were kind of heading down into a valley. This feels more like jumping off a cliff.”

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Budget quirks revealed

In 2019, Orem brought in 15% more sales tax than neighboring Provo, even though Provo has a population that’s 18% bigger. With its more diversified revenue stream, Provo Mayor Michelle Kaufusi is projecting a 5% loss of sales tax compared to trends before the pandemic. She asked department heads to make 1.5% reductions but kept the public safety budget intact by tapping a surplus from the general fund.

“I pride myself on doing a couple things,” Kaufusi said. “One is saving for a rainy day and the other is knowing when it’s raining.”

With tax revenues from big players such as Station Park shopping mall and the water park at Lagoon all but gone for March and April, Farmington is cutting what it can in its budget to avoid job losses, its mayor said. City workers are deployed in unfamiliar jobs, cost-of-living pay bumps are likely on hold, and Farmington has slowed the expansion of a business park.

Some parks and summer sports programs may be slower to open, Mayor Jim Talbot said, but as to other essential city services, “most residents won’t notice the difference.”

Cottonwood Heights Mayor Michael Peterson noted that gasoline consumption is also down statewide due to travel bans and social distancing, meaning cities will also see losses in gas taxes dedicated to road repairs.

His city will also dip into its “rainy day” reserves, Peterson said, “so that the public should not see a tremendous hit on the services provided.”

The quirks of Utah’s formula for divvying sales taxes among cities actually dealt Eagle Mountain something of a winning hand in the pandemic. With more of its residents shopping from home instead of heading to stores in other communities for their purchases, the Utah County city has temporarily gained an estimated 11% in sales tax revenues from the crisis.

“We’re still trying to figure out exactly what it means and what the real effect is going to be,” said Eagle Mountain’s assistant city administrator, Paul Jerome.

‘Rainy’ days are here

The Utah Legislature allows cities to keep no more than 25% of their general fund revenue in rainy day reserves. The economic boom in recent years meant many cities were able to set aside a healthy surplus.

Last year, Provo got close to the state cap, saving about 24% or $16.9 million. Kaufusi plans to use $826,000 of that surplus in the coming year.

In Salt Lake City, Mayor Erin Mendenhall has proposed tapping more than $4 million in the capital city’s general fund reserves to make up for budget shortfalls, but she said she plans to hold back 15% for 2021.

Amid a multitude of cuts, the capital’s budget proposes a 2.6% increase to the police general fund — and a recent council meeting was packed with people, many upset with law enforcement confrontations during recent protests, demanding the funding be redirected to other areas.

While a 25% savings limit might sound like a lot for a city with a big budget like Salt Lake City or Provo, Diehl, with the Utah League of Cities and Towns, said that threshold doesn’t amount to much for smaller communities with smaller budgets.

“One of the lessons [from the pandemic] may be that we need to revisit, in state law, the cap of what a city can have in its rainy day fund,” Diehl said. “Should cities, particularly smaller cities, have a little more flexibility to take advantage of the good times?”

Utah jobs and gross domestic product grew at a record pace over the past decade, allowing many cities to set aside funds to see them through the current downturn.

It’s a different story in eastern Utah, which has seen hard times with the decline of coal mining and radical fluctuations in oil prices.

Price was only starting to catch up to revenues seen before the Great Recession, according to Lisa Richens, head of the city’s finance department. Then the pandemic struck.

“When you’re a small entity and you’ve had the economy we’ve had, you try to save,” Richens said. “But roads are expensive to fix. It’s a tight balance.”

Richens has yet to prepare and present a budget for the city, which is difficult because she doesn’t know the extent of the fiscal damage caused by pandemic closures. There’s a two-month delay between the time businesses report their sales tax numbers to the Utah Tax Commission and when the state shares those numbers with local governments.

“I’m kind of hoping for a delay in adopting the final budget,” Richens said, “so we can work with actual data rather than just estimates.”

Vernal had a double hit in recent months as the pandemic took a toll on retail as well as oil and gas production in the Uinta Basin. April’s unemployment rate in Uintah County was 15.9% compared to the state average of 9.7%.

“This is the most challenging budget I’ve ever been through in 20-plus years of city management,” said City Manager Quinn Bennion.

Vernal plans to cut its staff by 12% to make up for shortfalls, Bennion said. Projects to improve roads, sidewalks and water meters have all been reduced.

“We’re just down to basic, essential services,” he said.