According to the National League of Cities (NLC), 65% of cities are being forced to delay or cancel capital spending and infrastructure projects due to COVID-19.
Unlike the federal government, most U.S. cities are required by charter to run a balanced budget. This means revenue shortfalls have to be met with cost-cutting.
The NLC says cities are projected to lose $360 billion in revenue over the next 3 years due to the economic effects of the pandemic.
If that happens, it means major cuts in operating expenses in addition to capital spending cuts.
The impact on cities is a good example of the pandemic's 2nd order effects.
The first set of impacts hit consumer-facing industries, like travel, entertainment and dining. But we're now seeing firms and organizations further up the value chain from these industries get hit.
Examples include advertising agencies and marketing firms, professional services providers and cities, which rely in part on sales tax and consumer use fees for much of their budgets.
The NLC survey shows that 74% of cities have started to cut their budgets, with 20% reporting across-the-board reductions. So the budget cuts have already started.
Also, about 1.5 million public sector workers have been laid off or furloughed. Those numbers are expected to rise in the coming months.
The economic impact of major budget cuts by cities would damage local economies and reduce much needed city services. How bad it will get depends on whether or not cities are provided with financial assistance in the next round of federal government stimulus spending.
But even if they are provided assistance, many projects have already been canceled or delayed. So even if cities are given stimulus funding, it will still take time for this sector of the economy to recover.
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