Cleveland's "Worst Case" Covid-19 Budget Scenario Does Not Account for Income Tax Challenge

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Council's Finance Committtee meets virtually, (5/19/20) - YOUTUBE / CLEVELAND CITY COUNCIL
  • YouTube / Cleveland City Council
  • Council's Finance Committtee meets virtually, (5/19/20)

In its bleakest financial forecast, the City of Cleveland has projected an end-of-year budget balance of negative $18.7 million. That's a surprisingly modest figure, given the scale of economic destruction that the COVID-19 crisis has already wrought both locally and nationally.

The city's projections are based on estimates that are subject to change at the drop of a hat. But this scenario, presented to City Council Monday by Cleveland's finance director and interim Chief of Staff Sharon Dumas, projects a roughly $63 million gap between revenues and expenditures on the year, (largely the result of reductions in income tax collection due to unemployment), offset by $46 million that the city carried over from the previous year's budget.



Dumas' presentation was encouraging in the respect that, thanks to "sound fiscal management" over the past several years, even the worst projections didn't seem all that catastrophic. But the budget picture could ultimately be much more severe. Even the "worst case scenario" presented did not account for a potential legal challenge to the city's income tax collections. If that legal challenge were to be successful, the city's budget would take a devastating hit.

At issue is whether employees who work for Cleveland companies, but who have been working from home in municipalities other than Cleveland, will still owe income taxes to the city of Cleveland for work conducted from home during the quarantine period. Mayor Frank Jackson and Sharon Dumas are confident that a provision written into the state's stay at home order will be sufficient legal protection.



"We have the strength of law on our side," Dumas said Monday.  "And if we get a legal challenge, we'll deal with it at that time."

Others, including cleveland.com editor Chris Quinn, are convinced that a legal challenge is forthcoming and that Mayor Jackson's confidence is naively misplaced. Quinn is correct that if a legal challenge is successful, the city's finances will be shattered. Fully 85 percent of the city's annual $445 million in income taxes (by far the largest chunk of the budget) comes from workers who live in the suburbs.

Dumas reported that the April income tax revenues, which reflect March activity, were down about 11 percent as compared to 2019. The "worst-case" budget scenario projects that May will get much worse, with projected revenues down 25 percent. (The stay at home order and business closures were in effect through the entire month of April). In June, the worst-case projection has revenues down 15 percent, and then down 10 percent from July through December.

But these projections will seem optimistic, indeed downright quaint, if suburbanites manage to successfully plead their case. But Dumas did not seem especially concerned Monday. She said the language in the stay at home order was written with cities in mind, to pre-empt this obvious outcome.

"People may want to challenge this, they may think differently," she said, "but a lot of municipalities are of course dependent on those income taxes, and it was not of their doing — not anybody's actually — but they did think of us in that way, to ensure that we maintained our [tax] base."

Even without the legal challenge, Dumas said that the current budget situation was unprecedented, "unfathomable," in fact. The city was prepared to take multiple actions based on future developments. Right now, the city is focused on not making the unemployment situation worse by laying people off. It is managing to keep costs down by maintaining a hiring freeze.

The city's "uniformed personnel" are still operating at 100 percent capacity, but all other full-time permanent staff are at about 84 percent. (Both the best-case and worst-case budget projections were based on non-safety full-time staffing at 86 percent.) 

The city's income taxes aren't the only revenue area being hard hit. The city collects four taxes collectively grouped under an "entertainment" umbrella: the admissions tax, parking tax, hotel bed tax, and rental car tax. At the beginning of the year, the city had projected roughly $40 million in entertainment tax revenue. So far in 2020, $11.7 million has been collected, and Dumas said that projections have been adjusted down to $26.1 million.

Currently, Dumas said, the city wanted to communicate to council a "degree of concern, but not panic." She said sound fiscal management had given the city a number of cushions, including the $46 million beginning-of-the-year balance and that the city was standing "at the ready."

"We're hanging in there," she said. "We have done creative things in the past — people were not tremendously opposed to taking 10 days off without pay during the recession — and there are four or five things we could do on a dime, as the mayor says. We are not out of the woods, and everything is still on the table."

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