May 15, 2020

Anticipating the Fiscal Impact of COVID-19

As the ongoing COVID-19 pandemic continues to wreak havoc on the economy, made all the worse locally by a sharp decline in oil prices, there’s no doubt our city finances will take a hit.  How much of a hit we can’t yet say—we don’t know any more than anyone else does how this will all end.  We are, however, paying close attention to our numbers and actively planning for the worst, so we’ll be prepared whatever the eventual outcome.

Thus far, our direct out-of-pocket expenditures relating to the coronavirus response, such as for personal protective equipment and essential employee overtime pay, have been relatively modest.  And we can expect to receive reimbursements for most of these costs.  Earlier this week the Governor announced the process by which the State will distribute a portion of its $11.24 billion federal Coronavirus Relief Fund allocation to cities and counties to cover their COVID-19 expenses.  Because Bellaire is located within one of the 12 Texas counties to have received a direct disbursement from the federal government, we’ll have to work with Harris County to get our share.

The greater fiscal impacts we can anticipate are revenue shortfalls from diminished local economic activity and from the suspension of fee-supported city services and programming.  We’ll see a reduction in expenses, too, but not enough to completely cover the lost revenues.  The proposed next federal relief package, to be voted on today by the House, would include financial assistance to local governments to shore up their ability to continue providing the essential services residents depend on, but in planning for the worst we certainly aren’t counting on that to happen.

In the second quarter financial report presented in our last City Council meeting, staff offered two hypothetical scenarios to illustrate the potential impact to our bottom line.  The first assumes a return to normal operations for the fourth quarter (July through September), while the second represents the worst case and assumes the current COVID-19 situation continues for the remainder of the fiscal year.  In either scenario, nearly all city departments would recognize some budgetary savings from not providing their usual level of services.  Most prominently, seasonal Parks & Recreation expenses associated with summer programming like day camps and swimming pools would not be incurred, but of course neither would the corresponding revenues be realized.  Other departments have identified savings by deferring or forgoing entirely lower-priority projects and services.

Staff estimate lost revenues in the General Fund ranging from $786,000 in Scenario 1, to $1.73 million in Scenario 2.  Those losses would be partially offset by expense reductions of $427,000 to $1.26 million.  To make up the remaining difference, both scenarios assume we would eliminate this year’s contribution, $471,000, to the Vehicle and Equipment Replacement Fund, a decision not to be taken lightly but one staff feel confident we can manage without falling too far behind in future years.  The net result to the ending balance in the General Fund would be a positive $112,000 in Scenario 1, and more or less breaking even in Scenario 2.  The impact to the Enterprise Fund would also be positive in Scenario 1, and even though slightly negative in Scenario 2 we would still finish the year above our required 60-day minimum fund balance.

We’ll thus get through the rest of this fiscal year just fine.  But no one knows what the future holds and right now it’s particularly uncertain.  Looking ahead to the development of next year’s budget we’ll continue forecasting conservatively, and based on the assumption of prolonged fiscal impacts from COVID-19 and general economic conditions.