Major Highlights
• COVID-19 pandemic has created economic conditions not witnessed since the Great Depression in the 1930’s
• The State of Iowa has lost over 250,000 jobs since March, 2020
• Cities are beginning to feel the fiscal effects as a result of the economic slowdown
• Full scale of impacts on city finances yet to be known
• Motivation is to understand how the last recession impacted city finances
• Great recession of 2007-09 created significant financial impacts on Iowa cities
• Using actual financial data, this report tracks trends of a host of revenue indicators
• Data includes both, governmental and proprietary funds, 2007-15
• Data has been broke down into seven categories, based on the Total Annual Revenues
• Not all small cities have low annual revenues – variation is primarily due to presence of business like operations – utilities, hospitals, rec centers etc.
• Major variations across the seven categories.
• Cities with lower annual revenues witnessed gradual revenue decline, although there were years which witnessed increases
• Cities with smaller annual budgets witnessed larger percentage declines
• Cities with the largest budgets held steady through the recession and in the post-recession recovery period
• Reliance on property tax increased across all the categories
• Debt witnessed decline in the period following the recession but increased from 2013 onwards
• Intergovernmental funds helped larger cities more than smaller cities
• Charges for fees increased across all city sizes

Full report available at:

https://www.extension.iastate.edu/igfi/files/page/files/lessons_from_last_great_recession_and_recovery.pdf

Biswa Das, an Iowa State University assistant professor of community and regional planning and community development extension specialist, recently completed a national study on the fiscal condition of rural counties in the United States after the end of the Great Recession. Das was the principal investigator on the study — funded by the North Central Regional Center for Rural Development/USDA — with co-PIs from four other Midwest land-grant universities: Kansas State University, Michigan State University, University of Missouri and University of Nebraska. The whitepaper, “Fiscal Stress after the Great Recession: A Study of Rural Counties in the U.S.,” is now available.

The Annual Fiscal Conditions Report, FYE 2017, for all cities in Iowa is now available on the Iowa Government Finance Initiative (IGFI) website. The individual reports include revenue and expenditure indicators that track fiscal performance of cities in Iowa. They also include legislative updates that impact city finances.

Published annually for the past four years, the reports use the latest US Census data to provide key socioeconomic indicators for each city that provide the context in which the financial data can be understood. Biswa Das, an assistant professor in community and regional planning at Iowa State University, is the IGFI program leader. Co-authors include Chris Seeger, Professor, Landscape Architecture, Bailey Hanson and Cindy Kendall, ISU Extension and Outreach. Questions can be directed to Biswa Das, bdas@iastate.edu

Over the past few, a number of states across the nation have been dealing with what has come to be known as the ‘dark-store’ strategy. The phrase ‘dark-store’ which was coined by the property assessment community refers to the method used to assess the value of a commercial property. Across the nation, there are growing instances of big-box retailers challenging the accuracy of valuation methods used by assessors. In recent past, they have been successful at not just questioning the accuracy, but have been successful at changing the methods to effectively lower the valuation estimates, thereby paying lower amounts of property tax. “Big-box retailers argue that the market value of their commercial property should be the sale price of similarly sized but vacant retail buildings. They point out that these buildings are extremely hard to sell as-is once the retailer moves out. They tend to sit empty for long periods. Thus, the assertion is, they aren’t worth nearly as much as local tax assessors have traditionally assumed in valuing the property.” (Governing.com, Sept, 2016)

Effectively, the dark-store strategy reduces the value of commercial property, which in turn reduces the amount of property tax that the owner has to pay. In Michigan, where this practice is already in place has created significant shortfalls in local government revenues leaving them stranded to finding alternate revenue sources to fund services. In addition, there is evidence that the retail community is interested to pursue this in other states including Alabama, Iowa, Florida, Indiana, North Carolina, Ohio, Tennessee, Washington and Wisconsin (NACO, 2016).

It is common knowledge that local governments (cities, counties and schools) in Iowa rely on property tax as a major revenue source. For example, for the year 2015, City of Carroll and Carroll County earned approximately 25 and 36 percent of their revenues from property taxes respectively. In its most simplistic form, property tax revenue is determined using two variables, the taxable property base and the property tax levy rate. The taxable base is the portion of the total property assessment that is done by assessors in every county. Depending on the classification of property – residential, commercial, industrial and commercial, all or portion of the market value of the property is used for property tax calculation purposes. Three common types of methods used by property assessors to arrive at market value include the market data or comparable sales approach, income approach and the cost or summation approach. Once the market value has been determined, the rollback or assessment ratio, determined by the state is used to calculate the assessed value of a property. This value is used along with the property tax levy rate to arrive at the amount of property tax that is owed by a property owner. While residential property accounts for a large portion, the rest three classes of property are as important, especially in urban areas and small regional hubs, as well as in rural parts of Iowa. Commercial property, which includes retail establishments form a key group that contributes to the tax base. The proposed dark-store strategy, if implemented will significantly reduce the amount of property tax that a retail store owner would have to pay.

To get a sense of the property tax base in Iowa, figure 1 illustrates the fiscal capacity for each of the 99 counties in the state and provides a visual comparison.  Fiscal capacity is an index to assess the strength of a government’s (state and local) tax base. Given the importance of property taxes for local governments, the index represents the relative strength of property tax base that exists in each county. Property valuation data for 2014 for all 945 cities in Iowa were used in creating the index and the value in each county is an average of the fiscal index of all the cities that reside within that county. A county that has an index value of greater than 100 has a relatively stronger tax base and those that have less than 100 have a relatively lower property tax base to generate property tax revenue. The cities were grouped into six categories based on population size to create the index. As the index represents a value relative to a group, the group’s index value is 100.

Given the complexity of property tax assessment and the differences in appraisal laws between states, it has been tricky for lawmakers to come up with legislative solutions that can assist local governments to respond to this situation. While some states have already done and others are considering laws to protect the local governments, places where this strategy has been implemented are already feeling the financial stress.

Given the power vested upon the local governments, they have little scope for increasing tax rates. In Iowa, the state through legislation and tax and expenditure limitations dictates what local governments can and cannot do by placing caps on revenue generation and spending increases. These limitations often tie the revenue and expenditure growth to the rate of population growth.  Therefore, the dark-store strategy, if implemented in Iowa will significantly add to the fiscal stress that local governments currently face. In addition, local governments in Iowa are currently dealing with a new law (SF 295) that has put a dent into their budgets. While the state is backfilling them to compensate for the revenue losses, it is not a promise in perpetuity and it might not be very long when cities, counties and school districts might have to find additional revenue sources. On top of this, the dark-store strategy, if implemented will make their financial situation worse.

Under such circumstances, local governments will perhaps need to make unpopular choices – cutting services or laying off employees or a combination of both. In addition, it is likely they will not be able to pursue major capital improvement projects. Overall, the dark store strategy if adopted in Iowa could alter the trajectory of community and economic development efforts that communities pursue, in significant ways.

Questions can be addressed to bdas@iastate.edu

Much is being written about self driven cars, electric cars and how transportation will look like in the not so distant future. I was reading an article on how large cities are slowly moving toward self driven cars and the impact it will have on the use of private cars. Assuming that such a transportation model is acceptable and becomes a reality in urban settings, I was struck by the impact it will have on government finance. Transportation departments rely on parking fees for a good portion of their budget and having auto driven cars replacing private cars would mean a fall in parking revenues. Based on a recent study, the largest 25 cities in U.S. collected approximately $5 billion in transportation related revenues including gas tax, traffic citations and parking fees. For example, the city of Chicago anticipates a 10-15 percent fall in revenue once the self-driven cars become an acceptable mode of transport in their metropolitan area. Combined with the push to have more electric cars on the road which translates into lower levels of gas tax, the future certainly could put a dent in the revenue stream cities receive from the transportation sector.

Recently I was conducting a financial management workshop for local government officials when we got into a great discussion on how technology is helping propel local governments to deliver more effective services. It is allowing for much closer interaction between government and people at the local level thereby improving customer access to quick information and oftentimes reducing the cost of delivering host of services. While technology is a broad term, for local governments it involves both hardware and software as well as technology adoption by its constituents or residents. and its use depending on the type of service. For example, with the use of more automated machines allowing patrons to borrow, renew, pay fines, and a host of other services, public libraries in many places are able to provide services with much lower costs, thereby offering similar services at a lower cost or more/better services for the same cost. In this example, cost savings could translate into other resources that libraries may provide to it patrons.

However, related to all of these, a new issue is slowly evolving that is proving to be a cause of concern for local governments. With growing use of technology, it is leading to decline in revenues for local governments that have been a reliable source for a long time. With more energy efficient appliances, self-driven cars, higher mileage per gallon of gas, electric cars, consumers are having to pay less to the providers of the services, usually city or county governments. While it is still unknown how the future will eventually look like, it goes without saying that technology is both a boon and could become a bane for local governments across the nation.