The COVID-19 pandemic continues to evolve rapidly and has already plunged the entire world—and the U.S. with it--into recession. Projections for GDP contraction start in the first quarter (negative 1.3%) and worsening substantially in the second (negative 12.7%). Over the course of 2020, S&P Global Ratings forecasts an annualized decline in real GDP of 2.1%. The forecast is predicated on a precipitous drop in tax collections on consumer spending, coupled with a surge in unemployment. See S&P Global Ratings' most recent forecast, "It’s Game Over for the Record U.S. Run; The Timing Of A Restart Remains Uncertain," (published March 27, 2020, on RatingsDirect. As a result, all of S&P Global Ratings' sector outlooks in U.S. public finance are now negative (See "All U.S. Public Finance Sector Outlooks Are Now Negative," published April 1, 2020).

Prolonged Revenue Declines Will Lead To Pressure On Liquidity

In our view, American cities that entered the recession with weak liquidity and reserves or with a high amount of economically sensitive revenues will be particularly vulnerable to the looming pressures. When unbudgeted COVID-19 expenditures are added to the mix, the pressure to make ends meet becomes exponentially harder for local governments, straining already tight city budgets. Federal aid from the recently passed relief package, the CARES Act, will likely provide some help but is unlikely to make budgets whole since $150 billion in federal aid earmarked for state and local governments will likely only cover COVID-19-related expenditures and not revenue declines.

For all U.S. cities, sales and uses taxes; leisure and hospitality revenue; lottery revenue; licenses, fees, and permits; and motor fuel taxes will be the hardest hit. Those that rely less on this revenue will be more insulated in the short term. However, even property taxes are likely to be affected should the recession be prolonged.

With Revenue Down, Management Will Make The Difference

In times of crisis, proactive and nimble management with robust governance policies are critical in maintaining credit quality. This includes carefully monitoring liquidity, particularly where revenue streams start to falter, reaching out to access external liquidity sources when needed.

The cities in this article all enjoy proactive management teams focused on both current and future pressures. As the situation unfolds over the course of 2020, cities who respond quickly and adequately to major budgetary shifts will have a much better ability to allay negative credit action, particularly if they start in a position of relative financial strength.

Ten Cities Facing The COVID-19 Pandemic

New York City

New York City's (AA/Stable) strong liquidity threshold positions it well for the evolving COVID-19 situation in the near term. In support of this view, we cite a high average cash balance of about $7.6 billion for fiscal 2019, an average daily cash balance of $5.6 billion (six months ended Dec. 31), and total cash receipts that are up 5.3% in the first half of fiscal 2020 over the prior year. These factors partly offset our belief that New York City could experience acute economic challenges amid ongoing severe limitations on global travel, given its role as an international tourist hub and as the No. 1 U.S. port of entry (according to the U.S. Department of Commerce).

Furthermore, the city predicts its cash balances daily, which is operationally instrumental when one-time shock events such as COVID-19 occur. In addition, its forecast for wage growth (which generate its personal income tax revenue projections) for 2020 is 2.3%, conservatively lower than the nation's forecast of 2.9% (prior to incorporating the COVID-19 outbreak).

Officials report that expenditures to date (as of March 24) related to COVID-19 are approximately $130 million, of which 75% will be reimbursable by the Federal Emergency Management Agency (FEMA). The expenditures are mostly associated with equipment purchases to address the increasing need for personal protective equipment and to bolster the city's available hospital beds. We expect virus-related expenditures will increase significantly as the pandemic peaks. That said, management implemented a program to eliminate the gap (PEG) to immediately reduce costs for non-COVID-19 programming and services equal to $1.3 billion over fiscal years 2020 and 2021, some of which will recur in the outyears of the financial plan. Furthermore, the city is poised to receive substantial federal fiscal stimulus, including $1 billion to cover Medicaid costs while it will receive billions more to offset health and safety costs, pay unemployment benefits, and support small businesses. In addition, with public schools closed at least until April 20, the governor reports that the state will hold districts harmless if they do not meet the 180 days of required instruction; we anticipate that this will translate to no significant loss in state aid supporting the city's education costs (approximately 30% of expenditures in fiscal 2019).

We believe New York City's economy could experience more significant economic headwinds over the medium term given the state-imposed shutdown of non-essential businesses, limitations on restaurant and bar services to takeout and delivery, and other social distancing requirements that curtail discretionary spending and consumption habits. The city's comptroller estimates revenue could decline by as much as $6 billion over fiscal years 2020 and 2021 with sales tax revenue receiving the most significant hit (collections accounted for about 10% of the city's revenue in fiscal 2019). Depending on the length of the city's virtual shutdown to control the community spread of COVID-19, we believe that weakness in certain revenue sources could persist into fiscal 2021 (which begins July 1, 2020) and calendar 2021 given S&P Global Ratings' expectations for a slow U-shaped economic recovery.

Los Angeles

Los Angeles (AA/Stable) has seen a large number of COVID-19 cases--over 1,300 so far--and it has a shelter in place order, along with the entire state, to stop the spread of the virus. We expect that these orders will continue over at least the next month and contribute to a sharp decrease in certain city revenues. However, Los Angeles maintains a very large liquidity position with $8.8 billion in cash and cash equivalents across all funds as of June 30, 2019, consistent with prior fiscal years. The city is preparing for a decrease in sales tax and transient occupancy tax revenue for the first time since the end of the Great Recession, but does not have exact numbers on the revenue decreases. On March 19, the mayor issued a memo implementing a hiring freeze and an overall reduction in spending across city government to offset some of the expected revenue losses. We believe that the city's broad revenue mix, anchored by property taxes, should help insulate it from potential steep revenue losses in the near term. Its largest taxes are property tax (37.2%), utility users tax (12.2%), and sales taxes (10.2%). We expect that management will continue to decrease expenditures to offset reduced revenue.

The 2019-2020 budget reflected $6.57 billion in general fund revenue, a 5.5% increase from the 2018-2019 adopted revenue budget. Projected revenue assumptions included growth in property taxes (6.5%); business tax (8.8%); licenses, permits, and fees (7.8%); and sales taxes (3.5%). Not included in the budget was any additional funding for employees whose contracts expired at the end of fiscal 2019. The city's third (midyear) financial status report showed overspending of $164.4 million, primarily due to unaccounted-for salary adjustments and costs related to wildfires. Revenue was above budget by $23.7 million, primarily due to property and transfer taxes. Prior to the outbreak, the city had identified expenditure reductions to offset almost half of the overspending, but expected to use some of the $519.9 million in reserves to balance its budget. We expect that it may need to use additional reserves to balance fiscal 2020. We also expect the city may need to continue to reduce expenditures into fiscal 2021, depending on how long the recession lasts.

Of concern is the city's annual TRAN issuance. The $1.7 billion fiscal 2019-2020 TRAN, issued in June 2019, was to prepay its pension actuarially required contribution (73.5%) for fiscal 2019-2020, as well as to manage uneven cash receipts and disbursements (26.5%) throughout the year. We note that if the bond market continues with its current instability, the issuance could be significantly more expensive next year. The city could choose to not issue the portion of the TRAN for pension pre-payment, which would necessitate a significantly smaller cash-flow TRAN to manage lumpy cash-flow receipts.

Chicago

Chicago's (BBB+/Stable) uphill climb has gotten harder with the addition of COVID-19 and recession pressures on a city already struggling to regain structural balance. Last fall, the new mayoral administration laid out clear plans for regaining that balance by maintaining constant vigilance to ensure any changes in revenue collections are met with expenditure adjustments. However, for Chicago the absolute essentiality of staying on the path to ramp up pension fund contributions leaves very little room for error. Without staying on plan to meet growing pension funding requirements, the city will jeopardize its credit quality and rating.

While the full extent of the cost of COVID-19 response will not be known for some time, the city remains confident that it has sufficient expenditure flexibility to address the pandemic's related costs. However, while Chicago may be able to keep controls on costs, economically sensitive revenues like home-rule and state-shared sales, transaction, transportation, recreation, and state-shared income taxes made up 35% of key operating revenues in fiscal 2018. With a shelter-in-place order since March 21, the tax revenue is expected to continue flowing, but the amount collected is likely to dip significantly before stabilizing. In the short term, this could result in cash-flow fluctuations to Chicago's historically robust liquidity position (total available cash of $2 billion at year-end 2018 (not including investments). However, given the city's close attention to cash management, we expect it should be able to maintain sufficient cash flow for operations and debt service even if revenues start to decline.

In the long term, the damage the ensuing recession will inflict on the city's pension plans could range from benign to catastrophic. Chicago participates in four pension plans with a combined funded ratio of only 22.9% and a combined net pension liability of $30.1 billion as of Dec. 31, 2018. Therefore, the effects of market volatility could have an outsized effect on the funds. In 2018, Chicago's combined required pension and actual OPEB contributions totaled 29.0% of total governmental fund expenditures, which we view as very high and limits overall budgetary flexibility. Given the magnitude of the problem and reliance on market returns to stay on track with pension funding, it is possible that even if the city takes all the right steps to align expenditures with revenue, the effects from COVID-19 and the recession could still result in credit deterioration.

Houston

Houston (AA/Stable) was awarded $5 million for the City of Houston Health Department to fund COVID-19 preparedness and response activities. The city will be creating a grant fund called the "COVID-19 Disaster Fund" and requesting City Council authorization to transfer up to $5 million into that fund from the budget stabilization fund as seed money for expenditures related to the public health emergency response efforts. The expectation is that up to 75% of this will be reimbursed by FEMA.

Compounding these challenges is the fact that crude oil prices fell sharply at the beginning of 2020 to points that were comparative to those of fiscal 2016. Despite the continued diversification in the local economy, with sectors other than the energy sector strengthening, the city and its local economy are still very closely tied to the oil and gas industry and prolonged weak oil prices will add to Houston's challenges.

In fiscal 2019, general fund revenue was derived mainly from property taxes (48.8% of total general fund revenue). Roughly 30% of the city's general fund revenue came from more economically sensitive revenue streams such as sales, mixed beverage, and hotel occupancy taxes. We anticipate special taxes of the city will be shrink--leading up to March, sales tax performance remained solid. The city's latest Monthly Financial Report for the period ended Jan. 31, projected sales tax of $702.6 million, which is $8 million above the adopted budgeted amount of $694.6 million. January receipts came in 8.63% above the same period in the prior year. The city expects February receipts to be strong and will not receive details on March receipts until May. While Houston's fiscal performance is not directly tied to oil and gas royalties, similar to 2016, if oil prices remain weak for a prolonged period, employment, spending, and other factors in the local economy could suffer. Given that the greater region has generally been on a growth trend in population, development, and market value, the depth and breadth of the risk would depend on how long the current challenging environment persists.

At fiscal year-end 2019, the city's unassigned general fund balance totaled $350 million, or a very strong 15.3% of adjusted expenditures when calculating transfers out of the fund. As of January 2020, general fund performance was better than the adopted budget, which did anticipate the use of reserves. Trends through January indicated that general fund reserves would be maintained at $35 million above the city's target of holding 7.5% of total expenditures in reserve.

Phoenix

Phoenix (AA+/Stable) and the state lagged national peers in announcing its stay-at-home order, which the governor issued March 30. Business operations slowed over the last month, with many shuttering their doors before the official announcement. In response to national orders, all non-essential retail, lodging, and large events for which the region is known, including MLB Spring Training, have been closed or canceled. While the scope of the economic and financial challenges remains to be seen, Phoenix has begun implementing cost-containment measures to better position itself for future difficulties. We understand that the city is working to assess and adjust its budget for the current and subsequent fiscal years by using prior recessionary scenarios and data from national and local economists. Given the two-month lag in sales tax collections, it does not expect to see the revenue effects of COVID-19 until May. In the meantime, the city has halted all non-essential expenditures and curbed all hiring, excluding critical positions. In the coming weeks, management intends to present possible scenarios and potential budget reductions to the governing council for fiscal 2021, when it anticipates the financial effects being most noticeable.

Phoenix relies heavily on volatile revenue streams for operations, including local sales, use and franchise taxes, as well as state-shared sales, income, and vehicle registration taxes, which together account for over 70% of general fund revenue and 75% of total governmental revenue. We note, however, that potential correlated budgetary pressures are somewhat alleviated by the city's very strong fund balance position and very strong financial management policies and practices.

The city's balanced fiscal 2020 budget as adopted includes $55.4 million in general fund contingency, which in recent years has been largely unused and results in a surplus at year-end. Through January 2020, Phoenix's general fund revenue collections were 6.5% higher compared to the same timeframe last year, although governmental fund revenue was tracking 2.5% lower than budgeted for the period. Additionally, the majority of the city's existing debt is secured by excise tax, including the local and state-shared components and, while some deterioration in pledged revenue is likely in the medium term, we do not anticipate pressure on its current ability to pay debt service considering the historically very strong coverage.

Boston

Boston (AAA/Stable) is well positioned in the short term to manage revenues and expenditure pressures from the COVID-19 outbreak. It has a stable revenue mix derived primarily from property taxes, along with high reserve and cash levels. In fiscal 2019, real and personal property taxes accounted for 66.1% of audited general fund revenue. Intergovernmental revenue was 16.3%, of which more than half is school formula aid. The remaining 17.6% of operating revenue includes excise taxes (7.2%) and all other revenue. We believe the city's revenue that is most exposed to immediate deterioration is excise taxes, which include hotel room occupancy and meals taxes, along with aircraft fuel and vehicle rental surcharges related to Logan Airport. Additionally, if state revenue significantly lags the budget, it could pressure unrestricted operating aid. However, given the city's available general fund reserves totaling $1.19 billion (or approximately 34.5% of operating expenditures) and availably liquidity totaling $1.55 billion (or approximately 8.5x governmental debt service, not including special revenue or capital projects funds) at year-end 2019, we believe, in the short term, its high reserve and liquidity levels will ensure service continuity and debt service payments. The entirety of the city's debt is general obligation (GO), with all revenue sources available for debt service payments.

The school department is accounted for in the city's general fund and is its chief expenditure, with education accounting for more than one-third of operating costs. Boston schools are currently planning to reopen on May 4, although this could change. The city is implementing distance-learning measures, which includes procurement of a variety of supplemental instructional materials. Management does not expect the supplemental instructional costs to materially pressure finances, with projections showing costs will be absorbed within the current school operating budget with supplemental support from the city's new Boston Resiliency Fund.

We believe the city has very strong management, with significant planning and coordination. We understand management is working closely with departments to track and document COVID-19-related activities and costs. In our view, the city's financial management team is addressing the current public health crisis while working to ensure Boston's financial position remains stable, although we believe year-end reserve reductions are possible. Additionally, if an economic downturn persists, it could pressure growth in the property tax base. While the city's reserves and cash balances may decline in the short term, we do not expect material pressure on its current ability to pay debt service, given the high reserve and cash balances.

Miami

Miami (AA-/Negative) has a population of nearly 500,000 people, is well-known as a beach and tourist destination, and serves as an international trade hub and a regional business, financial, and health care center for south Florida. Given the city's size and unique characteristics, we believe tourism and retail activity and employment are likely to be affected in the near term as beaches, hotels, cruise lines, and non-essential retail have closed to reduce the spread of COVID-19. In addition, restaurant services are limited like in many other local governments across the nation, which could also affect sales tax activity. The city has implemented additional procedures to limit the spread of the virus, such as screenings for all employees and visitors prior to entering city buildings, and the provision of drive-thru and on-site testing services for seniors (ages 65 and older). At this time, there is limited information available in terms of how reduced sales tax and tourism-based revenue will affect the budget, as there is typically a two-month lag in collections data. We believe the city's budget effects may be somewhat offset by the above-average level of sales and visitor activity the city experienced in February 2020 as host of Super Bowl LIV. However, there is a great deal of uncertainty as to how long the current curb on economic activity will last.

The city of Miami's governmental funds liquidity position has remained very strong in recent years, amounting to $475.2 million for fiscal 2019, whereas total budgetary flexibility is also consistently strong, with available reserves of $103.0 million or 13.3% of expenditures (including recurring transfers). Additionally, the city's primary general fund revenue sources are diverse, consisting of property taxes (46%), charges for services (16%), franchise and other taxes (15%), and intergovernmental revenue (10%). We believe this flexibility, stability, and diversity will be beneficial in times of distress. The city adopted a balanced budget for 2020 and the most recent monthly financial report (Jan. 31, 2020) shows total revenue remaining above the prior year by 6.6% and expenditures staying 2.7% above the prior year. The 2020 budget includes a $5 million contingency reserve pursuant to city code, and so far, COVID 19-related expenses have amounted to about $2 million. We believe the city's charges for services (a large portion of which is parking fee revenue) and economically sensitive tax revenue will be the most vulnerable revenue streams in the current environment.

Philadelphia

Philadelphia (A/Positive) is in a better financial position than it has been in years to handle the financial stress of the current COVID-19 pandemic. At the close of fiscal 2019 (June 30), the city's available general fund balance was $439 million, or 10.9% of general fund expenditures. Total government cash (including short-term investments) was approximately $2 billion (29% of total governmental fund expenditures). For fiscal 2020, the city was expecting the general fund balance to decrease to $352 million (6.9% of expenditures) on a budgetary basis; however, the budget incorporated several contingencies, including $55 million as a federal funding contingency and $20 million for a recession readiness fund. The mayor has called for $85 million (1.7% of general fund expenditures) to cover costs related to COVID-19, which will include increased labor and IT costs and expenditures for quarantine and testing sites. Management expects the $85 million would come from general fund balance, but would be offset by the contingency funds. The mayor presented the proposed fiscal 2021 budget in March, but it did not include the potential effects of the COVID-19 outbreak. The city expects to revise its revenue and expenditure projections prior to budget adoption in May.

We believe Philadelphia's primary general fund revenue sources to be somewhat resilient to near-term economic shocks, but would be vulnerable over the medium term if the current economic disruption persists. Both the governor and the mayor have issued stay-at-home orders until further notice. The city's largest general fund revenues are wage and earnings taxes (33% of general fund revenue), real property taxes (14%), and business income receipts tax (BIRT, 11%). Notably, the city reports that only about 8% of its wage and earnings tax receipts come from the service and hospitality sector, which is experiencing the most severe effects, and its largest sector is health and human services, which should be resilient. The city has not yet revised its revenue forecasts as economic data are still coming in and subject to rapid change, but plans to do so in the coming weeks.

The city's pension reforms, including lowering its discount rate and contributing above the required contributions, have put its pension plans in a better position than before. However, funded ratios remain low and the liability large. The city recently made a $550 million contribution to the plan as part of its long-term goal to improve funded levels, which will provide additional near-term liquidity. It reports it has cash available to pay seven-to-eight months of benefits without needing to rely on investments.

San Francisco

San Francisco's (AAA/Stable) economy, tax revenue, and service demands will show more polarity than most of its big-city peers due to COVID-19, in our view, but its very strong management profile and voter-approved reserve set-asides should allow for the city to maintain its credit quality.

Already a center of finance, the city has competed with Silicon Valley during the recent economic expansion for high-skilled IT and life science jobs, many of which can be performed remotely with minimum disruption under social distancing rules. This points to a source of resiliency in the local housing market and the likelihood that its (till now) hot market for office space will quickly warm up again when public health conditions improve. By contrast, the city's robust restaurant, retail, and lodging industries, which typically enjoy a diverse mix of demand from tourism, business and convention travel, face a tougher road because the high local cost of living may push employees in this industry out of the region.

The city's March 31, 2020 budget outlook update characterized the economic and tax revenue losses from COVID-19 as "stark and immediate." We expect the revenue effects to first show up in economically sensitive tax revenue such as lodging taxes and sales and use taxes, although the large interval between when property values are measured and when taxes are levied makes an outright decline in the city's largest general fund revenue source, property taxes (38% of general fund revenue in fiscal 2019), unlikely through the fiscal year ending June 2022. However, we think other, more economically sensitive revenues are likely to show year-over-year drops by fiscal 2021. The city's March revision shows estimated fiscal 2020 lodging tax revenues (equivalent to 14% of adjusted general fund expenditures in fiscal 2019) likely to come in 32% below budget under a limited COVID-19 impact scenario and sales tax revenues (8% of adjusted expenditures) at 10% below budget. The city anticipates further weakening in these two revenue streams in fiscal 2021 under both its limited and extended-impact scenarios but slight growth in property tax revenues next year.

San Francisco has shown caution in its revenue assumptions during the recent economic expansion, in our view, and we think the city has room to pull back on spending growth as the revenue effects of COVID-19 become better known, but we also expect to monitor the extent to which the city needs to escalate support for public hospital and social service operations if sufficient state and federal support is not forthcoming.

Seattle

Seattle (AAA/Stable) and its surrounding cities received early publicity as for a large number of COVID-19 cases in the region and the state was an early adopter of social distancing rules that quickly wound down large gatherings, cut business and tourism travel, and forced restaurants to close or convert to take-out operations. We anticipate that COVID-19 will have a material negative effect on the city's revenues in 2020 and at least temporarily bring hope for a lodging tax revenue boom--multiple sites are in the development pipeline with openings scheduled through 2022 to capture heretofore strong demand growth--to an end. At the same time, we think that the city's very strong management profile and accumulated reserve growth as part of automatic set-asides position it to respond to the potential for medium-term revenue losses or operational disruptions.

We think at least two of the city's main tax revenue sources could show weakness starting in the fiscal year ending December 2020. The budget as adopted before the threat of COVID-19 became known anticipated that property taxes would represent the leading general subfund (a budgetary-basis fund that substantially overlaps with the city's general fund on a generally accepted accounting principles basis) tax revenue source, at 23% of total revenue. Due to statutory limitations on growth that also protect against revenue declines and an active construction pipeline, we think this revenue source is unlikely to weaken through 2021, but we anticipate that sales and use tax revenue (20% of total revenue) and business gross receipts tax revenue (also 20%) are poised for declines as taxable activity drops through at least the second quarter of the year. Management reports that the lag between economic activity and collection for sales and use and gross receipts tax revenue means that representative revenue data will not start to be available until May at the earliest and the city is studying prior recessions to develop a budgetary response to the current one.

All ratings are current at the time of publication. We will review all GO ratings on the included cities individually and could revise the rating and/or outlook on a case-by-case basis. S&P Global Ratings will continue to publish on local government credit as conditions change and in response to market interest.

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Related Research

• All U.S. Public Finance Sector Outlooks Are Now Negative, April 1, 2020
• The COVID-19 Outbreak Weakens U.S. State And Local Government Credit Conditions, April 2, 2020
• It’s Game Over for the Record U.S. Run; The Timing Of A Restart Remains Uncertain, March 27, 2020
• Global Macroeconomic Update, March 24: A Massive Hit To World Economic Growth, March 24, 2020
• Economic Research: A U.S. Recession Takes Hold As Fallout From the Coronavirus Spreads, March 17, 2020
• COVID-19 Credit Update: The Sudden Economic Stop Will Bring Intense Credit Pressure, March 17, 2020
• COVID-19's Potential Effects In U.S. Public Finance Vary By Sector, March 5, 2020