Coronavirus Update: Local Governments and Agencies

INDUSTRY OVERVIEW

• Expenditures are increasing due to response effort to the virus.
• Tax revenues have declined with business closures and rising unemployment.
• Many state and local legislatures have adjourned or suspended sessions.
• Working remotely is increasingly common for legislators and staff.
• State and local governments that have revenue streams related to airports and seaports are being impacted by decreased passenger travel as well as interruptions in supply chains.
• State and local governments are addressed in the CARES Act, which will provide $150 billion in direct aid to state and local governments (at least $1.5 billion per state), $5 billion in additional funding for Community Development Block Grants (CDBG), $454 billion in emergency loans for businesses and governments, and $25 billion in transit infrastructure grants.

IMPACT ON FINANCIAL REPORTING REQUIREMENTS

• The Internal Revenue Service (IRS) has not suspended the responsibilities that entities have to calculate federal arbitrage, yield restrictions, and adhere to private use regulations related to tax-exempt bond issuances.
• On April 15, 2020, the Governmental Accounting Standards Board (GASB) proposed to postpone the effective dates of provisions in almost all Statements and Implementation Guides due to be implemented by state and local governments for fiscal years 2019 and later. The GASB did not propose postponing the other provisions of Statement 93 or Statement No. 94, Public-Private and Public-Public Partnerships and Availability Payment Arrangements, because the pandemic was factored into the establishment of the effective dates for those pronouncements.
• The U.S. Office of Management and Budget (OMB) released memorandum M-20-17, Administrative Relief for Recipients and Applicants of Federal Financial Assistance Directly Impacted by the Novel Coronavirus (COVID-19) due to Loss of Operations, which covered various administrative reliefs including the extension of Single Audit submission. The memorandum allows recipients and sub-recipients that had not yet filed their single audits with the Federal Audit Clearinghouse as of the date of the issuance of the memorandum (March 19, 2020) and that have fiscal year-ends through June 30, 2020, to delay the completion and submission of the Single Audit reporting package, to six (6) months beyond the normal due date.

MARCUM VIEW

Increased Attention to be Devoted to Identifying Operational Efficiencies

Given that state and local governments are unable to borrow in the same manner as the federal government, they’ll begin to seek out efficiencies and reduce duplicative efforts wherever possible to compensate for decreased tax revenues. A key area of focus will be ensuring the local government has enough cash on hand to cover essential services. This may call for a rebalance or amendment of the local governments’ budget after consideration of possible reduction in expenditures, the delay of capital spending, and creation of new cash resources.

Going Paperless

Using electronic documents can reduce printing and material costs in several ways. Implementing cloud-based tools can lead to improved customer service, operational efficiencies and increase in security. In addition, moving to electronic record-keeping and electronic signatures (DocuSign and ADP) can reduce transaction costs for the local governments and its partners.

Possible Increases in Local Tax Rates or Increased Fees

Closed restaurants and retail store closings, and the shut-down in tourism all reduced sales tax revenue, gas tax revenue, hotel tax revenue and other fees. Aside from cutting expenses, some local governments will explore increases in property taxes and tax rates in a number of areas over the next year and through the next mid-term election cycle to reach a balance budget. Dependent on how long COVID-19 concerns remain, certain revenue source issues could persist into the fiscal 2021 budget year.

Reassessment of Vendor Relationships and Contacts

Another area likely to receive increased scrutiny is vendor relationships. Government contractors and vendors in any area of operations are likely to feel increased attention paid to the terms of contracts as well as new bidding processes during renewals.

The potential need to re-evaluate capital spending, including shelving discretionary projects or diverting funds from capital projects to operations will be considered. The acquisition of new capital assets that don’t have a critical public health or safety function might be prime candidates for deferral.

Continued Adoption of Automation

Many local government entities have only just begun to explore process automation (i.e., machine learning, etc.). Given the aforementioned need to focus on efficiencies, government entities are likely to invest in automation tools at a faster rate if they are able to see case studies around the investment paying for itself within a short time frame.

Pension Plans

The spread of COVID-19 has shaken financial markets, which has resulted in significant declines in investment portfolios. Due to the weak market, which may take time to recover, a local government or state agency may see an increase in its reported Net Pension Liability or Net Other Post-Employment Benefit Liability in the upcoming year. It would be highly suggested that City officials and Finance Managers meet with Plan actuaries and investment managers in order to best prepare and act on investment strategy modifications.

Ports to See Steady but Slow Increases in Traffic

Passenger travel will start to increase as restrictions are lifted. However, we expect that it will be an extended period before leisure or business travel return to pre-pandemic levels. That will continue to impact revenues from parking garages and fees often realized for cities/counties where airports and seaports exist.

Marcum’s Government industry team is ready to help companies work through these difficult times. For more information about the impact of the coronavirus on local governments and agencies, please contact Moises Ariza, at 305.995.9612 email Moises.