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As the entire country is still struggling to emerge from COVID-19, local and state governments are starting to see the financial strains it has caused on their current operations.
Where the future of local and state government revenues is looking grim, they are also faced with some serious cuts to produce a balanced budget for the next fiscal year. The recent example is New York City’s proposed budget, which introduced some serious spending cuts to services like cultural affairs and after-school programs to make up for over $9 billion in lost revenues due to COVID-19.
In this article, we will take a closer look at the various budget cuts that cities and counties are proposing and how they may impact the municipal debt world.
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As local and state economies are projecting massive revenue losses, many of them are already cutting critical services and laying off staff. The International Association of Fire Chiefs has projected nearly 30,000 fire department employee layoffs this year and next year combined. The National Conference of State Legislatures is projecting the following U.S. state revenue losses.
The annual budget process for almost all local and state governments runs on a fiscal year basis, which means that governments start working on their revenue and expenditure forecast in December-January to produce a budget book for the start of the fiscal year, July 1. The start of this new fiscal year brings tons of uncertainty for not only budgeting for the next fiscal year, but also for elected officials to understand the impacts of lost revenues and how to make up for them in the form of cutting expenditures.
Now, what does this lost revenue entail?
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From the last financial meltdown of 2008 to new COVID-19 challenges, local governments are facing challenges to meet a wide range of community needs and wants while adhering to fixed budgeted revenues in the form of taxes. In addition, these challenges often meet ongoing debates over what services and levels of these services are really needed by communities, and what revenue sources can be pledged to provide these services.
Here are some of the key guiding philosophies for a local government and its constituents:
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The economic impacts of the current crisis will certainly be felt in upcoming quarters and into 2021, and investors should carefully assess all the risks associated with municipal debt instruments. Investors should also consult with their financial advisors and tax experts before making investments.
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Disclaimer: The opinions and statements expressed in this article are for informational purposes only and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned. Opinions and statements expressed reflect only the view or judgement of the author(s) at the time of publication and are subject to change without notice. Information has been derived from sources deemed to be reliable, the reliability of which is not guaranteed. Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professionals and advisers prior to making any investment decisions.