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Following New Executive Order, Connecticut Municipalities Need to Plan for Possible Temporary Drop in Revenues

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Insights  <  Following New Executive Order, Connecticut Municipalities Need to Plan for Possible Temporary Drop in Revenues Due to COVID-19

As Connecticut’s municipalities continue to adjust to the unprecedented challenges and disruptions caused by the Coronavirus Disease 19 (COVID-19) outbreak, one area to which they will need to pay particularly close attention in the coming months will be its revenue streams, as the interruptions caused by this crisis are certain to have a tangible impact.

A recent Executive Order from Governor Lamont will cause further adjustments to be made. Executive Order 7S establishes programs that, according to the Order, “offer support to eligible taxpayers, businesses, nonprofits, and residents who have been economically affected by the COVID-19 pandemic.”

Most significant to municipalities is the Deferment Program, which authorizes municipalities to provide a property tax deferment to eligible residents, businesses, nonprofits and other eligible taxpayers for a 90-day period on a number of taxes, including real property, personal property or motor vehicles, municipal water, sewer and electric rates, and other charges or assessments. Guidance will be offered from the State as to which taxpayers, businesses, nonprofits and residents shall be considered eligible for the Deferment Program. According to the Executive Order, “participating municipalities may, upon approval of its local legislative body—or, in any town in which the legislative body is a town meeting, by a vote of the board of selectmen—extend eligibility for the deferment program to other categories of taxpayers, businesses, nonprofits and residents.”

So what does this mean to those cities and towns that depend on property tax payments to balance their budgets?

Many cities and towns were already bracing for local revenues to fall a bit short due to this crisis—property tax collection rates are not expected to be as high as in previous years, and for those cities and towns with large commercial, retail and tourism sectors, the widespread business restrictions and shutdowns are expected to have an even greater impact. If a business needs to close temporarily or even permanently due COVID-19, those tax revenues could be lost and the municipality would feel the impact. And now, with a deferral program available for up to 90 days, it could create a gap period where expected revenues are not coming in and for which cities and towns will have to make contingency plans.

For starters, businesses will need to look to the recently passed CARES Act, the massive $2.2 trillion stimulus program approved last week by Congress and signed into law by President Trump, which has the newly created $349 billion Paycheck Protection Program (PPP) to help small businesses keep their doors open during this difficult time. This can also have a direct impact on cities and towns; if these businesses can utilize the PPP to endure this time, the property tax revenues they are expected to pay can still be paid and the municipality can benefit.

Municipalities should also talk with their financial teams to further examine the CARES Act for other possible sources of relief. In addition, municipalities should consult their financial advisor and bond counsel about the possibility of issuing short-term tax anticipation notes (TANs). TANs are a temporary way of alleviating cash flow needs to eventually be paid by the tax revenue collections.

Now is the right time for finance teams to gather (in virtual settings, of course) and to take a thorough look at their budgets, to see where further savings can possibly be found. Cash-flow projections may need to be made based on the Executive Order, and an ultra-conservative approach may be required with the local budget to offset the temporary loss of revenues.

It would be a very good idea right now for cities and towns to work collaboratively with the local business community, possible convening virtual meetings with local chambers of commerce, banks and other business leaders to assess the situation and discuss possible stopgap measures. Other possible temporary relief measures could be working out arrangements on certain accounts payables, as well as looking into what expenses can be deferred, and potentially delaying contributions to pensions and other post-employment benefit plans. This is a temporary crisis, albeit one without a known end date right now, so temporary measures could prove effective.

No municipality in Connecticut could have possibly planned for all of this as recently as one month ago, but there is an opportunity now—through contingency planning, robust communication with all audiences, seeking possible opportunities through the CARES Act, potentially issuing TANs, and taking a much closer look at the local proposed budget—to be well-positioned for recovery once this is behind us.

 

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