Backgrounder: The Flu and City Finance
by Jason Arp
On Friday the 13th, I attended an emergency meeting of local government officials regarding the Wuhan Flu or novel coronavirus. A variety of city and county elected officials were convened for a briefing from the county health department. After an assortment of scary words, like “pandemic,” “quarantine” and “police power” were pronounced, we were treated to a few statistics, none different than what you are seeing on the news. These were married to news clippings from the 1918 Spanish Flu epidemic. Ultimately, we received encouragement to keep our hands clean and avoid large groups.
My constituents need to know, too, that this will have especially severe financial costs for my city and many other Indiana cities whose council majorities have borrowed on the foolish assumption that such an event would never occur, a misjudgment to be addressed later in this article.
As I write, of course, the ultimate course of the Wuhan Flu episode is unknown. For all we know it could end up having health effects on this country anywhere on a scale between the annual flu and the 1918 version. Given the uncertainty and lack of tangible information, it is unprecedented to close the schools for nearly a month and cancel all meetings of groups larger than 250 people.
In my 46 years I’ve only seen this level of anxiety once, the days following 9/11. My church, and many others around the country did not hold services this Sunday. This is the only time I can ever remember this happening. The level of fear of something that may be a threat is astonishing.
One can be fairly certain, however, that these actions by government agencies, whether justified or not, are going to have material consequences on the economic outlook for the remainder of the year, perhaps longer. Whether masses of people are going to get sick from the virus remains to be seen, but without doubt millions are going to lose their jobs because of the actions being taken now.
Individuals, businesses and governments in the U.S. have accumulated debts that have in aggregate approached the levels prior to the last recession. High levels of debt increase earnings ratios in good times, however a downturn in sales and economic activity often means bankruptcy. Those who have borrowed for their catering business or restaurant will be cutting expenses and laying off employees, if not closing their doors forever. The employees will be buying fewer TVs and cars. The government’s reaction to a possible flu epidemic has ensured a sharp recession.
As a city councilman, I have to worry about whether the city government will be able to continue to provide the services needed to protect the lives, liberty and property in the manner taxpayers have come to expect. An economic downturn will mean lower tax revenues than recent years. Since the council majority spends nearly every penny we receive, a reduction in revenue necessarily means a decrease in expenditures.
The bigger problem comes from the level of financial leverage the city has taken on. Through bonding (direct loans) or structured leases (same effect as borrowing) the city has amassed financial obligations that have to be paid first. Economic development projects to construct garages, office towers and apartments have been made the first fiscal priority. Again, when the inevitable economic downturn occurs, these bonds and leases have to be paid in order to avoid bankruptcy. That means the reductions in spending will have to occur in police, fire and street-department budgets to the extent they don’t have longterm contracts.
The disregard of financial prudence in the fat times ensures that lean times will be even leaner. The city will have to decide whether to further raise taxes in order to maintain the level of critical services citizens are accustomed to, or to allow the number of police officers and firefighters to dwindle.
On the other hand, fiscal prudence during good times allows people in all walks of life to live fearlessly during crisis. That is the lesson usually taught by hard times. Clearly, most government officials didn’t learn it a decade ago in the last recession. They never do.
Jason Arp, for nine years a trader in mortgaged-backed securities for Bank of America, was recently reelected to a second term representing the 4th District on the Fort Wayne City Council. Arp has served on the Redevelopment Commission, the Community Legacy Investment Committee and as co-chair of the Finance Committee of the Common Council.
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