All indicators are pointing to a significant economic downtown beginning this year and will have major impacts on Solon, city Finance Director Matthew Rubino said Monday of the impact of the ongoing COVID-19 health crisis.
“We know we will lose revenue,” Mr. Rubino said to the City Council Finance Committee.
It is highly probable that the operating deficit in the general fund will reach $5 million in 2020 and could continue to persist at similar levels in 2021 and beyond, he added.
The total operating revenue loss could exceed $50 million by 2025, Mr. Rubino continued.
“That number can be less or more,” he said, noting these are based on models that can change. “The city will have to begin adjusting the general fund operating picture to offset the revenue losses.”
“The goal for the remainder of this year should be to institute as many cost-cutting measures deemed necessary to slow the rate of reserve utilization to a manageable level and prepare for similar operating results in 2021,” Mr. Rubino said.
Mayor Edward H. Kraus outlined a seven-point plan to begin immediately and into 2021 to cut spending.
“We will maintain all the natural reductions we are doing,” he said, then begin implementing a plan. He said he would not give all the details as it involves sensitive employee information that he wishes to first share with them.
The city will begin by cutting off paying people “who are idling at home,” he said. “Those employees will be forced to take vacation,” he said. He did not provide an exact number but there are not a lot in this category.
“We have 300 employees, and we have to be sensitive to their issues,” Mayor Kraus said. “Many live paycheck to paycheck.” He will communicate all of the information first to employees, he added, and also thanked all the employees who sacrificed and continue to sacrifice.
The city has also instituted a hiring freeze for non-critical vacancies,” Mayor Kraus continued.
“No new positions will be filled unless they are deemed critical hires,” he said. They will also stop all overtime with the exception of the public safety forces.
Each department will also be asked to “dial back.”
Solon will also be postponing some of the non-essential capital projects, and deferring heavy equipment purchases. “That can involve hundreds of thousands of dollars,” the mayor said.
Mr. Rubino said that, in addition to cutting spending the city will look at new revenue sources that could include federal assistance or relief funding and proceeds from short-term bridge financing. He did note that the latest federal COVID relief bill (CARES Act) did not include direct assistance to municipalities with populations under 500,000.
Tax increases were not considered as the administration explored solutions, Mr. Rubino noted.
There will be targeted cuts to programs and “across-the-board measures to cut the budget,” Mr. Rubino said. The first phase of budget containment measures will kick in immediately and additional measures will be layered in by the end of 2020 and in future budget cycles beginning with the 2021 budget development, Mr. Rubino said.
“If we do an across-the-board cut, we will assume they are permanent until economic conditions allow us to ease up and come back to a normal state,” Mr. Rubino said.
“We have a rainy day fund, and it’s raining. It will start raining heavily,” he added. “We assume we have to use it, that is its purpose, but we will be efficient on how we use it.
“We have to aim high when it comes to mitigation levels because we don’t know how far down our revenue sources are going to fall,” Mr. Rubino said.
Income tax, which is the city’s largest source of revenue, will have at least a 10 percent loss this year, he said. “It is hard to say what will happen next year.”
Income tax revenue, which averages about $42 million annually, funds more than 70 percent of city operations and is the main source of funding Solon’s infrastructure program each year.
“There will be a substantial decrease in tax revenue that will start in 2020 and continue into 2021,” Mr. Rubino said. He suspects that all three main components of income tax receipts (withholding, individual and net profit) will begin exhibiting decreases in the second quarter (this year). Restaurants and retail will show the first signs of decrease in withholdings, he added.
“Every 1-percent decline in revenue from the estimate equates to a dollar loss of $360,000 to the general fund,” he said.
Mr. Rubino said the next three months of income tax collection data will be used to gauge the projected level of decline in receipts.
“National economists are forecasting unemployment rates may reach as high as 30 percent in some regions,” Mr. Rubino said. “All of these factors are going to put significant, if not historic, downward pressure on the city’s income tax receipts.”
The cash flow from income tax revenue is going to be delayed and stretched out due to the push back of the filing date to July 15. Solon is going to see less revenue stretched out over a longer duration in 2020, Mr. Rubino said. There will also be a downward trend in estimated payments for 2020 as non-essential businesses were ordered to close and many individuals were laid off or furloughed, he continued.
The city has received preliminary projections from RITA for both the potential loss and deferral of income tax collections in 2020. Those estimates will be shared once the administration has carefully vetted the agency’s assumptions and methodology, Mr. Rubino said. A special finance committee meeting is slated for May 4 where a revised budget is planned to be discussed and legislation ready to identify reductions and memorialize them.
“Economic decline is the consensus,” Mr. Rubino said. “We will know more in the next year.”
Councilman William I. Russo said that, while the city and its employees are facing these cuts, City Council should lead by example and take a cut in pay. He suggests a 25-percent cut for the rest of the year and also suggested the mayor do the same.
The law director will look into this as the council’s pay is directed by charter.
“We should all have skin in the game,” Councilman Eugene Macke Bentley said in agreement wth Mr. Russo.
Mr. Russo also said it is important to make any cuts or mitigation efforts as soon as possible as it will take longer to recover if those efforts are put off. “The longer we take to act, the harder this will be to get under control.”
The rate in which Solon recovers will be specific to the mix of businesses and revenue sources the city has, Mr. Rubino added.
“The numbers are much more dire than I anticipated,” Councilman Jeremy A. Zelwin said. “The fact we have been at home for six weeks. The numbers show we will have to make tough decisions as a council and administration but making those decisions sooner than later will benefit us going into next year.”