According to data from the Urban Institute’s recently released April state tax revenue report, 31 states saw sales tax revenues fall in real terms from a year ago, a decline the nonprofit think tank attributes to lower overall spending and consumers shifting from taxable goods to nontaxable services.
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The slowdown in consumption and changing spending patterns are also impacting county and municipal governments. Cuyahoga County, Ohio, is one example.
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The county, centered around Cleveland, had projected a 4% increase in sales tax collections in 2024 after budgeting for 2% in previous years. But collections are projected to be $9.8 million short of the forecast by the end of the year.
“After several years of strong growth, sales tax revenues are flat or declining for a variety of governments across the country,” said Corey Anderson, vice president at Moody’s Ratings. “This trend is not unique to Cuyahoga County.”
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“The fundamental factors that impact state tax revenues will likely have a similar impact at the local level,” said Lucy Dadayan, a senior fellow at the Urban Institute. “With consumer spending declining across the board due to the state of the economy and inflation concerns, this will impact sales tax revenues at both the state and local levels.”
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The county issued $190 million in sales tax revenue bonds.
Cuyahoga is currently
According to an official statement posted on the Municipal Bond Regulatory Commission’s EMMA disclosure website, the annual debt service fees on these bonds are capped by sales tax revenue projections, and officials cannot reduce the portion of county sales tax revenue that goes toward paying debt fees on sales tax revenue bonds.
However, according to official statements, the county may use available funds other than cooperative revenues (in the case of the 2022 bond) or bond funds and committed special funds (in the case of the 2017 bond) to repay the debt.
The combined revenues for the 2022 bond will come from the county’s general fund, money from a sports facilities reserve account drawn from the county’s lodging tax levy, half of the city’s baseball stadium admissions tax revenues, a portion of the city’s parking revenues and additional rent from Gateway, the nonprofit that manages certain sports facilities in Cleveland, including Progressive Field.
Debt service on the 2017 bonds will be paid from county sales tax revenues, cooperative income drawn from the county reserve fund, allocated contingent rent and allocated additional rent.
“To my knowledge, the county has never defaulted on its debt, and I’m not concerned that this trend will change,” Cuyahoga County Councilman Patrick Kelly told The Bond Buyer. “I will be paying close attention to sales tax revenues and will work with county officials to adjust spending if necessary.”
The county started 2024 with an $11 million deficit that could grow to about $16 million by the end of the year, due in part to overspending at the sheriff’s office due to hiring difficulties and high overtime costs.
But county council members also noted that Mayor Chris Ronayne has increased staffing during his first term in office, doubling previous spending levels, The Plain Dealer reported.
Cuyahoga County Executive Communications Director Kelly Woodard said the general fund’s cash reserves will cover the general fund deficit. The Plain Dealer reported that the cash reserves are on track to be $14 million above what’s needed by the end of the year.
Regarding staffing increases, he said the transfer of multimedia staff from the IT department to the mayor’s communications office “did not have an impact on the budget,” and “other additional positions are funded through grants and do not impact the general fund.”
Walter Parfeziewiec, the county’s budget director, did not respond to a request for comment, but he was reported to have told the County Council’s Budget and Finance Committee that the sales tax revenue shortfall was the “biggest problem” in the county’s projected deficit.
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“Many local governments have smaller tax bases than state governments, which may make them more vulnerable to changes in consumer spending patterns,” said Dadayan of the Urban Institute.
He said the decline in spending is being driven by interrelated factors including rising interest rates, rising costs of living, economic pessimism, Americans saving less, a weak labor market and a shift in spending from discretionary purchases to non-discretionary items like gasoline and groceries.
The sluggish trend in sales tax revenues is likely to continue in the short term, she added. “Indeed, the provisional figures for May 2024 indicate continued weakness in sales tax revenues.”
But if the Fed achieves the “soft landing” it hopes for and inflation eases, consumer spending could normalize, ultimately leading to a recovery in sales tax revenues, Dadayan said.
In fiscal year 2025, state and local governments will likely see modest growth due to normalizing post-pandemic revenue patterns, the phase-out of temporary tax cuts and a gradual stabilization of the economy, she said.
S&P Global Ratings gave the 2022 sales tax revenue bonds a AAA rating. The rating agency also gave the 2017 bonds a AAA rating. The outlook is stable.
The ratings reflect S&P’s view of the strength and stability of promised revenues, which the rating report states are “sufficiently removed from County control, mitigating operational risk,” as well as Cuyahoga County’s creditworthiness.
“The bond’s security interest in the 1.25 percent sales tax is comparable to the county’s other sales tax secured bonds,” S&P noted. “All sales tax revenues have been applied to the bonds, and we believe the debt service capacity remains very strong.”
While the bonds are backed solely by sales tax revenues, S&P noted that the government has a variety of revenue sources that can be used to repay the debt.
Moody’s assigned an Aa2 rating to the 2022 and 2017 bonds with a stable outlook.
“Although the counties have beneficially committed to instructing the Ohio Tax Commissioner to first remit revenues directly to the bond administrator, this does not achieve full legal variance,” Moody’s said of both bond groups.
But the rating agency said the rating also reflects Cuyahoga County’s large economic fundamentals, the strength of its triple supplemental bond test, healthy maximum annual debt repayment capacity and favorable sales tax trends to date.
Moody’s analyst Anderson said the county’s Aa2 rating reflects strong credit quality and “very low” credit risk.
