The Coming Revenue Crisis for Public Libraries
Public libraries will be financially hurt by Coronavirus economic crisis even as they are called on to help more residents in their own personal crises and community-wide challenges. It is mission-critical for library leaders and library workers at all levels to understand the economic and tax policy issues that will affect library budgets, and quite possibly your own employment. This will not be a short-term problem for our sector and requires us to focus on stabilizing current-year revenues and expenses, diversifying revenue over the long term, and finding new revenue and service alignments across jurisdictions to ensure that libraries are viable.
In October 1929, unemployment was 4 percent. At the depths of the Great Depression in 1933, it had risen to 25 percent and GDP had fallen by 46 percent. In 2020 with the ongoing Coronavirus crisis, the shutdown of large and small businesses across the country has resulted in similar unemployment figures as well as potentially significant declines in GDP. This is happening over the course of weeks rather than a several-years-long decline in the early 1930s. The shock to the economic system in the United States is profound, deep, and immediate. It will be felt by everyone regardless of prior means or station. And will reverberate through our global economy for a generation.
In the near-term, the negative impact on library budgets and the library workforce will be unevenly distributed and will depend, to a large degree, on the legal and tax basis that funds each library individually. The legal structure of each public library and the type of taxes that fund each particular library are what is relevant. There are almost no “apples to apples” type comparisons to make between libraries, even between neighboring towns, because of the specific legal structure of each library (e.g. district, municipal department, nonprofit contract) and the type of taxes that are raised (e.g. property, sales, income, severance) in each specific locality are the only criteria that matter as well as the governance structure (which delineates the internal decision-making process).
Local Taxes and Local Governance
In the main, public libraries that are funded locally through one of seven different ways: through dedicated property taxes; through dedicated sales or use taxes; through the general fund of a municipality; by the terms of a contract with a municipality; through a fund allocation by a school district; through fund allocations by several legal or municipal entities via an MOU or IGA; or by direct funding from a state. In most states, over 90% of operational funds are from one of these sources. In some states, there is a supplemental aid contribution from the state via a formula. There are significant and important differences in the underlying stability of local tax revenues between all of these systems.
Likewise, public library boards have varying types of fiduciary and financial responsibility. While these responsibilities are set out by state law they are often informed by local customs and political alignments as well. In a time as fraught as this, it is important to understand who has ultimate control of a library’s budget. In some types of jurisdictions, the library board (either elected or appointed through an MOU or IGA) is solely responsible for setting the tax rate and budget. This fiduciary authority includes issuing bonds and other public debt. While their ability to raise or lower taxes may be capped or limited by a state-imposed formula or could require voter approval, boards with real fiduciary responsibility have a wide amount of discretion to manage their own budget under law.
In other jurisdictions, the library board may have a role in crafting or proposing a budget, but the ultimate authority for levying property taxes or initiating a transfer from a general fund rests with a town board, city council, school board, or county supervisors. Town meetings and warrants are forms of citizen-led checks to board authority, too. While this type of advisory board may or may not have a policy-setting role and may even have the ability to direct expenditures within an approved budget, they lack a legal role in establishing the funding level for the library. In good economic times, proposing a budget and receiving the funding may be a Pro-forma act. But in bad economic times, the library board may, in fact, be powerless in the face of cuts, reductions, or reallocations. While local customs may have previously kept the library at arm's-length from other parts of local government, the funding future for the library is part and parcel with the rest of the municipality.
In certain parts of the country, the library itself is a nonprofit corporation (and may or may not have been recognized as a 501(c)3 by the IRS) so the library board is a board of directors for an organization rather than a board of trustees for a public body. While the board has fiduciary responsibility for the library as an entity, it does not have any statutory authority to levy taxes. It can take out loans or other debt (like a mortgage) as any business can. State laws classify nonprofit libraries as public libraries when they are acting in that capacity. The board of directors operates the library under contract with a municipality, school district, or other legal entities. The terms and conditions of the contract are binding on both parties. However, and as many childcare providers, health clinics, and afterschool organizations will attest, in hard economic times, the municipal partner may be slow to honor its financial obligations.
Property Tax-Funded Libraries
In general terms, and at this point in late April 2020, libraries that are funded primarily through dedicated property taxes are more likely to weather the current financial crisis better than those that are funded by sales or use taxes, or that are within a general fund allocation by a town, city township, or county, either as a department or under a contract. This is largely because the collection of residential property taxes is made in advance through escrow payments and is therefore considerably more stable than sales, use, income, or other tax receipts and fees. Personal property, business or commercial property, farm and agricultural property, and industrial property taxes are likewise generally collected in advance by county assessors. In fact, the bond rating agency Standard and Poors is forecasting only a “Moderate” near-term risk (just above “Very Low”) concerning property tax collections. S&P ties most of its concerns to the possible implementation of proposals to delay the collection of property taxes.
While there will be coronavirus-related contractions in every real estate market, public library leaders with a stable property tax base should not panic about their core revenue at this early stage. For libraries with self-governing boards, this stability should allow you to continue to support your core programmatic priorities, service debt, and pay staff. There is also a wide discretion available to independent library boards to manage and allocate reserve funds or other dedicated funds. Whether it is a capital fund, a reserve fund, or a rainy-day fund, this may be the time for a hard discussion about your priorities. If your goal is to retaining capital at the expense of staff positions, it would be wise to consider that retaining staff is more cost- and mission-effective than retooling after a layoff.
Independent library boards in certain states may have the discretion to use financial instruments and credit/debt servicing to weather anticipated revenue shortfalls. Depending on the state, library district leaders should become familiar with the use of tax anticipation warrants or notes and certificates of participation as potential ways to ensure financial and operational stability. Likewise, library boards in many states are eligible to take out commercial loans. This is not the norm, but interest rates are very low. If your property tax base is stable, a collateralized loan may be an appropriate approach. (Please note that this article should be considered financial advice, so your library must work with a qualified financial advisor and bond attorney before proceeding.)
For libraries with advisory boards but who have a dedicated property tax levy, it is critical to engage your municipal partners about the nature of your dedicated tax and work to ensure that it is protected both politically and legally. If your library is a municipal department and is funded through a dedicated property tax, the stability of your revenue depends on what the definition of “dedicated” is - either in state law or the municipal ordinance that establishes the levy. Unfortunately, in our experience, there are places where a dedicated levy is “dedicated” only by custom, tradition, or perception and not by law. While an advisory board may not have the ultimate authority to set the property tax, it is incumbent upon you to ensure that a dedicated tax continues to fund library services, programs, and staff.
Likewise, even in good financial times, we have seen dedicated levies become vulnerable to rededications through both legal and extra-legal means. In states like Indiana and Louisianna, library levies and fund balances are subject to review, audit, and possibly (attempted) seizure by another unit of government - often a county or a parish. It is not unreasonable to assume that library leaders in these settings should be prepared for extra scrutiny and possible action on the part of cash-starved municipal partners. It is important for library leaders to be prepared to defend their budgets and reserves by focusing your programs, collections, services, and staffing on helping your community in the coronavirus recovery.
Library leaders need to become active in several interrelated discussions about property taxes at the state and local level. In some places, TIF Districts impose long-term caps on revenue growth for schools, libraries, parks, and other districts by funneling property taxes to development projects. The problem of Big Box retailers using "Dark Store" loopholes to under-pay their fair share of property taxes is gaining momentum and will likely be exacerbated by this crisis. And state after state have considered and enacted various forms of property tax caps and abatements like Prop 13 in California and TABOR in Colorado. These issues are legitimately within the policy and legislative purview of state library associations and local library boards. Without a firm policy framework, the core funding for thousands of libraries is at risk.
Municipal Library Departments - General Funds
We are very concerned about the future stability of public libraries that rely on general fund allocations from municipalities. This concern extends to libraries that are departments within a municipality as well as nonprofit libraries that operate under contract with municipalities. While we will discuss nonprofit libraries later in this article, the fundamentals of what kind of taxes are collected by towns, cities, townships, and counties will be a key determinant of the short-term and long-term stability of municipally funded library budgets.
Many public libraries are a department or component of local government and are inextricably linked to their municipal budgets. The municipal entity may be a town, borough, city, township, or county (parish) and it may be governed either by a mayor-council form of government, a council-hired manager approach, by a commission, or with either a direct or representative-type town meeting. Local governments across the country rely heavily on revenue from sales and use taxes and from fees and fines. If your library is a department of local government and you rely in full or in part on your municipal partner’s general fund revenue for operations, you will likely face a financial problem because of the coronavirus economic slowdown.
Even in states with property taxes or income taxes, revenues from purchases and consumption are key components of municipal revenue. In states without a property tax scheme, the economic shock of closing sit-down restaurants, and bars, non-essential retail, and private businesses will be grave. It is only now beginning to be felt and understood. With schools and private businesses shuttered, gasoline taxes are significantly down. As the economy slows, fees from permits, real estate transfers, and related activities decline. With local governments closed or curtailed, municipalities have suspended parking enforcement and court fees are down. In many places, taxes and fees from hospitality, travel, entertainment, conventions and meetings, and tourism are critical sources of revenue for local government. Taxes on hotel rooms and short-stay services like AirBNB, fees for rental cars, taxi and rideshare surcharges, entertainment and ticket taxes, and other tourism-related revenue are significant contributors to local budgets.
While safer-at-home orders and travel restrictions have caused an immediate sectors-wide collapse of these revenue sources, over the long term, several health-related and social-emotional factors will contribute to slow the rebound of the travel, entertainment, convention, and tourism sector. Ongoing social distancing will change personal behaviors about gatherings and travel for years to come. And as we saw during the SARS epidemic in 2003 and 2004, employers will likely continue to impose travel restrictions on employees to minimize risk. But it is the immediate and dramatic decline in sales and use tax revenues that will impact each and every local government across the country. Regardless of whether a locality has had any reported cases of COVID-19 to date, no municipality will be spared from the economic downturn due to the loss of sales and use tax. This is at the same time that local governments are being asked to do more for their communities. For county governments, in particular, this is a stressful time. According to NACO, counties operate over 1,900 public health departments, nearly 1,000 hospitals, and more than 800 long-term care facilities.
Library leaders who are part of a town, borough, city, township, or county will experience the most dramatic economic disruptions from the coronavirus crisis. If your library is part of the general fund and does not have a dedicated tax line, you will need to be prepared for cuts and possibly closure. The direct impact on your library budget will be determined by two interrelated factors. One is the amount of tax revenue available within that municipality. The other is the political calculus about what municipal services should be cut and which should be spared. If you are anticipating a cut to programs, services, and collections budgets, there will be pressure to supplement your budget with fundraising, grants, and other outside support. It is more important than ever to dedicate time and attention to developing new revenue and to support an active and viable Friends group or Foundation as a conduit for charity, philanthropy, and grant programs.
If you are facing significant cuts and the prospect of layoffs or furloughs, it is critically important for your municipal partners to understand the relative differences between a layoff and a furlough for both the short-term budget impact and the long-term mission of the library. In most states, a layoff obligates the municipality to pay unemployment because it terminates employment. A furlough, however, continues the obligations that a municipality has to its employees while temporarily ending work and wages. It is important to remember that prior to the coronavirus-related shutdowns, the unemployment rate was very low and libraries across the country struggled to find skilled workers at all levels. Onboarding staff is an expensive and time-consuming prospect as well. Unilaterally firing library staff at this critical juncture will cause further disruptions in the community not only to the mission and work of the library but also to local employment.
Municipalities will be in financial peril for months if not years to come. The decisions that are made during an ongoing financial crisis like that will be practical as well as political. If the library and your staff are not seen as an essential part of the recovery, then the decisions on where to dedicate limited public funds will pass you by. Library leaders must devote staff time and resources to enhance your library's marketing and outreach efforts while aligning your library with other mission-driven organizations across your community. If you can demonstrate your impact on the economic well being of the community along with literacy services, education, human services, and community cohesion, you have a better case for funding in a very uncertain revenue climate.
Nonprofit Libraries Under Contract
According to the 2017 IMLS dataset, there are 1,340 libraries whose legal structure is as a "nonprofit". In several states, nonprofit libraries are so embedded in the ecosystem that our sector has forgotten to distinguish them from libraries that are units of government (i.e. districts or municipal departments). But their legal structure and their relationship with the towns, cities, townships, or counties they serve (under contract) are significantly different than those of a unit of government. At some point in each state’s past, that state’s library laws formally classified nonprofit libraries that are functioning in the public interest as public libraries for the purposes of state aid, cooperative purchasing, and confidentiality laws. Be that as it may, these nonprofit libraries retained their nature as nonprofit corporations and their relationship with their municipality continued to be governed by a contract.
As contract partners with municipalities, nonprofit library leaders and boards of directors need to pay attention to the local revenue picture with the same attention as your colleagues in the municipal library world. While the contracts between municipalities and nonprofit libraries should continue to be honored, there will likely be a need to work within the municipality about the continuity of services. Likewise, there is a small but important possibility that library leaders need to plan for, which is that municipalities may slow-pay or otherwise look to breach a contract. There is very little recourse when the government chooses to unilaterally modify the terms of a contract. It is cautionary to remind ourselves that in the Great Recession, service providers across multiple sectors believed they had a valid contract and even fully performed it only to find out the municipality or state cannot be held liable for a breach. The contractor was not be paid or was paid on such a slow schedule as to threaten their stability or continuity.
If your nonprofit library is a registered 501(c)3 organization with the IRS, then it is potentially eligible for financial help through Small Business Administration programs that have been enacted or expanded in the CARES Act. The two most significant programs for nonprofit organizations are the Paycheck Protection Program and the Expanded Economic Injury Disaster Loan and Emergency Grants Program are discussed in a related EveryLibrary article. While the CARES Act (passed March 27) contains a number of provisions for state and local government, 501c3 nonprofit libraries have a specific set of financial reliefs that don't come through those government focused provisions. Nonprofit libraries are eligible for financial relief not because they are libraries but because they are nonprofit corporations.