Shadow Revenue

by Patrick Scott, senior vice president of operations, Avenu Insights & Analytics

Running a local government during an economic expansion can be straightforward. Pothole repairs and other visible needs happen faster, and more attention goes to behind-the-scenes functions like long-term planning.

But this time is different. Now in the eighth year of one of the longest economic growth periods in history, local governments are struggling. Recent research from the National League of Cities shows that local revenue grew only 1.25 percent in 2017, while expenses grew 2.16 percent. And since 2010, 61 localities have declared bankruptcy. Finding the funds to support critical programs and services is one of the primary functions of city and county leadership.

Interestingly, funds are available. In fact, in many cases, they are “shadow revenue” funds that jurisdictions are already owed.

Transient or mobile businesses, unlicensed contractors providing services, and rental income that’s subject to business tax are revenue streams that are not used to the fullest extent. Increasing compliance creates a new and sustainable revenue source.

Take Richmond, California, for example. In 2003, to earn back shrinking revenue, the city passed an ordinance classifying rental properties as a business and requiring them to pay business license fees. As demand and supply skyrocketed for affordable Bay Area housing, there was no corresponding increase in business license fees for the East Bay suburb. Garages and in-law units had been converted into full rental living spaces without going through the permit process or paying the fee. Efforts to contact delinquent property owners received little to no response, and the few who did claimed they were not aware of rental requirements.

Not being able to take full advantage of a revenue source is frustrating for leadership of any community. In Richmond, city leaders engaged an outside firm to take over the revenue discovery and recovery effort because staff had too many higher priorities to chase the property owners, and the shortage was starting to impact service delivery, too.

Through a collaborative effort with city staff, the team identified all rental properties and property owners and alerted the ones not in compliance. Through consistent, professional outreach and meetings, the team raised awareness of proper licensing requirements and increased voluntary compliance among the landlords. Nearly 2,800 previously unlicensed businesses were identified, which allowed Richmond to collect more than $2.2 million of this shadow revenue. Through ongoing efforts, the city anticipates a $360,000 annual increase in business tax revenue.

Making the most of revenue sources will only become more important when the current bull market comes to a close. Jurisdictions will need to maintain the baseline services and plan on more residents taking advantage of mental health and other services that typically see an increase during poor economic times. And, cities and counties always have to consider budgeting for rainy day funds and longer-term liabilities that can compound a small problem into a bigger one.

A combination of creativity and the right partnerships can find some of the necessary revenue and soften the impact of the next economic downturn.

Avenu Insights & Analytics, an ICMA Strategic Partner, offers revenue enhancement and administration solutions for towns, cities, and counties.

Related Resources

ICMA Volunteers Share Leading Practices for Revenue Generation. This 2018 article details work ICMA members did in the Philippines sharing best practices in revenue generation.

Franchise Fees: An Important and Sometimes Untapped Source of Local Government Revenue. In a 2018 blog post, the focus was on franchise fees and how local governments can create revenue from the fair and consistent collection of said fees.

Shoring Up Local Government Revenues. This 2014 Public Management (PM ) magazine article looked at ways local governments were responding to the financial crisis regarding raising revenue.  

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