Cuyahoga County’s sluggish sales tax intake reflects national trend

Data from the Urban Institute’s recent report on April state tax revenues showed sales tax revenues down year-over-year in 31 states in real terms, a decline the nonprofit think tank attributed to decreases in overall consumption and a shift by consumers from taxable goods to nontaxable services.

According to the report, 30 of 47 states reporting data also experienced a year-over-year drop in total state tax collections in real terms.

That slowing of consumption and shifting of spending patterns is impacting county and municipal governments, as well. Cuyahoga County, Ohio, is one example.

The county, centered around Cleveland, had been expecting a 4% increase in sales tax collections in 2024 after budgeting for 2% in past years. But collections are forecast to fall $9.8 million short of projections by the end of the year, according to the Cleveland Plain Dealer.

“After years of robust growth, sales tax revenues are either flattening or declining for various governments nationwide,” said Moody’s Ratings Vice President Coley Anderson. “This trend is not exclusive to Cuyahoga County.”

A report published Tuesday by Kroll Bond Rating Agency said state sales tax collections in eight of 10 states tracked by KBRA trailed inflation by 1% year-over-year in May. In Ohio, the growth in sales tax collections from February to April 2024 was 1%, compared with 2.5% over the same period in 2023.

“The fundamental factors affecting state tax revenues are likely to have similar effects at the local level,” said Lucy Dadayan, principal research associate at the Urban Institute. “Because consumers are spending less overall due to economic conditions or inflation concerns, this would affect both state and local-level sales tax revenues.

Cuyahoga County’s most recent publicly published revenue report covers the period ending in February; it said sales tax collections were down 0.2% year-over-year in the first two months of 2024.

The county issued $190 million of sales tax revenue bonds in 2022 for upgrades to Progressive Field, home to Major League Baseball’s Cleveland Guardians. In 2017, it issued $140.95 million of tax-exempt and federally taxable sales tax revenue bonds for the renovation of Quicken Loans Arena, home to the National Basketball Association’s Cleveland Cavaliers. 

Cuyahoga currently levies a 2.25% county sales tax on top of the 5.75% state sales tax. The county sales tax proceeds include 1.25% for the county, which secures the bonds, and 1% for the Greater Cleveland Regional Transit Agency.

According to official statements posted on the Municipal Securities Rulemaking Board’s EMMA disclosure website, annual debt service charges on those bonds are capped by sales tax receipt projections. Officials may not reduce any portion of the county sales tax pledged to the payment of debt charges on sales tax revenue bonds.

But the county may use other available funds besides the cooperative revenues (in the case of the 2022 bonds) or the bond fund and pledged special funds (in the case of the 2017 bonds) to pay debt service, according to the official statements.

The cooperative revenues for the 2022 bonds are composed of money from the county’s general fund; money from its Sports Facilities Reserve Account, which draws from the county’s bed tax collections; half of the city’s ballpark admissions tax revenue; a portion of city parking revenues; and additional rent from Gateway, the nonprofit that manages certain Cleveland sports facilities, including Progressive Field.

Debt service on the 2017 bonds is payable from county sales tax receipts; cooperative revenues drawn from the county reserve fund, among others; assigned contingent rent and assigned additional rent. 

“To my knowledge, the county has never defaulted on a single debt payment, and I have no concerns that this trend will change,” Cuyahoga County Councilman Patrick Kelly told The Bond Buyer. “I will be paying close attention to sales tax revenue and will work with the County administration to adjust expenditures if needed.”

The county started 2024 with an $11 million deficit which is likely to grow to around $16 million by the end of the year. That stems in part from overspending by the sheriff’s office due to hiring difficulties and high overtime costs.

But county council members have also noted that County Executive Chris Ronayne has increased staffing in his office in his first term to double historical spending levels, the Plain Dealer reported.

Kelly Woodard, director of communications for the Cuyahoga County Executive, said general fund cash reserves will cover any deficit in the general fund. The cash reserves are forecast to end the year $14 million above the required level, according to the Plain Dealer.

As for the increased staffing, she said the transfer of multimedia staff from the IT department to the County Executive’s communications department “was budget neutral,” and “other added positions were grant funded and do not impact the general fund.”

The county’s director of budget and management, Walter Parfejewiec, did not respond to requests for comment. But Parfejewiec reportedly told the county council’s Budget and Finance Committee that the sales tax revenue shortfall is “the biggest issue” in the county’s expected deficit. 

“Many local governments have narrower tax bases compared to states, which can make them more vulnerable to shifts in consumer spending patterns,” said the Urban Institute’s Dadayan.

The decline in consumption, she said, is driven by interrelated factors: higher interest rates, a higher cost of living, economic pessimism, the depletion of Americans’ savings, weakness in the labor market and a shift from discretionary buying to spending on non-discretionary items like gas and groceries.

The weak sales tax revenue trend is likely to persist in the near term, she added: “In fact, preliminary numbers for May 2024 indicate continued weakness in sales tax revenues.”  

But if the Federal Reserve achieves its hoped-for “soft landing,” and inflation eases, consumer spending may normalize, Dadayan said, and that may eventually bring a recovery in sales tax revenues.

In fiscal 2025, state and local governments will likely see modest growth, fueled by the normalization of post-pandemic revenue patterns, phasing out of temporary tax cuts and gradual economic stabilization, she said.  

S&P Global Ratings assigns its AAA rating to the 2022 sales tax revenue bonds. The rating agency rates the 2017 bonds AAA, as well. The outlook is stable.

The rating reflects S&P’s view of the strength and stability of the pledged revenues, which it said in its rating report are “sufficiently removed from the county’s control… to mitigate operating risk,” and the credit quality of Cuyahoga County. 

“The bonds’ lien on the 1.25% sales tax is on parity with the county’s other sales-tax-secured bonds,” S&P noted. “All sales tax revenue is pledged to the bonds and the debt service coverage remains very strong, in our opinion.”

While the bonds are secured only by sales tax revenue, S&P also pointed to the diverse sources of revenue used to pay debt service.

Moody’s assigns its Aa2 rating to the 2022 bonds and to the 2017 bonds. The outlook is stable.

“While the county has favorably covenanted to direct the State of Ohio state Tax Commissioner to directly transfer receipts first to the bond trustee, this does not achieve complete legal divergence,” Moody’s noted of both groups of bonds. 

However, the rating agency said, the rating also reflects Cuyahoga County’s large economic base, a strong 3.0x additional bonds test, healthy maximum annual debt service coverage and previously positive sales tax trends.

Moody’s analyst Anderson noted that the county’s Aa2 rating reflects high credit quality and “very low” credit risk.