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Absent Fed Help, State Budgets Will Be the Worst in Decades

Already, thousands of state and local government workers have been furloughed or laid off. Falling revenues and soaring demand could lead to budget shortfalls of up to 40 percent, making help from Congress crucial.

Wyoming Capitol Building
Wyoming Capitol Building
Shutterstock/Henryk Sadura
Something’s about to happen in Wyoming that hasn't been the case since statehood, back in 1890. Given the drop in oil prices, it’s possible that by June not a single rig will be drilling for oil there. Meanwhile, the drop in electricity demand is slowing or stalling work at coal mines in the nation’s largest production state.

Add it all up and Wyoming’s government is facing a severe decline in revenues. “The pessimistic scenarios looking out over a two-year period show about a 25 to 30 percent drop in revenue,” says Wyoming House Speaker Steve Harshman. “That’s not something anybody’s ever seen.”

It may be unprecedented, but it may also become common. Around the country, states, cities and counties are seeing revenues fall through the floor, even as the demand for unemployment insurance and other services is rising fast. Already, furloughs and layoffs of government workers number in the thousands and budget shortfalls are being counted in the billions.

Moody’s Analytics, a financial research firm, projects that the shrinking economy could translate into a revenue drop for states of between $158 billion and $203 billion, or 18 to 23 percent. That’s in fiscal 2021, which begins on July 1 for most states. The variation is based on how soon the economy starts to open up. The longer it takes before people feel safe enough to congregate in offices, factories and shops, the worse the economic pain will be. 

On Saturday, New York Gov. Andrew Cuomo released a revised financial plan that calls for cuts of $8.2 billion in aid to localities, along with a 10 percent cut in state spending, absent direct federal help. Through 2024, Cuomo said, revenues will fall short by $61 billion. Revenue in California cities will decline $6.7 billion over the next two years, mainly due to dropoffs in sales and hotel taxes, according to a League of California Cities estimate.

Dan White, director of fiscal policy research at Moody’s Analytics, says if the economy remains mostly frozen through the summer, it could take six to seven years for the resulting job losses to be erased, a scenario he calls “unfortunately relatively plausible.” Combine the revenue cuts with the increase in service demand, he says, and “some states are going to see 30 to 40 percent of their budgets that need repairing.”

Given the magnitude of the problem, associations representing state and local governments are calling on Washington to provide anywhere from $250 billion to $500 billion in direct aid. The feds have already devoted some $180 billion to states and large cities, but those funds are dedicated to unemployment and COVID-19 response. The Treasury Department has made it clear states can’t use the money to balance their budgets.

Mitch McConnell, the Senate Republican leader, suggested on Wednesday that it would be better to allow states to go bankrupt (which is not legally an option) rather than bailing them out for bad fiscal management or to prop up their pensions. That may have been more a bargaining ploy than a firm position, but it’s clear that congressional Republicans are less eager to assist states and localities than Democrats.

There are bipartisan bills in Congress that would send $500 billion to states and localities. The size and scope of any fiscal relief package won’t be known until next month. But it’s clear states, cities and counties will struggle mightily to cut their way out of their budget problems, absent federal help. Tax increases will also be politically unpalatable in most places.

“No state has the financial wherewithal to make up for a prolonged loss of economic activity like we’ve been seeing for the last month,” says Laurence Msall, president of the Civic Federation, a tax policy organization in Chicago.

The upshot is that, absent federal help, state and local budgets will be in worse shape than anyone can remember.

“We can expect furloughs, layoffs and across-the-board cuts,” says Scott Pattison, a former executive director of the National Association of State Budget Officers. “In some states this will be, in percentage terms, the worst they have seen in decades.” 

Prepare for Some Bad Months

At this point, fiscal forecasts depend on economic forecasts, which in turn depend on the public health response. “With the economic forecast, the virus is driving the train here and we’re just passengers,” says White, of Moody’s Analytics.

For that reason, some states won’t even try to write budgets for fiscal 2021 until the last possible minute, hoping at least to gain a better sense of the damage they’re dealing with. “We have decided to wait until mid-June to do our budget,” says Mississippi House Speaker Philip Gunn. “I’ve advised my members to prepare their minds for some bad months.”

Georgia Gov. Brian Kemp allowed more businesses to reopen on Friday, but the Legislature likely won’t meet again until June 11, when it can have April revenue figures in hand. “To try to go in during May would be like trying to throw darts when you’re blindfolded,” House Speaker David Ralston told the Atlanta Journal Constitution.

Attempting to predict where revenues might end up is like trying to catch a falling knife. Last month, even before many local businesses had shut down, Seattle forecast revenue shortfalls of $110 million, or 7 percent of its general fund budget. On Tuesday, Mayor Jenny Durkan said the city is now looking at shortfalls of $210 million to $300 million.

Los Angeles is looking at a decline of $231 million just between now and the end of June. Its shortfall next year could be $598 million. San Francisco is projecting a shortfall of up to $1.7 billion over the next two fiscal years. New York Mayor Bill de Blasio is calling for budget cuts of “at least” $1.3 billion.

“There’s not a clear measure of where the bottom is,” Msall says. “This is really only the first few weeks of unprecedented stopping of state and local economies, which was necessary to stop the spread of the disease.”

From Good Shape to Reshaped?

States and local governments entered the pandemic period in good financial shape, thanks to the prolonged economic expansion. States began the year, collectively, with some $72 billion in their rainy-day funds, which amounted to a much larger percentage of their budgets than was the case prior to the Great Recession. 

But it still won’t be enough to fill their widening budget holes. “We had filled our rainy-day fund. For the current fiscal year, we were running about $200 million (in collections) over estimate,” says Gunn, the Mississippi speaker. 

That surplus, and more, will soon be gone, he says.

“This is a rainy day right here,” Gunn says. “This is why you have a rainy-day fund.”

Louisiana ended fiscal 2019 with a surplus of $534 million. Given its declining revenues, not least from oil, a shortfall is inevitable. In fact, says White, the combination of declining revenues and increased spending due to COVID-19, unemployment and other costs means Louisiana could see a shortfall amounting to 40 percent of its budget. “That’s so far beyond the realm of normal, you almost can’t fathom it,” White says.

In such a scenario, layoffs and normal-range spending cuts won’t be enough, especially given the need to keep funding Medicaid and the political demands to maintain funding for K-12 education.

Jeffrey Sadow, a political scientist at LSU Shreveport, notes that the state patched budget problems in prior years through tax increases. That won’t happen again in “the most hostile legislature ever to that idea,” he says.

For Louisiana to put its fiscal house in order, Sadow says, the state will have to reshape itself. “This may create the greatest opportunity in the state’s history for fundamental fiscal reform that will focus more on reducing state government than in searching for new revenues,” he says. “The state never will get past its budget problems until fundamental reform occurs.”

That points to the political question now looming in Congress and elsewhere. Do hard times mean that states and localities need to rethink their entire missions and do less with less — much less — or would the resulting drop in spending and employment be too great a drag on economic recovery? Not to mention the implications for delivery of services.

“Even the states that are really well-prepared are going to be overwhelmed by the sheer size of this thing,” White says. “It’s not like anything we’ve seen before and it’s not something we’re likely to forget anytime soon.”

Alan Greenblatt is the editor of Governing. He can be found on Twitter at @AlanGreenblatt.
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