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States and Cities Continue Plunge into Financial Black Hole

States face revenue shortfalls exceeding 20 percent. Cities and counties have furloughed hundreds of thousands of workers. Already, public employment has fallen more than during the Great Recession.

State and local officials are well aware that they face the most dire fiscal circumstances in decades. They still don't know just how bad it will be.

In Minnesota, a surplus of $1.5 billion turned into a shortfall of $2.4 billion within two months. The freefall may well continue. “It’s the uncertainty that is so difficult,” says Minnesota House Speaker Melissa Hortman. “We’re all anxious because we know it can get way worse.”

Minnesota's problems are almost universal. States collectively are facing revenue drops of more than 20 percent. The Center on Budget and Policy Priorities, a liberal think tank, projects that state budget shortfalls will total $765 billion over the next three years. That’s an increase from other recent CBPP estimates of shortfalls totaling $500 billion, then $650 billion.

At least one city is publicly flirting with bankruptcy. State and local government employment has plummeted to levels that are lower than any point during the Great Recession. Already, nearly 1 million positions are vacant. Half the job losses are in education.

In contrast to other recent recessions, public safety workers are not immune. The furloughs are extending to police and fire departments and, perversely during a pandemic, health workers. “To us, cuts in public safety signal a canary in a coal mine,” says Christiana McFarland, research director for the National League of Cities (NLC). “If we’re already seeing cuts in public safety, the situation is pretty dire.” 

Most forecasters are projecting a sharp uptick in economic growth this summer, following the coronavirus-induced cliff, but no one can be sure of the size of the possible rebound. Another round of federal aid may come, but there's no guarantee at this point.

All that adds up to spending cuts. Already, nearly 1 million state and local jobs have been lost. Public employment at those levels has already dropped lower than at any point during the Great Recession. It's possible that far worse is yet to come.

“Cities are extremely hopeful that the federal government will support them,” McFarland says, “but they can’t wait because it’s so uncertain at this point.”

For and Against a Bailout

On May 15, the U.S. House narrowly passed a stimulus package known as the HEROES Act, which includes more than $1 trillion in aid to state and local governments. Less generous but still hefty packages have been introduced in the Senate, but it’s not certain how much additional support the chamber will approve, if any. President Trump has also expressed skepticism about a bailout. The administration, though, is considering allowing states more flexibility in how they can use federal aid funds from the earlier CARES Act.

More than 150 state legislators signed a letter circulated by the conservative American Legislative Exchange Council arguing against additional federal dollars. ALEC contends a bailout would reward profligate states at the expense of those that have been more prudent. Past bailouts, according to the letter, have led to increased dependence on the feds while ultimately increasing state taxes because of higher spending levels.

“These are very trying times for budget writers and appropriators, there’s no doubt about it,” says Jonathan Williams, chief economist for ALEC. “For those who believe in state autonomy, while these are difficult times, don’t overly rely on the feds, because then we see the strings come out.”

Separately, 43 Wisconsin legislators wrote to the state’s congressional delegation, urging them to oppose a federal bailout. "Wisconsin taxpayers should not be responsible for funding bailouts for irresponsible states across the country, like Illinois, New York and California,” they wrote.

Most state and local groups, including NLC, the National Governors Association and the U.S. Conference of Mayors, are pleading with Congress to provide fiscal relief. Budget pain is universal and, while states and localities entered the year with record reserves, they will not be able to balance their budgets, in the absence of federal support, without severe cuts.

State and local spending represents nearly a fifth of GDP. Deep cuts could create a sizable drag on the economic recovery. Every dollar cut by states during the Great Recession reduced economic activity by $1.70, according to a Harvard study published last year.

For that reason, officials at the Federal Reserve have called on Congress to offer fiscal aid. A group of 100 California business leaders, including top brass at Disney, Salesforce and Netflix, have signed a letter supporting $1 trillion in federal aid.

Furloughs at the Local Level

In April, retail sales dropped by 16.4 percent, on top of an 8.3 percent drop in March. The percentage point drop in sales tax receipts was actually worse, since many essential goods are not taxed.

The situation is especially dire in places that are heavily dependent on tourism. Clark County, Nev., which includes Las Vegas, is projecting a 52 percent drop in revenue, or $118.1 million, in the last three months of its fiscal year, which ends June 30. The seaside town of Monterey, Calif., has eliminated 106 positions, including 24 vacancies, to save $11.3 million.

Pain is prevalent everywhere. Dallas has furloughed 472 workers, mainly in parks, libraries and cultural departments. Louisville has furloughed 380 workers and may have to let more go, as it faces a shortfall of $46 million in its current fiscal year ending June 30. Among its 1,700 furloughed workers, Cincinnati has let go 36 percent of its health department staff. 

Facing a shortfall of $3.5 million, or more than 10 percent of the city budget, Vicksburg Mayor George Flaggs Jr. says his city may file for bankruptcy. “To lose the kind of revenue that we have lost has not happened in the history of this state,” he told the Vicksburg Post. “I don’t know a city or a county in this state that has not been devastated by the loss of revenue.”

Serious Shortfalls at the State Level

Eye-popping revenue drops of up to 40 and 50 percent at the state level in April, compared with last year, may have been a bit misleading. Normally, states collect about 15 percent of their annual revenues in April, due to income tax filing deadlines. Since most states have moved the deadline back to July 15, they’re hoping they’ll still see an influx.

But they know that mass unemployment has taken its toll. Michigan is facing a gap of $3.2 billion. New York is projecting $31 billion in lost revenue in its current fiscal year, which began April 1. California is projecting a shortfall of $54 billion. 

Even as tax collections plunge, some expenses are increasing. Prior to the pandemic, Maryland was paying $7 million per week in unemployment benefits. Now, it’s paying out $170 million per week, according to state Labor Secretary Tiffany Robinson.

In Oregon, state agencies have been ordered to come up with plans to cut their budgets by $1.8 billion. Agencies in Georgia must save twice that number — $3.5 billion, or 14 percent, with “no exceptions,” as a memo from Gov. Brian Kemp and legislative leaders put it.

States ended fiscal 2019 with $72 billion in reserves, representing a substantially higher percentage of their general funds than their rainy-day accounts going into the last recession. State-issued debt dropped in 2019 by 0.8 percent, according to Moody’s, while median debt service costs fell by 3.8 percent, decreasing for the sixth straight year.

But states are entering this apparent recession with pension costs higher as a share of their budgets than was the case in 2008.

Still Finding the Bottom

New Jersey and South Carolina have pushed back the start of their fiscal years until September, hoping the picture will get brighter or at least they’ll have a firmer grasp of the budget situation they face.

For most states, cities and counties, the normal July 1 start of their fiscal years is coming up fast. They’re hoping that Congress will act before then, to spare them from making the most drastic cuts.

Mississippi at one time anticipated a $200 million surplus. Legislators know they’re going to come up short. “I’ve advised my members to prepare their minds for bad months,” says House Speaker Philip Gunn.

He is putting off writing next year’s budget until mid-June, so the Legislature will have the latest possible set of revenue numbers available from May.

“Nobody knows what to expect,” Gunn says. “For that reason, we have to be extremely cautious.”

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