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States and Localities Shouldn't Count on More Federal Aid

Mitch McConnell and other Republicans are opposed to further aid for states and localities. It looks like the Senate will stay in GOP hands, so prospects for relief next year have dimmed.

Senate Majority Leader Mitch McConnell has called a bailout of the states a bad idea. (Jon Cherry/Getty Images/TNS)
President-elect Joe Biden most likely will be dealing with a Senate led by Republican Mitch McConnell. That bodes ill for a lot of Democratic hopes, including major fiscal relief for states and localities.

It takes two sides to make a deal, so perhaps there's something Democrats can trade in exchange for more aid. But that's been the expectation for months now and McConnell hasn't budged.

“Sen. McConnell has put down the marker pretty strongly about why they think a bailout of the states is a bad idea,” says Jonathan Williams, chief economist at the American Legislative Exchange Council. “I tend to think that Senate Republicans will hold together and say there are more effective ways to spend money than to send it to state and local governments as a pass-through.”

State and local officials continue to sound the alarm about budgets. Collectively, they face shortfalls through 2022 in the neighborhood of $1 trillion – an estimated $434 billion among states; $360 billion for cities; and $202 billion for counties.

Although the economy has picked up since its spring meltdown, the need to address coronavirus-related problems remains dire, with caseloads increasing by upwards of 100,000 per day. And states and localities continue to see reduced revenues due to the decline in economic activity, including tourism and in-person transactions.

“We know that the need for local governments is in the hundreds of billions,” says Mark Ritacco, director of government affairs for the National Association of Counties. “Based on what we face today and based on what we face over the winter, that number” -- $1 trillion in combined losses – “was not unreasonable.”

Some Republicans have noted that the falloff in state revenues has not been as calamitous as projected back in the spring. “If you take a look at the revenue picture for most states from April through September, it’s not far off from where it was last year,” says Joe Coletti, a senior fellow at the John Locke Foundation, a free-market think tank in North Carolina.

But tax receipts have been propped up by the trillions spent by the federal CARES Act in March, including a boost to unemployment benefits that helped keep household spending and income levels afloat. Most of the federal stimulus dollars have either dried up or will by the end of the year.

“All along, we have underscored the reality that the pandemic has been a national emergency across the country, not merely because of an economic shutdown out of concern for protecting health and safety, but also because of the strain on state and local resources to mitigate or stop the spread of COVID – and also to keep communities going,” says Irma Esparza Diggs, director of federal advocacy for the National League of Cities.

State and local revenues will continue to decline. Tax revenues are a lagging indicator, meaning they reflect prior economic activity. Following the Great Recession, it took states years to recover to their 2007 revenue levels. Some never did.

States now face their biggest cash flow problem since the Great Depression of the 1930s. The Brookings Institution projects that state and local income tax revenues, for example, will decline by five percent this year, 7.5 percent next year and eight percent in 2022. Revenue declines, in other words, are going to be a multiyear issue.

“State revenues are inherently backward-looking,” says Tracy Gordon, a public finance expert at the Urban Institute. “People losing their jobs this year won’t show up (in terms of income tax revenues) until next year, unless they’re filing quarterly.”

But if states, cities and counties are facing a long-term problem, they now also confront a short-term problem and potential disappointment, due to the election results. The continuing Republican majority in the U.S. Senate doesn't have much interest in helping them out.

At a post-election news conference, McConnell said there was a need for further federal aid, but he specified supporting schools, hospitals and small businesses, not general governments. He called Friday’s jobs report, which showed unemployment dropping to 6.9 percent in October, a “stunning indication of a dramatic comeback of the economy,” suggesting that only limited, targeted stimulus was needed. 

That same report showed a continue decline in government employment.

Aid Is a Partisan Issue

There’s been an assumption through most of the year that Washington will come to the aid of states and localities, as has been the case during past recessions. In June, California passed a budget that included billions in cuts that would only take place if the federal government failed to provide sizable relief by Oct. 15. Needless to say, Congress didn’t meet California’s expectations or deadline.

Congress has failed to pass fresh stimulus legislation since March. The Democratic-controlled House has passed $1 trillion in aid to states and localities – roughly about the size of the combined budget shortfall they face – but Senate Republicans have resisted the idea. In April, McConnell suggested that cash-strapped states should declare bankruptcy rather than expect aid from Washington. “What he really was saying was that his preferred number for state and local relief was zero,” Gordon says.

Republicans have expressed two major objections. One is that they’ve already provided $150 billion in aid as part of the CARES Act. (Most of that money went to states, which they could share with localities, although local jurisdictions with populations over 500,000 received funds directly). Even now, all that money has not been spent.

The other is that they have no interest in helping out states they believe bungled their own finances. In August, President Trump tweeted that congressional Democrats “only wanted BAILOUT MONEY for Democrat run states and cities that are failing badly.” 

The reality is that states have balanced-budget requirements and, collectively, entered the year with rainy-day funds at an all-time high. In addition, the downturn in revenues was universal across states, not just those led by Democrats. 

But Republicans – including many state legislators and governors – maintain that blue states are seeking a bailout after mismanaging pensions and other programs. “There’s a fairness issue,” says Utah GOP Gov. Gary Herbert. “Some states need it and some states don’t need it, so does that mean we give more money to those who’ve been less fiscally prudent?”

Alex Brill, an economist at the American Enterprise Institute, says he doesn’t agree with his fellow conservatives who say that states and localities have mismanaged budgets and don’t deserve a penny. They may not need as big a cash infusion as they claim, he says, but providing assistance would help the larger economy, since state and local budget cuts are a drag (as they were during and after the Great Recession.)

“I really think a stimulus deal in August would have been a good idea, a stimulus deal in September would have been a good idea, a stimulus deal in October would have been a good idea,” Brill says. “I’m surprised they didn’t want to compromise on a package.”

In retrospect, House Speaker Nancy Pelosi may have misplayed her hand in the expectation that Democrats would win unified control in Washington. Last month, Treasury Secretary Steven Mnuchin was open to the idea of as much as $300 billion in state and local aid, but they couldn’t come to agreement. 

McConnell might not have signed off on that anyway.

“Most state budgets are not going to be as highly impacted as was initially supposed,” says Williams, the ALEC economist. “That does affect lobbying in Washington.”

Can They Make a Deal?

Not all Republicans oppose further aid. With revenues plummeting in his state, Louisiana Sen. Bill Cassidy cosponsored a bill to provide $500 million in state and local assistance. 

“We built support among Republican members in the Senate,” says Esparza Diggs, the NLC lobbyist. “There are members of the Senate that want to be able to get a package done, get that aid out the door and then move on to other pressing matters.”

It’s possible that the dynamics will change now that the political deck has been reshuffled. Long ago, Biden was a county official himself. As vice president, he oversaw the billions sent out to states and localities by the 2009 stimulus package. He will doubtless be more sympathetic to the idea they need help than Trump has been.

“I don’t think it’s a nail in the bailout coffin or relief coffin, but I do think that anything that comes out of Washington will be much closer to the limits that McConnell had discussed than was seen from the other side of the aisle,” says Michael LaFaive, who directs a fiscal policy program at the Mackinac Center for Public Policy in Michigan.

It would be possible to direct federal aid in ways that protect against states and cities shifting it to programs that have nothing to do with coronavirus response, says Gordon, the Urban Institute economist. “If you do the formula right, you don’t have to worry about money being used to shore up pensions or creating incentives for bad behavior,” she says. “If you thought that the CARES Act was a failure, then just design something better.”

Ritacco, the NACo lobbyist, says that counties would be perfectly content to see “guardrails” around any additional federal funds so that they go strictly to COVID-related expenses. But he notes that those costs will continue to rise through the winter, along with case counts, hospitalizations and deaths.

No one can say with certainty how the dangerous spread of the disease will affect the economy at this point. There appears to be no political appetite for measures as severe as the stay-at-home orders of the spring. But the economy is continuing to hurt even in states that never shut down, with individual and business behavior constrained by concerns about health. 

It’s possible that, for more aid to happen, conditions will have to get worse. And it may not even happen then.

“Quite frankly,” Brill says, “it’s going to be difficult for President Biden to move any legislation if he doesn’t control the Senate.”

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