States and local governments are gradually opening up after the coronavirus lockdowns, but most of them face a long and troubled fiscal road ahead.
With 20.5 million Americans unemployed and the nation approaching jobless levels not seen since the Great Depression, states and cities are experiencing a precipitous drop of tax revenues that exceeds early estimates.
California, the nation’s most populous state and one of its most prosperous, faces an unprecedented $54.2 billion budget shortfall despite entering the year with a hefty budget surplus.
On Thursday, Gov. Gavin Newsom (D) moved to close that gap with a scaled-down budget that cancels increases for education, health and other programs, utilizes rainy day funds and raises income taxes for some high-end firms by eliminating various tax credits.
Overall, the budget was reduced from $222.2 billion to $203.3 billion and the general fund, which excludes federal funds, from $153.1 billion to $133.9 billion.
The revised budget attempts to minimize the economic pain by using some of the federal money the state obtained from the Coronavirus Aid, Relief and Economic Security (CARES) Act to maintain summer school and public health programs.
But the budget can’t be balanced, as legally required in California and other states, without more help from the federal government. Two days before the revision Newsom joined Democratic governors of four western states — Colorado, Nevada, Oregon and Washington — in seeking $1 trillion of federal aid for “direct and flexible relief” in all 50 states.
Economist Ben Zipperer of the Washington, D.C.-based Economic Policy Institute said that widespread furloughing of workers in state and local governments are the beginnings of a huge contraction in the public sector.
The nation has nearly 22 million public sector workers, with 63 percent of them in local government and 23 percent in state government. The rest work for the federal government or the postal service, a quasi-federal agency.
Revenue losses in the states reflect soaring joblessness in the private sector. Public sector job losses will follow as states fall short in balancing their budgets — unless they receive a massive infusion of federal aid.
In 2010, a year after the Great Recession ended, 24 states reduced their work forces, observed Brian Sigritz, director of state fiscal studies for the National Association of State Budget Officers (NASBO).
California finance department officials said the Golden State faces an 18 percent unemployment rate, a nine percent decline in personal income and a 21 percent drop in new housing permits.
“This is a global pandemic,” Newsom said. “There’s not been an economy around the world that has been...immune.”
State tax revenues have dried up throughout the country amid quarantines that shuttered restaurants, sports arenas, movie theaters, gyms and nail salons. Here, listed alphabetically, are some of the developments in various states:
Florida Gov. Ron DeSantis (R) signed a tax package into law that creates sales tax holidays for school supplies and disaster-preparedness supplies even though sales tax revenues were down 25 percent. Florida, which has no state income tax, depends on sales taxes for 80 percent of its revenues.
Hawaii Gov. David Ige (D) proposed 20 percent pay cuts for teachers and other public employees. The Hawaii Legislature reconvened May 11, looking to cut $1 billion from an $8 billion general fund budget.
Illinois Gov. J.B. Pritzker (D) said his state will lose $2.7 billion in revenue this year and another $4.6 billion in fiscal year 2021 because of COVID-19. Pritzker estimated that at least $1 billion of this year’s shortfall is due to the shifting of the federal tax deadline to July 15.
Kentucky’s general receipts declined nearly $433 million, more than a third, with nearly 90 percent of the drop attributable to a decline in personal and corporate income tax revenues
Massachusetts revenue collections for April were $2.16 billion (52 percent) below estimates. The Massachusetts House unanimously passed a bill allowing the state treasurer to borrow money to fill spending gaps for the rest of the year.
New York Gov. Andrew Cuomo (D) said the state is expected to lose $13.l billion in tax revenue in fiscal 2021 and $61 billion over the next four years because of the coronavirus, of which the Empire State has been the epicenter. The New York Legislature has given Cuomo unprecedented authority to make budget cuts.
Ohio Gov. Mike DeWine (R) declined to draw upon the state’s $2.7 billion rainy day fund, which he said will be needed in future years. Instead, he announced immediate cuts in state spending totaling $775 million with the biggest reduction, $300 million, coming in aid for K-12 schools.
Fiscal actions in all of the 50 states can be found on News Flash, a monthly report on state finances issued by NASBO.
These revenue declines will have an enormous ripple effect on all levels of education. Colleges and most of the nation’s schools now teach online. The fall picture is cloudy with some colleges scheduled to open and others putting off a decision to June or July. But the California state universities, the nation’s largest four-year college system, has decided to conduct most of its classes online.
Moody’s Investor’s Service has downgraded its outlook for higher education from stable to negative, saying that financial consequences of the outbreak “could drive states to reallocate funding to other high-need impacted areas, such as health care, reducing available support for public higher education.”
The New York Times quotes Terry Hartle, senior vice president of the American Council on Education, as saying that “every college and university is facing an immediate cash flow crisis.”
Cash flow is also a problem for many of the 47 states that tax personal or corporate income or both. The federal action moving the filing date to July 15 has added to revenue uncertainties for the states.
But the biggest uncertainty — for the nation as well as state and local government — is how many of the jobs lost to the coronavirus shutdowns will become permanent.
When the monthly jobs report came out on May 8, President Donald Trump brushed aside the loss of more than 20 million jobs in April, saying “those jobs will all be back, and they’ll be back very soon.”
Many workers believe that too. A large majority of laid-off or furloughed workers — 77 percent — expect to be rehired by their previous employer once the stay-at-home orders in their area are lifted, a Washington Post-Ipsos poll found early this month.
But a new paper from the Becker Friedman Institute at the University of Chicago estimates that many of the layoffs will become permanent.
“Our best guess is something like 60 percent of the employment reduction is going to be temporary, and 40 percent is going to be permanent,” said Nicholas Bloom, an economics professor at Stanford University who co-authored the paper. “Looking through history at previous recessions, often these temporary layoffs unfortunately turn out to be permanent.”
In several past recessions the public sector sustained the economy as the private sector pulled back.
But this didn’t happen after the Great Recession, which began in December of 2007 and ended in June of 2009. Despite federal assistance amounting to $275 billion, states struggled to reach pre-recession revenue levels.
States did not reach 2008 inflation-adjusted revenue levels until 2019, Sigritz said.
This year states have received $150 billion in CARES funds, which governors of both parties have said is insufficient. Use of this money is tied to expenses related to the pandemic.
House Democrats, led by Speaker Nancy Pelosi, are holding conversations with the White House and skeptical Republicans about a bill to provide significant financial aid to states and local governments. But the White House wants to wait and see how re-openings in the states impact the economy, The Hill reported.
Judging by the budget numbers from California and other states, neither Congress nor the administration should wait too long.
- By Lou Cannon
States Project Big Pandemic-Related Revenue Declines
States could see revenue declines of as much as 15 percent (in Maryland and Massachusetts) in the current fiscal year because of the coronavirus pandemic, according to preliminary estimates compiled by the Center on Budget and Policy Priorities. The revenue outlook is even worse for FY 2021, which begins July 1 for most states, with drops of up to 30 percent (New Mexico) projected.