Democratic victories in the Senate runoff elections in Georgia have reopened a pathway for federal aid to states and local governments.

These elections produced a 50-50 tie in the Senate, which Vice President-elect Kamala Harris will be able to break in favor of the Democrats.

“This has increased the likelihood that Congress will pass legislation providing federal assistance” said Erlinda Doherty, director of the budgets and revenue committee for the National Conference of State Legislatures (NCSL).

This bright prospect for the states comes against the backdrop of the impeachment of Donald Trump in the final days of his presidency.

Democrats accuse Trump of inciting supporters who violently stormed the U.S. Capitol on January 6 in an attempt to prevent Congress from ratifying the electoral victory of President-elect Joseph Biden. Five people, including a Capitol police officer, died.

Mounting Job Losses

Two days after this mob action, the Labor Department reported that employers cut 140,000 jobs in December, capping the worst year of U.S. job losses since World War II. In all, more than nine million jobs were lost during 2020, including 1.4 million jobs in state and local government.

This loss of government jobs reflected budgets that have been hollowed out by a precipitous decline in sales taxes and other tax revenues because of the COVID-19 pandemic. Unlike the federal government, most states and cities are required to balance their budgets.

State general fund spending in fiscal 2020 is projected to decline $10.2 billion after nine consecutive years of budget growth with greater declines expected in fiscal 2021, said Kathryn White of the National Association of State Budget Officers (NASBO).

This is the first state budget decline since the Great Recession of December 2007 to June 2009.

“Weakening revenue projections resulting from the COVID-19 recession led states to reduce general fund spending by 1.1 percent compared to fiscal 2020 and by 5.5 percent compared to governors’ budgets proposed before the pandemic,” NASBO said in its annual report on state finances.

The National League of Cities estimates the pandemic will cost cities $360 billion in lost revenue between 2020 and 2022. The National Association of Counties estimates a $202 billion budget impact during the same time period.

Because of the revenue gaps, these organizations joined with the NCSL and the National Governors Association in attempts to win congressional approval of up to $500 billion in federal aid to states, cities, counties and tribal governments.

The Democratic-controlled House in 2020 twice passed bills that included such aid, but the Republican-controlled Senate rejected them.

Even after the state and local request for federal aid was whittled down to $160 billion in December, it remained anathema to Republican senators. Because of GOP opposition, state aid was dropped from the bipartisan $900 billion stimulus bill approved last month by Congress.

New Jersey Gov. Phil Murphy (D), noting that his state had borrowed billions of dollars in anticipation of an expected $20 billion decrease in state revenue, called this decision “unfathomable.”

His criticism was echoed by governors of New York and Connecticut and by the mayors of New Orleans, San Francisco and other cities.

While Limited, Current Aid Package Will Help

But while states did not get the direct budget aid they were seeking, Congress did not completely abandon them.

The $900 billion stimulus bill includes $7 billion in grants to states for testing and tracing the COVID-19 virus plus $3.42 billion for vaccine development and distribution.

The legislation also includes $1 billion for technology modernization and fraud prevention in state unemployment systems.

The latter provision is of particular importance to California, where the state unemployment system has been ridden with massive fraud and incompetence.

States and cities will also benefit from billions included in the stimulus bill to help education funding, public transit, broadband and rental assistance.

The Fitch Ratings service said these provisions will help stabilize state and local budgets even without direct aid to state and local governments.

“However, the new bill’s ability to stem recent economic declines and related effects on tax revenues is not assured and depends upon increased business and consumer confidence, which is influenced by vaccination rates,” the Fitch report said.

This month consumer confidence has been jolted by the slow pace of vaccinations amidst a surge of the coronavirus and by the Labor Department’s jobs report. This report “pretty much” ruled out the V-shape recovery Trump had predicted, wrote New York Times senior economics reporter Neil Irwin.

The leisure and hospitality sector, already reeling, was particularly hard hit, losing 498,000 jobs in December as governors responded to the surging pandemic with widespread shutdowns.

As Irwin observed: “Consider what that number represents: countless restaurants, hotels, and performance stages and arenas shuttered; and hundreds of thousands of people back on the jobless rolls and unsure when they’ll be able to resume work.”

These shutdowns further reduced sales tax revenues, which account for nearly a fourth of state income.

Help could be on the way from the incoming Biden administration.

Biden responded to the Labor Department report by saying “there was a dire, dire need to act now.”

To that end,last Thursday he proposed a $1.9 trillion COVID-19 relief package that would include $350 billion in aid to state, local and territorial governments. The package, which would need Congressional approval, would also include $1,400 checks to many Americans as well as boosting unemployment benefits by $400 per week.

Biden has been making similar promises since he was elected, but his chances of keeping them improved notably when the Democrats won the Senate runoffs in Georgia.

The resulting 50-50 tie that Vice President-elect Harris will break will allow the Democrats to organize the Senate and should enable Biden to win confirmation of his cabinet and other appointments.

But on a day-to-day basis, a tied Senate is not the same as one in which a party has control, wrote Richard Cohen, chief author of the Almanac of American Politics.

Cohen pointed out that vice presidents have other duties than presiding over the Senate, and Biden has said he will make extensive use of Harris.

The last time there was a tied Senate — a five-month period in 2001 — Vice President Richard Cheney (R) was called upon to break only two ties as moderate senators of both parties worked together to bridge differences.

If such cooperation occurs again in this more polarized era, a 50-50 Senate could be “perfectly tailored” for Biden, who served 36 years in the Senate and has promised a bipartisan approach, Cohen wrote in the Cook Political Report.

There are already tentative signs of such cooperation. Senators Susan Collins (R-Maine) and Joe Manchin (D-West Virginia) played key roles in jump starting the negotiations that led to the $900 billion stimulus bill last month.

Independent Senator Angus King of Maine said on 60 Minutes that he anticipates such cooperation in the coming Congress, mentioning himself, Collins and Manchin among senators who would try to find common ground.

Biden has promised increased federal spending on health and education programs and massive efforts to combat climate change and racial and social inequality. He has also pledged an economic development plan driven by federal investment.

What would this mean for states?

Biden’s vision, if enacted, is likely to provide states with more funding but also bring additional federal oversight, according to Deloitte, a consultancy.

The Deloitte report said that Biden has proposed that federal transportation block grants to states be made contingent on plans for inclusionary zoning and that other federal funding be linked to state and local progress toward various environmental goals.

States and cities will appreciate the federal funding more than the oversight that will accompany it.

But with coffers laid bare by the pandemic and business lockdowns, they will welcome whatever federal funding they can get.

-- By Lou Cannon

 

States Expecting Sharp Revenue Drops in FY 2021 Due to COVID-19

Many states are facing major revenue declines this fiscal year as a result of the coronavirus pandemic, according to a report from the Center on Budget and Policy Priorities that was last updated on Nov. 6, 2020. As of that date 11 states were expecting revenue declines of 6 percent or less in FY 2021 (which began on July 1, 2020 and ends on June 30, 2021 for most states). But most states were expecting larger declines, with 13 projecting drops of up to 15 percent or more.