State Watch

States brace for massive budget gaps in coronavirus recession

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State governments have spent a decade stockpiling billions of dollars in reserve funds for the next economic downturn, scarred by the steep cuts they were forced to make in the midst of the last recession.

Now, with the coronavirus grinding the global economy to a virtual halt, those billions could be gone in a matter of months.

State and local experts say the coming months will be a bloodbath for governments that are required by law to maintain balanced budgets. They will be forced to choose between steep and painful cuts to social programs that are already underfunded or tax hikes at a time when millions of people will be unemployed.

“States are very limited in the options available to them,” said Jeff Chapman, director of the state fiscal health project at The Pew Charitable Trusts. “States have to balance their budgets, so when revenue falls precipitously like it is now they’re going to have to either raise taxes or cut spending. And both of those options are bad for the economy.” 

Adding to their plight, states are already forking out tens if not hundreds of millions of dollars to fight the spread of the coronavirus in the short term.

State legislatures have proposed or appropriated at least $1.4 billion in short-term funding to fight the virus, according to data compiled by the National Conference of State Legislatures. 

That does not include legislation that provides billions more that can be spent at a governor’s discretion; the California legislature alone has given Gov. Gavin Newsom (D) the authority to spend a billion dollars beyond what has already been appropriated, if he deems it necessary.

Congress has taken early steps to send money to the states. A provision in the Families First Coronavirus Aid Package measure, signed into law last week, included $1 billion for state governments. President Trump’s emergency declaration will make $50 billion in emergency funding available. The stimulus package unveiled late Wednesday would include another $150 billion for state and local governments and $8 billion for local governments specifically.

Before the onset of the coronavirus, state budgets had enjoyed one of the longest streaks of healthy growth on record. Tax revenues were rising, especially in states that rely heavily on capital gains taxes. Sales taxes grew uninterrupted since the first quarter of 2010, according to Lucy Dadayan, an expert on state fiscal health at the Urban Institute.

While it will be months before states release revenue data from the early days and weeks of the coronavirus epidemic in the United States, there is already evidence of a substantial downturn.

The indicators range from the mundane — West Virginia is losing $9 million every week after closing its casinos and lottery services — to the deadly serious: Rhode Island has been forced to borrow $300 million just to meet cash flow.

States have already started dipping into their reserve funds. Newsom on Wednesday authorized transferring $1.3 billion from one of California’s reserve funds to purchase supplies and equipment that will treat patients and protect health care workers responding to the coronavirus outbreak, said H.D. Palmer, a spokesman for the California Department of Finance.  

Governors in Arizona, Georgia, Maine, Maryland, Nebraska and Washington have all approved measures to tap into rainy day funds, and the governors of Pennsylvania and Idaho have bills on their desks.

The coming recession is likely to put a long-term squeeze on state budgets, because most states rely heavily on the types of tax revenues that shrink in times of economic downturn. Thirty-one states rely on income taxes as their greatest sources of revenue, which are reduced when fewer people have jobs. Fifteen states rely most on sales taxes, which decline when people spend less money. 

States like California and New York take significant hits when the stock market craters, because those states rely so much on capital gains taxes to fund their budgets. During the last recession, the market tanked for such an extended period that California ran multi-billion-dollar deficits for years, culminating in a more than $20 billion deficit in 2011-2012.

And while California has socked away more than $20 billion in its reserve fund, not every state has been as prudent. A third of all states have less in their reserve funds than they did before the last recession, Chapman said — and even the two-thirds that have more on hand now than they did a decade ago may not have enough to cover what could be a painful contraction.

“Rainy day funds today are a real success story for states. In the last few years in particular states have really focused on building them up,” he said. “Whether it’s enough is another question.”

Even city governments are beginning to worry about the fallout from the coronavirus and its economic shock. Officials in Seattle estimated the city would lose up to $100 million in revenue after they became the epicenter of the first outbreak in the country.

A survey of local government officials by the National League of Cities found half expected to have to draw down financial reserves within the next six months. A quarter predicted they would have to cut services, and a quarter thought they would have to lay off staff.

Brooks Rainwater, director of the Center for City Solutions at the National League of Cities, said local governments bear the extra burdens of caring for their businesses and vulnerable populations, and they must do so without the guarantee that their state or the federal government will reimburse those costs.

“Scientists and doctors are making it quite clear that in order to flatten the curve that we need to take action, and city leaders are on the front lines of efforts to stem the health crisis caused by Covid-19,” Rainwater said. “City leaders have been especially focused on supporting vulnerable populations during this time with cities enacting eviction moratoriums, temporarily stopping utility shutoffs, and funding or coordinating food and medicine delivery.”

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