Federal aid to state and local governments should rely on real numbers

Federal aid to state and local governments should rely on real numbers
© Greg Nash

The $3 trillion Heroes Act has passed the House of Representatives and awaits a vote in the Senate. The law would provide $1 trillion of federal aid to state and local governments. This aid would be on top of the $150 billion provided to state and local governments to cover direct costs related to COVID-19. The new federal aid would be used to make up for tax revenue that state and local governments are losing during the current crisis. Some people estimate the revenue loss for states alone will be between $500 billion and $650 billion

But all of these estimates are educated guesses, and nobody knows exactly how much state and local governments are going to need. We are in uncharted territory. Estimates could possibly be made based upon data from the Great Recession and its recovery; however, the current shock to the economy is a lot worse than that of the Great Recession, and nobody knows what the recovery will look like.

Some say it will be a very flat recovery. On the other hand, if a vaccine produces promising results or there is a miracle cure, the economy could come back quicker and stronger than most predict. But what happens to the economy and state and local government tax receipts if the virus comes back in the fall?

ADVERTISEMENT

Instead of basing the federal aid packages on educated guesses, if Congress is going to provide aid to the governments, the program should be based upon actual revenue losses. All the states, except California, have issued their fiscal year (FY) 2019 audited financial reports, and cities are in the process of producing their FY 2019 reports. The federal aid should be based upon the actual revenue amounts reported in these audited statements. 

Each government’s revenue shortfall can be determined by comparing the revenue earned each quarter based on their FY 2019 reported amount and the current quarter’s earned revenue. The shortfall would be the amount of federal aid the government would receive for that quarter. The federal aid would not cover revenue losses that result from state or local legislative measures, such as tax cuts. The program would be for a two-year period with the first reporting quarter beginning April 1, 2020. 

FY 2019 earned revenue would be derived from each government’s Statement of Revenues, Expenditures and Changes in Fund Balances for Governmental Funds, which include the general fund, special revenue fund and governmental debt service fund. Federal revenue should be excluded from the calculation because that money will be received from other federal programs. 

For example, the state of New York’s FY 2019 audited governmental funds statement reported revenue of $165 billion for the year, including $64 billion in federal revenue. This means $101 billion would be the FY 2019 baseline revenue. For this example, we will assume that approximately one-fourth of the baseline revenue, $25 billion, was received between April 1, 2019 and June 30, 2019. In July 2020, the New York comptroller will calculate the actual revenue earned between April 1, 2020 and June 30, 2020. Let’s say that amount is $20 billion. Then the state would receive federal aid in the amount of $5 billion to make up for the actual shortfall. 

If Congress is going to provide aid to the states and cities, the program should not be based upon sloppy, logical educated guesses or politically driven projections. State and local governments should receive the actual amount they need based on last year’s reported numbers.  

Sheila A. Weinberg is the founder and chief executive officer of Truth in Accounting, a nonprofit government finance watchdog organization in Chicago, Ill.