by Sean Slone, CSG senior policy analyst
As states and cities are passed over for funding in the latest federal stimulus package, many of them are coming to grips with the sort of havoc the coronavirus pandemic is wreaking on their budgets. While there will certainly be a clearer picture of those numbers in the months to come, the preliminary estimates are devastating enough to prompt a variety of conversations about what actions may be needed to address those impacts.
Raymond Scheppach of the University of Virginia writes in a recent analysis piece that a number of factors will put states and their governors in difficult budget situations this year: a collapse in tax revenues caused by the drop in economic activity, a quick evaporation of state rainy day funds and other surpluses (they collectively have about $113.2 billion on hand — an all-time high), an explosion in Medicaid spending, the need to cut spending and eventually increase taxes, and the need for substantially more assistance from the federal government to supplement the $150 billion made available to state and local governments as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act.
State leaders have called on Congress to allocate an additional $500 billion as part of a future stimulus package. The Center on Budget and Policy Priorities has suggested that even more fiscal relief could be needed as the full picture of fiscal devastation emerges. President Trump has said he favors more federal aid to states in a later bill.
But that additional aid could be hard to come by if Senate Majority Leader Mitch McConnell’s comments are any indication. McConnell suggested to conservative radio host Hugh Hewitt that states facing steep shortfalls could instead consider filing for bankruptcy, The New York Times reported. Members of McConnell’s staff subsequently suggested in a news release that the motivation behind the comment was to stop bailouts of pension systems in heavily Democratic states such as California, Illinois and New York that have been among the hardest hit during the pandemic. The comments immediately drew the ire of New York Gov. Andrew Cuomo, who said the bankruptcy suggestion was “one of the saddest, really dumb comments of all time.” Maryland’s Republican Gov. Larry Hogan, who chairs the National Governors Association, called the “blue state bailout” claim “complete nonsense,” Axios noted.
As policymakers await the resolution of that ideological battle, The Pew Charitable Trusts reports that states are taking a variety of initial actions to face their fiscal realities. Among them:
- At least 15 states and the District of Columbia have frozen hiring or taken other immediate action to restrain spending.
- At least 12 states have moved to tap rainy day funds. According to the Tax Foundation, Wyoming, Alaska, North Dakota and New Mexico have the biggest reserves proportional to their government obligations (Wyoming could reportedly go more than a year just on its emergency reserves). Kansas and Illinois have the smallest rainy-day funds.
- At least 10 states have drawn from savings or paved the way to more easily access funds.
- Some states have reversed plans to spend revenue surpluses on building projects.
- New Jersey, New York and Rhode Island have looked to borrow funds.
Even as they have been spending millions of dollars in recent weeks to combat the virus and shore up resources, many states and municipalities have faced the added challenge of trying to create new spending plans using revenue projections that are now hopelessly out of date due to the economic shutdown. Some have had to make budget cuts with just weeks left in the current fiscal year just as the demand for government services was rising. Complicating matters for states: many of them have postponed income tax filing deadlines, which has made estimating state revenues even more difficult. Some states have been able to get creative, however:
- Given the uncertainty, Kentucky lawmakers in early April passed a one-year status quo budget rather than its regular two-year spending plan, The (Louisville) Courier-Journal reported. They plan to pass a new budget during the 2021 annual session once the full effects of the pandemic are known.
- New Jersey officials hope they’ve come up with a way to buy time as they assess the state’s revenue picture. Gov. Phil Murphy signed legislation earlier this month extending the deadline for paying personal and business taxes to July 15 (from April 15) but also extending the state’s fiscal year-end to September 30 (from June 30). The governor is required to file a revised budget proposal for FY 2021 by August 25, Pensions & Investments reported.
- Washington Gov. Jay Inslee used his line-item veto authority on 147 expenditures totaling $235 million in a supplemental operating budget approved by legislators in March, Route Fifty reported.
- Nevada Gov. Steve Sisolak asked state agencies to prepare for up to $687 million in cuts to the state budget over the next two years, according to The Nevada Independent.
- As New York was beginning to experience some of the most difficult days of the pandemic earlier this month, the administration of Gov. Andrew Cuomo was also contemplating the parameters of the state’s budget. The governor’s budget director, Robert Mujica, projected a revenue decline of between $10 billion and $15 billion for the coming fiscal year. Cuomo and state lawmakers struck a deal to enact a budget that cuts billions of dollars a year from the state’s Medicaid system and other social programs, HuffPost reported. The state, which faced a $7 billion budget gap even before the pandemic hit, plans to look at revenues throughout the year and make additional cuts as needed. In recent days, Cuomo has suggested that 20 percent budget cuts for schools, local governments and hospitals could be needed if the state doesn’t receive a federal infusion of cash.
- In early April, Missouri Gov. Mike Parson announced $180 million in restrictions to the state budget including reductions in funding for the departments of higher education and workforce development, transportation, natural resources and economic development. Parson predicted a $500 million shortfall for April, May and June, according to KRCG-TV.
- At the end of March, New Mexico lawmakers were already concerned about a huge budget hole that was getting bigger quickly, The Santa Fe New Mexican reported. Senate Finance Committee Chairman John Arthur Smith, who had predicted in mid-March that state revenue would fall $1 billion short of projections, said two weeks later that the number was likely closer to $1.5 billion or $2 billion due to the pandemic and low oil prices. Gov. Michelle Lujan Grisham has reportedly told lawmakers a special legislative session likely will be necessary this year to shore up the budget once revenue estimates and the impact of federal assistance become clearer.
- The crash in oil prices combined with the challenges presented by the coronavirus have also taken a toll in Oklahoma, where Gov. Kevin Stitt said earlier this month his state is now expecting a revenue shortfall of about $416 million for FY 2020, which ends June 30. But that pales in comparison to the $1.3 billion blow the state’s revenue outlook is expected to take for FY 2021. The state has a rainy day fund balance of about $806 million but can only constitutionally use up to $302 million to supplement this year’s budget, Route Fifty reported.
- Officials in Mississippi are hopeful that a portion of the $2.2 billion settlement paid by BP Oil in the aftermath of the Deepwater Horizon oil platform explosion a decade ago could help the state weather the economic crisis caused by the pandemic, The Sun Herald reported.
- The frustration over state fiscal matters has led to some more unusual state actions as well. Missouri Attorney General Eric Schmitt filed a civil lawsuit against the Chinese government alleging China’s response to the coronavirus outbreak led to devastating economic losses for the state. Legal experts don’t give it much of a chance for success since a legal doctrine called sovereign immunity offers foreign governments broad protection from being sued in U.S. courts. Members of Congress have reportedly drafted legislation to strip China of its immunity. Class-action lawsuits have also been filed in California, Florida, Nevada, Pennsylvania and Texas on behalf of U.S. businesses who have suffered injury, damage and loss during the outbreak.
Pew and Route Fifty also cite projected revenue declines and budget shortfalls in a number of other states, including:
- Arizona: $1 billion for the coming year
- Illinois: $2.7 billion for FY 2020; $4.6 billion-$6.2 billion for FY 2021
- Pennsylvania: $3.7 billion over the next 15 months
- Wyoming: Between $555 million and $2.8 billion over the next two years