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Historic State Budget Shortfalls


Early projections indicate that the impact of the COVID-19 pandemic on state budgets could almost double that of the Great Recession.

If you thought a socially distant Independence Day was last week’s most significant event, think again. Forty-six U.S. states, all but Alabama, Michigan, New York, and Texas, began their fiscal years on July 1. As The Economist explained last month, in normal times, these events are “usually about as exciting as a 501(a) tax filing and as unpredictable as a Saudi weather forecast (sunny again!). Not this time.”

Why?

As we recently discussed, most U.S. states are required to balance their annual budgets in some way, shape, or form. That feat is difficult—perhaps even impossible—in an environment in which a state has both delayed its deadline for filing tax returns and incredible economic uncertainty makes forecasting the expected revenue from those returns a fool’s errand.

In a tweet on March 20, U.S. Treasury Secretary Steve Mnuchin announced the Internal Revenue Service would delay “tax day”—the day when individual Americans must file their federal taxes—from April 15 to July 15. According to the National Council of State Legislatures (NCSL), each of the 45 states that levy an income tax followed suit. While a three-month tax day delay may not seem like much, as Bloomberg Tax correspondent Tripp Baltz explained, “Pushing the tax payment deadline back to July 15 means states won’t get revenue they were counting on in the current fiscal year which, for most, ends June 30.”

Indeed, the revenue shortfalls in most states were severe for fiscal year 2020 (the budget year that just ended), and those gaps will persist for some time. Consider this: according to CNBC, California had a $6 billion budget surplus in January 2020. The COVID-19 pandemic turned that number into a $54.3 billion deficit just a few short months later.

And California isn’t alone. According to the NCSL, for the budget year that began for most states on July 1. at least four states—California, Colorado, New Mexico, and Wyoming—face shortfalls of at least 20 percent. Another five—Kentucky, New Jersey, Oklahoma, Vermont, and Wisconsin—are down between 16 and 20 percent. The Center for Budget and Policy Priorities CBPP said, “California expects revenues to decline by $32 billion in 2021 alone” and the state’s “revenue declines in fiscal years 2020 and 2021, combined with COVID-19 costs and increased need for other state services, will result in a deficit equal to 37 percent of the general fund budget.”

Even more frightening? Most states haven’t even gotten a handle on their FY 2021 situation yet and have not made revenue projections.

And scarier than that? Things already are much worse than they were during the 2009-09 downturn, and the outlook could turn even gloomier.

Moody’s Analytics estimates COVID-19 will cost states up to $500 billion through FY 2022. By comparison, NCSL estimates that, “states lost $283 billion during the Great Recession.” Additionally, according to the National Association of State Budget Officers (NASBO), “State revenue losses resulting from the COVID-19 recession are expected to well exceed the 11.6 percent drop states experienced during the Great Recession.” NASBO also warned, “The worst is likely still to come for state tax revenues, as enhanced unemployment benefits expire, as more Americans restrict their spending, and the full economic impacts of the pandemic are felt.”

Indeed, the Center on Budget and Policy Priorities (CBPP) estimates states will need to either find increased funds or reduce spending to makeup $615 billion over the next three years in lost revenue as a result of COVID-19.

How have states dealt with these cards so far?

According to The Wall Street Journal, with 42 states having passed fiscal year 2021 budgets, “for now,“ officials “have largely avoided raising taxes … opting instead to cut spending or dip into reserves.” Georgia lawmakers, for example, reduced their annual budget by 10 percent ($950 million) from the previous year. Maryland reduced outlays by $412 million, with $136 million (33 percent) of that coming from education. (The state’s governor, Larry Hogan, has said officials will need to cut about three times that number, based on its expected revenue shortfalls.) And, according to CNN, Colorado lawmakers passed a budget that shed an amazing one-third of its general fund.

Some states have found creative – albeit temporary – ways to avoid immediate pain. Back in April, New Jersey Gov. Phil Murphy signed legislation that delayed the beginning of the state’s fiscal year from July 1 to October 1. (New Jersey is one of the states that is required under its constitution to balance the budget.) At the time, Gov. Murphy said the move would give the state “additional time to combat the virus and get as many taxpayers as possible back on sound financial footing.”

Of course, the decision also allowed lawmakers to wait until after the July 15 tax filing deadline to try to balance the budget. (A smart option, perhaps, since, as The Economist explained, “Two-thirds of state revenues come from income taxes or sales taxes.”) On June 30, Gov. Murphy signed “bare bones” spending legislation for the months of July, August, and September, and now the legislature will get to work on a plan for the rest of the state’s normal fiscal year (October 1, 2020 to June 30, 2021). That’s when the cuts might have to come.

The implications of state budget cuts haven’t been limited to only the services and programs they fund; they also have had an immediate and direct impact on the job market. Local and state governments have laid off at least 1.5 million workers in the last four months. (This impact, of course, is in addition to a downturn in overall growth. According to CNBC, in New York and Nevada, state gross domestic product fell 8.2 percent in the second quarter. In Michigan, the heart of the American auto industry, growth was down 6.8 percent.) Dayton, Ohio’s mayor told The Wall Street Journal her city might eventually have to let go of firefighters and trash collectors.

Even sports are suffering. As state-funded colleges and universities look for ways to save money, they are cutting back on the number of teams they support. According to Axios, more than 130 NCAA teams have been eliminated in the last 12 weeks. Not all of those programs are at public colleges and universities, but many are.

Now that they’re in a new fiscal year, what comes next for state budgeters?

With COVID-19 cases spiking in many states, no one really knows. As Urban Institute fiscal expert Tracy Gordon told The Wall Street Journal, it’s impossible to “overstate the amount of uncertainty that states are dealing with.” That’s because “You’re asking revenue estimators basically to consult epidemiological models and public health experts and take account of all kinds of variables that are normally not part of their forecasts.”

Local and state officials also have no idea where Congress will end up on this issue. The National Governors Association has been pleading with federal lawmakers for months to provide $500 billion in direct aid to states and cities. So far, those requests have gone unanswered. (The U.S. House did approve legislation, the HEROES Act, back in May that included $1 trillion in direct aid to states and localities. Republican leaders in the Senate oppose that bill.)

There is precedent for direct aid to states from the federal government, of course. As the National Association of State Budget Officers reminded readers recently, during the Great Recession, the effect of state budget cuts “were mitigated by federal aid to replace lost revenues under the American Recovery and Reinvestment Act (ARRA).” But that bill, often referred to as the Obama stimulus, passed on a largely party-line vote with little Republican support.

There was a glimmer of hope for states and cities coming from the White House this morning. Bloomberg reported President Donald Trump wants Congress to send him a stimulus bill by August 1. His aides offered very little definition for what the president would like in that package. The main goal is simply that the cost not exceed $1 trillion—a figure that could allow federal lawmakers to fully grant governors’ requests for $500 billion in aid, depending on the other components of the package.

With Congress out of session for the next two weeks, then back in Washington for two weeks before they depart for their August recesses, we’ll have to wait and see how the House and Senate respond.

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