Coronavirus Threatens to Blow Big Holes in State Budgets

Theresa Malijan, a registered nurse, holds up her hand as she demonstrates how she collects a swab from patients at a drive-through COVID-19 and caronavirus testing station for University of Washington Medicine patients, March 17, 2020, in Seattle.

Theresa Malijan, a registered nurse, holds up her hand as she demonstrates how she collects a swab from patients at a drive-through COVID-19 and caronavirus testing station for University of Washington Medicine patients, March 17, 2020, in Seattle. AP Photo/Elaine Thompson

 

Connecting state and local government leaders

States are dealing with financial uncertainty as they spend to combat the virus, but also face the possibility of lost revenues as the disease puts a major drag on the economy.

Many states across the U.S. could see their budgets tested in the coming weeks and months by the coronavirus outbreak and the dramatic economic slowdown it is causing.

Responding to the pandemic is already creating sizable costs for some states. At the same time, huge segments of the economy have slowed to a crawl as authorities and the public take action to stop the spread of Covid-19, the respiratory illness caused by the new coronavirus.

For states, cratering consumer and business activity will mean a hit for tax revenues at the very same moment they are spending money to deal with the public health crisis. 

To what extent costs will mount, or revenues will fall, are open questions. The answers will depend in part on how much worse the virus outbreak becomes and how long it drags on for. But budget experts cautioned that the revenue implications could be severe.

David Schumacher, director of Washington’s Office of Financial Management, said that when he looks at the public health crisis in his state strictly from a budgeting perspective, he is more concerned about lost revenues than the additional costs. 

“We may end up spending a few hundred million dollars addressing the public health problem,” he said. “But we could lose a few billion.”

“That's the bigger budget crisis,” Schumacher said, “the revenues dropping through the floor.” For now, though, he added: “We just have no idea what this is going to mean to the economy. Is this going to last two weeks, two months, six months?”

New York's comptroller, Thomas DiNapoli, said on Tuesday that based on information available at the end of last week, "the most optimistic" scenario is that tax revenues in the Empire State would be at least $4 billion below the projections of $87.9 billion in Gov. Andrew Cuomo's executive budget for fiscal year 2020-21.

But an alternative scenario that DiNapoli's office analyzed suggests that "given deteriorating conditions and the potential likelihood of a deep recession in the coming fiscal year" revenues could be more than $7 billion below that previously estimated level.

One upside for states is that they have had more than a decade since the Great Recession ended to regain their financial footing. A long economic growth cycle during that time, along with solid revenues during the past couple of years, have helped to buoy state budgets.

The National Association of State Budget Officers reported last year that the median balance for state rainy day fund savings, as a share of general fund spending, had reached a new all-time high in fiscal year 2019, a sign of the progress states had made socking away reserves.

But the situation the nation is now facing is in many ways unprecedented and is pushing state governments and their finances into uncharted and unpredictable territory.

“Uncertain times, uncertainties all over,” said Lucy Dadayan, a researcher with the Urban-Brookings Tax Policy Center who focuses on state-level tax and economic issues.

“This is not just a particular sector of the economy shutting down, it's the whole world shutting down,” she added. “It feels like it's going to impact every single state, particularly the states that were the early victims of the coronavirus.”

One of those early victims was Washington state. Authorities there announced the nation’s first known case of the new coronavirus in late January. Since then, the state has become an epicenter for the disease with at least 900 Covid-19 cases and 48 deaths.

Lawmakers in Washington approved $200 million of spending to support the state’s coronavirus response before wrapping up their scheduled legislative session for the year last week.

"That's the first pot of money that will go mostly to our public health system," Schumacher said.

The money will help state and local agencies cover a variety of costs tied to the outbreak, such as testing people for the disease, moving patients from hospitals into long-term care facilities if they need that type of care, and quarantine housing for people who are homeless.

Other states are moving ahead with coronavirus spending measures as well.

For example, in Arizona, Gov. Doug Ducey signed legislation last week to appropriate $55 million for a public health emergency fund to support response efforts. And, in Georgia, lawmakers approved $100 million of coronavirus funding Gov. Brian Kemp requested.

Maryland legislators earlier this month passed emergency legislation giving the governor the power to transfer money from the state’s rainy day fund to help cover coronavirus costs.

As the nation tries to stop the virus from spreading, state and local officials have ordered businesses like bars, movie theaters and gyms to temporarily close and they have also imposed bans on large gatherings, including concerts and sports games.

Office workers have taken to working from home. People have canceled their travel plans. Events have been called off. Airlines, hotels, restaurants and retailers have all seen sharp declines in business that would have seemed unimaginable just a month ago.

This upending of day-to-day American life could have implications for a range of state revenues.

Layoffs could diminish personal income tax collections. Losses in the stock market that the disease outbreak has contributed to could erode capital gains tax collections. 

Sales tax revenues are apt to slow at least in the near term due to declines in consumer spending. Gas taxes stand to take a hit as people drive less to work and other places. Even tax revenues from legal gambling could get dinged as casinos close their doors.

“I think we're going to see nearly all revenue sources will be impacted by the coronavirus,” said Brian Sigritz, director of state fiscal studies for the National Association of State Budget Officers.

It’s important to note also that the virus is not the only wildcard for state budgets right now. Tensions between Saudi Arabia and Russia have led to a collapse in oil prices—a threat to the economies, and tax collections, in gas and oil producing states here in the U.S.

“Those states that don't have diversified economies, or diversified tax structures will probably be hit harder,” said Dadayan.

Colorado’s Office of State Planning and Budgeting on Monday released an economic forecast that wasn’t upbeat.

It revised general fund revenue downwards from the state’s December forecast by about $301 million for the current 2019-20 fiscal year, and by about $400 million for the upcoming 2020-21 budget cycle due to the expected effects of the Covid-19 pandemic. 

The state’s general fund budget for the current fiscal year is around $12.2 billion.

“I would call the economic situation in complete flux, and until we have a much better idea what’s going on I wouldn’t put much stock in any economic forecast, although we know the news isn’t good,” Gov. Jared Polis said in a statement.

“My top priority during this time is protecting the health and safety of Coloradans which also minimizes damage to our economy,” he added. “We’re doing everything we can to minimize the long-term economic impact of this global pandemic.”

Sigritz noted that a number of states came out with revenue forecasts in February that did not factor the coronavirus crisis into estimates. Updated forecasts that take the outbreak into account could guide policy makers as they put together budgets for the next fiscal year.

Washington doesn’t have an income tax, and sales tax revenues make up nearly half of its operating budget. “Sales tax is a really big deal,” said Stephen Lerch, the executive director of the Washington State Economic and Revenue Forecast Council.

Lerch explained that he and his colleagues don’t have much data yet to assess how bad the hit will be to that revenue stream. Medium and large retailers pay their taxes on a monthly basis, typically on the 25th of the month after a sale occurs.

Staff for the Economic and Revenue Forecast Council see the data on those collections about 10 days later, meaning that it won’t be until May that they have figures for the time period that’s been affected by widespread business closures and other fallout from the coronavirus.

Weekly data on initial unemployment insurance claims could offer a somewhat timely sense of what’s happening in the near term with layoffs within Washington’s economy, Lerch said.

But the fast-changing and unpredictable circumstances surrounding the coronavirus promise to pose challenges for revenue forecasters. “The data streams that we rely on for modeling are not really adequate for something like this,” he said. 

The council’s next revenue forecast is due out in June. Lerch said that, to date, there are no plans to issue a forecast before then.

Schumacher said his hope is that once the public health crisis subsides there will be a quick economic recovery. “If people only buy half as many cars for the next three months, we'll notice that,” he said.

But he added: “once this is over, you would imagine that things would pop back.”

For the Office of Financial Management, Schumacher said that during the next week or so, the priority would be getting the newly appropriated coronavirus money into the hands of agencies that are at the center of the state’s response effort.

After that, he said, the office’s staff would begin to examine different budget scenarios that the coronavirus outbreak could lead to, and would develop ideas for navigating them.

Washington entered into the outbreak with a relatively strong economy, driven in part by a booming tech sector in and around Seattle. Its budget has been in generally good shape overall as well.

The state's rainy day fund, known as its Budget Stabilization Account, has a balance of about $2 billion. Lawmakers tapped the fund to provide $175 million of the $200 million in coronavirus response funding that they recently approved.

"We were well prepared, better prepared than we've been for a lot of things,” said Schumacher. “We have money in the bank for something, who knew that it would be this.”

Editor's note: This story was updated shortly after publication to include revenue projections from New York state.

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Bill Lucia is a senior reporter for Route Fifty and is based in Olympia, Washington.

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