Prospect of Steep Service Cuts Looms as Virus Batters State and Local Budgets

Fog lifts over Chicago and the usually busy Columbus Drive after people were ordered to stay at home. Illinois Gov. JB Pritzker's office estimates the budget shortfall for 2021 will top $6 billion because of the coronavirus-fueled economic downturn.

Fog lifts over Chicago and the usually busy Columbus Drive after people were ordered to stay at home. Illinois Gov. JB Pritzker's office estimates the budget shortfall for 2021 will top $6 billion because of the coronavirus-fueled economic downturn. AP Photo

 

Connecting state and local government leaders

“The longer this persists, the deeper it will be for state and locals and state and local cutbacks,” one expert noted this week.

It’s a given at this point that the coronavirus is going to make a dent in state and local government budgets, with public officials and experts saying service and program cuts appear inevitable without some kind of federal bailout. 

Information continued to emerge this week about the extent of the financial pressure that states and localities are facing and how they are managing it. Even before the pandemic hit, some state and local governments were dealing with tight finances or lagging economies. Now they’re facing unplanned costs tied to the response, as well as depressed tax revenues because of the economic crash that the outbreak has caused.

States and local officials are advocating for billions of dollars in additional federal aid, on top of billions that Congress has allotted already. House Speaker Nancy Pelosi this week said that helping local governments offset lost revenues is “a very important piece” of discussions about a pending relief bill. But it’s still unknown how much more money lawmakers will pony up, or what limits will be imposed on how that cash can be spent.

In the meantime, the longer-term fiscal outlook for states and localities is murky. It’s unknown how much longer the business closures and stay-at-home orders public officials have enacted to control the disease will last, or how quickly or strongly the nation’s economy will rebound after they’re lifted. 

“Everybody's talking about how to get rescued. So far there's been little talk about whether the scope of services that government provides is to be reexamined and reduced,” said Richard Ravitch, a former New York lieutenant governor, who has had a hand over the years in resolving a number of high-profile situations involving state and local government financial stress.

“I think that as the next weeks unfold you'll see a significant effort on the part of some to reduce services,” Ravitch added, during a conference call held by the Volcker Alliance on Thursday.

Susan Wachter, co-director of the Penn Institute for Urban Research at the University of Pennsylvania, said the Great Recession of 2008 could provide clues about what might lie ahead for state and local governments’ finances. But, in her view, the current crisis is apt to put even more strain on their budgets.

"The longer this persists, the deeper it will be for state and locals and state and local cutbacks,” Wachter said. 

More critically, those cutbacks in spending and services could actually fuel the nation’s financial downturn, and hinder whatever economic recovery is on the horizon, Wachter said.

Because there’s so much uncertainty over how long the virus outbreak, and its fallout, will last, estimates for how it will affect government costs and revenues are hard to pin down. But states and local governments around the U.S. are coming up with numbers.

Sachi Hamai, chief executive officer for Los Angeles County, said that for fiscal year 2019-20, the county previously expected sales tax revenue of $5.9 billion. The county is now estimating that this revenue stream will be down 50% to 75% between March and the June close of the fiscal year. The county is also bracing for a 25% dip in collections in the next fiscal year compared to anticipated levels.

For now, Los Angeles County leaders have put freezes in place on purchasing and hiring and have asked departments to model what 10%, 15% and 20% budget cuts would look like.

In Westchester County, New York, it’s a similar story. The county’s annual budget is around $2.1 billion, according to county executive George Latimer. He said the county is estimating that it’s going to see revenue losses in the $90 million to $160 million range due to the virus.

He pointed out that beyond the public health and emergency services Westchester County is handling, his government, along with other localities, provides services like sewage treatment, jails, bus transit and restaurant inspections.

The county has identified $20 million in potential savings, Latimer said. But these would not be enough to make up for even the low-end projected slide in revenues. “If the federal government fails to help us succeed, there will be a catastrophic loss of basic services,” he said, referring to Westchester County and other local governments.

Gary Moore, the judge/executive in Boone County, Kentucky, which is near Cincinnati, said that the local economic development corporation in his area depends heavily on taxes from car rentals at the region’s international airport. Those collections have plummeted, as have hotel room taxes relied on by the convention and visitors bureau.

"This is a time that industry needs staff, they need our team approach. Yet there's going to be little to no revenue coming in to keep workers employed at our economic development corporation," Moore said.

Teryn Zmuda, chief economist with the National Association of Counties noted that in some cases the coronavirus crisis is taking a toll on communities that were vulnerable to begin with and had not fully rebounded from the last recession. 

She said that, before the pandemic even hit, about one-quarter of the nation’s counties—or roughly 800 of them—still had not seen economic output levels recover to where they were prior to the last downturn. 

Matt Chase, NACo’s executive director, said that after the last recession, counties shed tens of thousands of public health workers because of budget cuts. “Our public health staff and other frontline staff are already thin,” he said. "We're already at bare bones in many cases.”

Chase emphasized that when counties spend their tax revenues it goes towards areas like child welfare, homeless services and administering food assistance programs. He noted that these types of initiatives are even more important during the current pandemic, with heightened concerns about domestic violence as people are at home more, fears that the virus could rapidly spread among homeless populations, and as millions of people are out of work.

For now, many state and local governments are dealing with the immediate financial turmoil the virus is causing. Tapping “rainy day” funds and short-term borrowing are two options states are likely to turn to as they look to fill budget holes and maintain adequate levels of liquidity.

But William Glasgall, senior vice president and director of state and local initiatives for the Volcker Alliance, noted that the median state rainy day fund balance nationally is around 8% of general fund spending. And some states, like Illinois, have little money socked away.

“States are going to have to depend on other revenue sources to balance the books, as well as spending restrictions,” Glasgall said.

Illinois has for years had one of the nation’s most strained state budgets. Gov. JB Pritzker this week said that the state’s general revenues would be revised down by $2.7 billion for the current 2020 fiscal year and by $4.6 billion in the upcoming budget cycle.

But with short-term borrowing, the shortfall for 2021 is expected to grow to $6.2 billion when compared to the spending plan put forth by the governor in February. Pritzker’s office also said that the 2021 shortfall would expand to $7.4 billion if a constitutional amendment he supports, that would move the state to a graduated income tax, does not pass.

Most states have extended their income tax filing deadlines from April to July, likely delaying the collection of large chunks of revenue. Because of this and other issues tied to the coronavirus crisis, it’s expected state and local short-term borrowing needs will outpace investors’ appetite for their debt—at least if borrowing costs are to be kept at levels considered to be reasonable.

The Federal Reserve is taking new and unprecedented steps on this front with a “Municipal Liquidity Facility” that is intended to help states and larger local governments with credit and cash flow needs. 

The facility plans to purchase up to $500 billion of short term notes directly from states, counties with populations of at least two million, and cities with populations of at least one million. As it stands, the loans will have to originate by September and be repaid within 24 months. States are allowed to use proceeds from the program to support smaller counties and cities.

“It’s a very short-term funding program,” said Matt Fabian, partner and head of market and credit research at Municipal Market Analytics. “It’s large enough to provide bridge financing to really the fiscal 2022 budget, giving states and locals the time to adjust their budgets.”

As more time passes, the extent of those adjustments will come further into focus. 

Ravitch emphasized that many of the nation’s most essential services, like police, firefighting, and sanitation are paid for at the state and local level. “It's not terribly easy to reduce to a significant degree the level of expenditure without having a dramatic impact on the quality of—on the nature of—the services that the public is dependent upon,” he said.

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Bill Lucia is a Senior Reporter at Route Fifty and is based in Olympia, Washington.

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