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States expecting big revenue hit as COVID-19 slows the economy

Project vetoed in New Mexico; Hawaii expects tourism drop

While states are spending extra money to address COVID-19, budget planners are bracing for the drop in revenues they’ll see from the economic decline the pandemic has created.

State budget experts agree the pandemic will likely have a significant fiscal impact, but can’t yet say exactly what it will be.

“It’s going to have implications. The question is, how much, how deep, how long?” said Eric Kim, senior director of public finance with Fitch Ratings. “It is an incredibly fluid situation. Things are developing really quickly and happening really quickly.”

[Negotiators tweak coronavirus bill ahead of House vote]

States that get significant portions of their revenue from single industries like tourism or energy are already seeing impacts from the spread of COVID-19, the disease caused by the novel coronavirus.

New Mexico Gov. Michelle Lujan Grisham vetoed $150 million worth on infrastructure projects on Wednesday, a move she tied directly to “volatility in global oil markets and global economic uncertainty related to the COVID-19 outbreak.” The veto would help strengthen cash reserves, she said.

For every $1 the average annual price of a barrel of New Mexico oil drops, the state loses about $22 million in general fund revenue, according to a Jan. 30 state revenue forecasting group memo to Grisham and legislative leaders. The price of West Texas Intermediate crude oil dropped more than $10 per barrel on the New York Mercantile Exchange on Monday after Saudi Arabia cut its price over the weekend, itself a reaction to demand shortage related to COVID-19.

An international price war and ongoing uncertainty about demand has ramifications for other states that depend on oil revenues.

Forecasters with the Alaska Department of Revenue, a state that taxes neither income nor most sales and depends on royalty payments and taxes from oil producers and payouts from a securities fund seeded with oil money for most of its state revenues, have delayed the release of their twice-annual budget forecast because of the uncertainty around oil prices and the stock market.

Texas, which received nearly $3.9 billion in state revenue from the oil industry last year, is in a better position to sustain losses from oil directly. Most of the money it collects from oil production goes to the state’s rainy day and highway funds, so the price would have to drop significantly more to have an effect on the general fund, said Eva DeLuna Castro, who oversees fiscal and budget policy for the state think tank Center for Public Policy Priorities.

Still, a downturn in a major industry like oil would have ripple effects on the state economy, she said. Impacts to the hospitality industry, which was hit by canceled events like the South by Southwest music festival, would also hurt, she said.

Tourism

Among the reasons for a shortage of demand for oil is the reduction in global travel, hurting states dependent on tourism.

In Hawaii, the latest data showed sales taxes and airline passenger arrivals – a key indicator for the tourism industry, the largest sector in the state – were steady through February. But passenger arrivals dropped nearly 8 percent in the first 10 days of March, compared to the same period last year.

And those numbers reflected activity mostly before the virus exploded in the continental U.S. this week. The state’s Council on Revenues, which met Wednesday in possibly the first public meeting of a state budgeting authority since COVID-19 became widespread in the U.S., revised its budget forecasts down for fiscal 2020 and 2021.

The board revised its forecast for fiscal 2020, which ends June 30, to grow only 3.8 percent over the previous fiscal year, down from its previous estimate of 4.1 percent. After forecasting further 4 percent growth for fiscal 2021, the council revised its estimate to zero – a difference of $300 million for state lawmakers now working on the state’s spending bills.

“That’s a pretty dramatic decrease without actually having hard data,” Chairman Kurt Kawafuchi said.

Projections should be conservative because the signs of an economic downturn would lag behind current events, he added.

“If someone wasn’t going to spend money today for a fancy dinner, it’s not going to show up in the revenue until the 20th of April,” Kawafuchi said, referring to the release date of the next revenue report.

Representatives for Hawaii Gov. David Ige and legislative leaders either declined or didn’t respond to interview requests on the budgetary impacts of the forecast Thursday.

Resilient

The crisis will likely affect fiscal 2021 budgets, which most states are in the process of developing. Most data available to states now is from February, capturing activity in January, well before the pandemic was known to be widespread in the U.S.

States will have to make adjustments based on new budget projections. But there’s a high degree of uncertainty around what those new forecasts will look like.

“We’ll learn more in the coming couple weeks, but I think at this point states are just trying to figure out how bad it might be,” said Erica MacKellar, a senior fiscal policy specialist with the National Conference of State Legislatures.

States should be able to weather any downturn COVID-19 eventually causes, Kim said.

“States are very resilient,” he said. “We expect states to be able to deal with different kinds of volatility and shocks.”

During the unprecedented period of economic growth since the Great Recession, most states have built up sizable reserves. With the control they have over spending, they could likely handle a COVID-19 related downturn.

More federal help could also fill holes in state budgets. Congress is negotiating an economic stimulus to counteract the effects of the pandemic.

Brian Sigritz, the director of state fiscal studies for the National Association of State Budget Officers said states would like to see the federal government to pick up a larger share of Medicaid costs, which would enable them to redirect spending elsewhere.

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