As negotiations continue over the third COVID-19 relief package, states and local governments are still pressing for direct financial assistance they say they need quickly to continue responding to the pandemic.
The pandemic response has forced state and local governments to spend far more than they anticipated for this fiscal year on health care, unemployment benefits and other programs. At the same time, the depressed economy has hurt their ability to meet those funding needs. States anticipate major drops in revenue from sales and income taxes, while the demand for municipal bonds, one of the main tools local governments have to quickly raise money, has plummeted.
To cover those costs without their own revenue or access to the bond market, states and local governments, which must run balanced budgets, say they need direct payments from Congress.
Drafts of the most recent bill to provide economic relief do not include direct cash payments to states, Matthew Chase, the executive director of the National Association of Counties, said late Monday afternoon. The Treasury Department is blocking it, he said.
Without federal aid, states will have to cut costs — which would include laying off workers — or raise taxes, or some combination of the two. Raising taxes ahead of a recession is not ideal. Cutting public sector jobs would only deepen the recession, said Michael Leachman, research director for states at the liberal think tank Center on Budget and Policy Priorities.
“That’s why emergency aid from the federal government, before all that happens, is really important,” he said. “Fiscal aid to states is one of the more powerful tools in the federal government’s toolbox during a recession.”
The National Governors Association on Friday told congressional leaders they needed “at least $150 billion” to “provide unrestricted state fiscal support.” A group of 21 Republican governors wrote congressional leaders Monday asking they provide states with block grants.
Cash “would give governors the ability to respond to the unique needs of each state with the speed and flexibility that is required,” the Republican governors, led by Georgia’s Brian Kemp, wrote.
States are generally in a better fiscal position with more money in reserve than they had during the financial crisis in 2008 and 2009, Leachman said. Those reserves, which vary widely from state to state, could fill some budget holes, but won’t stop severe budget cuts states may be forced make in a prolonged economic downturn.
Federal aid could ease such cuts, said Brian Sigritz, director of state fiscal studies at the National Association of Budget Officers.
“Without it, you’d be looking at more substantial budget cuts,” he said.
The Senate package does include crucial aid to quasi-governmental assets like public transit systems and airports, Chase said. While not as fast or flexible for state budgets as cash, those measures were also necessary, he added.
There are signs the COVID-19 response and its economic fallout is already hurting state budgets.
Ohio Gov. Mike DeWine ordered a freeze in state hiring Monday to positions unrelated to the coronavirus response and told every state agency to cut 20 percent of its budget for the rest of fiscal 2020 and fiscal 2021. The move was directly related to the spike in spending to address the pandemic, and even more to the drop in revenue, spokesman Dan Tierney said.
New York Comptroller Thomas P. Napoli projected last week that tax collections would be $4 billion to $7 billion lower than earlier projections, a difference of between 4.5 and 8 percent of the budget.
Drastic projections like those will become more common as more states revise budget forecasts, Leachman said.