COVID-19: Severe state and local budget pressures fall on Washington

Tough choices to confront governments amid coronavirus, economic pause as Cassidy-Menendez legislation proposes relief


Even as they implement strategies to combat COVID-19 epidemic at present, governors and city managers are beginning to digest the hit to their budgets. And the fast-approaching fiscal crisis has made allies of ideological opposites in the Senate: Dr. Bill Cassidy (R-La.) and Bob Menendez (D-N.J.) have a bill in the hopper to deal with it. 

The Cassidy-Menendez legislation “would allow counties and towns with populations of 50,000 or greater — the current threshold is 500,000 — to be eligible for additional funding and would increase flexibility for states and local governments to use the funds,” Roll Call reported on April 20. 

State budgets must balance regardless of pandemic 

U.S. Senator Bill Cassidy, M.D. (R-LA) speaks at a Finance Committee hearing in July 2019. Image: cassidy.senate.gov
U.S. Senator Bill Cassidy, M.D. (R-LA) speaks at a Finance Committee hearing in July 2019. Image: cassidy.senate.gov

Michigan Governor Gretchen Whitmer told reporters on April 20 that flexibility with the funds that are coming into the states was “number one” for governors around the country. “We don't have the ability to run deficits. We have to have balanced budgets and every one of us is confronting some real strain on our budgets to put it lightly.” Whitmer emphasized that “the strain is all caused from COVID-19.” 

She could not overstate the problem. Governor Andrew Cuomo said on April 7 that “every state budget has been decimated by the situation.” “People aren't working, they're not paying income taxes. Businesses aren't operating so our budget just collapsed,” he told reporters at a daily briefing.  

While the CARES Act was aimed at providing crucial bridge funds for small businesses and individuals, lawmakers are eyeing support for lower level governments. 

Don't forget teachers and police officers and firefighters and transit workers and healthcare workers and nursing home staff," Cuomo insisted, “because those are the people who I fund with the state budget.”  

Cuomo has been outspoken on behalf of governors, seen most around the nation through satellite broadcasts carried by news networks. “And you shouldn't make us choose between small businesses and large businesses, and people who are on the front line doing the work day in and day out.” Cuomo has proposed hazard pay for first responders and health care workers. “They are the ones that are carrying us through this crisis. And this crisis is not over.” 

Leading a rural state, North Dakota’s Kristi Noem faces the same challenge. The former House member won’t have a grasp of her state’s fiscal condition until May; the legislature may return for a special session in June. According to projections and reports, “it doesn't look good. We're seeing revenue reductions in video lottery – things like that that are very significant – somewhere between 20 to 30% down,” Noem indicated on April 16.  

The pressure on Congress to address state and local budget shortfalls is only growing. “You want to restart the economy, you have to help restart the local governments,” Cuomo insisted, “and that's going to be a federal act. I don't have the capacity as a governor. No governor does to generate revenue in a positive way from an economy that's not operating. That is going to be a federal stimulus bill. There's no other way to do this.” 

“In the absence of unrestricted fiscal support of at least $500 billion from the federal government, states will have to confront the prospect of significant reductions to critically important services all across this country,” National Governors Association (NGA) Chair, Governor Larry Hogan (R-Md.), and Vice Chair Cuomo said in an April 11 statement

Coronavirus struck at the worst time for budget forecasts 

New York City Mayor Bill de Blasio said at his April 16 news conference his focus was on four priorities for city residents: New Yorkers’ health, safety, “making sure there's food on your table. Fourth, keeping a roof over your head,” he said. “These are just fundamental basics.” While the city’s budget is to be finalized in June, de Blasio observed that “things that might have been a priority, you know, two months ago, three months ago, can't be a priority right now.” 

Many states are waiting to revise their revenue estimates, and even small states anticipate painful losses. Vermont is projecting a 15 to 17% reduction while Washington State was considering what a 12 to 15% drop in GDP could mean for state revenues. 

Imagine a mayor’s chief of staff asking you to trim double digits from your budget in time for the next fiscal year or council markup. 

Moreover, the National Conference of State Legislatures has traditionally reported that 49 states must balance their budgets. New York’s fiscal year began on March 1; two-dozen state houses have postponed sittings and another dozen have adjourned until further notice. All must confront financial dire straits of economies forced into a coma to protect public health. 

How much more complicated is the issue for policymakers staring down a budget crisis? The follow-on economic effects of the virus – and global geopolitics – spell disaster for energy-rich states like Alaska, which relies heavily on oil and gas production for state revenues. Juneau revised estimates to assume $40 per barrel of oil, down from the state’s originally budgeted $59 a barrel. On April 20, that rate went negative, threatening bankruptcies within the energy sector.  

A further strain Whitmer alluded to is the demand for uncommon services like coronavirus-specific testing at scale, seen as a key determinant for reopening state, regional or sectors of the economy. Cuomo said on April 15 that state governments “have to be afloat and have some capacity to do all these things you want the governors to now do.”  

Municipal budgets injured 

Congress is considering funding for hospitals and a small business loan program but will put off on direct funding to states for a fourth comprehensive relief package. Cuomo said, “there can't be excuses about it.” One Los Angeles official said on a press call that while his was one of 36 cities to receive funding under the CARES Act, “it’s reprehensible and inexcusable that every other city that's below 500,000 population are currently not given direct funding. Local leaders understand the needs of their communities and are best positioned to make emergency management decisions related to allocation of resources.”  

Brian Barnett, president of the Conference of Mayors and mayor of the City of Rochester Hills, Michigan, said on the same call that “options to raise revenue, as you might imagine, are pretty slim, which means that really the only option cities are forced to consider are cuts.”  

Barnett explained that a Conference survey of cities with populations between 50,000 and 500,000 residents found that 55% reported they expect to have furloughed workers shortly, and nearly 40% responded that layoffs are expected.  

In my city,” of nearly 71,000 in the 2010 census, Barnett said, “about one third of our city's budget is in immediate flux.”  

Federal lending to munis and Congressional work ahead  

Will money be allocated to the states in a “CARES 2” bill? Treasury Secretary Steven Mnuchin told reporters at the White House on April 19 that President Trump “is willing to consider that in the next bill.” Moreover, Mnuchin indicated that the administration was working with the Federal Reserve on “establishing an unprecedented program for states and local governments to be able to borrow,” emphasizing that the program will represent an “unprecedented federal investment across the board.” 

While Federal Reserve Chairman Jay Powell said on April 9 that the responsibility for direct assistance “falls to elected officials,” the Fed is affording “a measure of relief and stability during this period of constrained economic activity and by using our tools to ensure that the eventual recovery is as vigorous as possible.” But criteria for Fed lending to certain cities has already met criticism

He was not only one to attract criticism over how the federal government may help states. Senate Majority Leader Mitch McConnell (R-Ky.) suggested in a radio interview with host Hugh Hewitt that Congress be cautious about bailing out states, some of whom faced a pension crisis predating the pandemic. “We all represent states and we all have governors regardless of party who would love to have free money.”  

McConnell, who alone decides what bills cross the Senate floor and how, predicted a “fulsome conference-wide discussion” among Republicans before proceeding. “These are all taxing authorities just like we are.” Hewitt raised the bankruptcy code available to private sector enterprises as a way for states to discharge unfunded liabilities. “I would certainly be in favor of allowing states to use the bankruptcy route to save some cities, and there's no good reason for it not to be available,” the host said. 

House Speaker Nancy Pelosi (D-Calif.), who similarly controls legislative products in the lower chamber, and speaking in support of a bill to replenish small business emergency funding and more, attacked McConnell’s suggestion on the floor. “Oh, really? And not pay the healthcare workers and public hospitals, the first responders and the rest? Oh, really? What made you think that was a good idea?” 

At an April 24 press conference, Pelosi said the U.S. “can't defeat this pandemic if Mitch McConnell is letting our health heroes get fired, and that's what's happening.” 

Cuomo also responded to McConnell’s position on funding relief for state and local governments. “Senator McConnell, who's getting bailed out here?” Cuomo said the day before. “It's your state that is living on the money that we generate – your state getting bailed out. Not my state.” 

Further, Rep. Tom Suozzi (D-N.Y.)  noted as Cuomo has that New York “subsidizes Senator McConnell's state and has for decades. He “is telling my state and others to drop dead.  Well, I have a message for you: We are going to fight you,” said Suozzi. 

“The COVID-19 pandemic may not know state borders, but it has certainly hit some states and regions harder than others. The proverbial house is on fire,” Menendez said in a statement about the Cassidy-Menendez legislation, “and we need to focus the water on the hotspots, because if we don’t put the flames out, they will only jump until the entire block is up in smoke.” The proposed SMART Fund created by their bill is a direct response to the NGA request. 

Nothing will substitute for swift economic growth, however. “Following the release of our reopening guidelines, governors across the country are looking forward to Phase One [reopening guidance] and announcing plans for an economic resurgence,” President Trump pronounced at his April 20 White House briefing. “We’re going to have a resurgence.” 

“The reality is that we still have a lot of work to do before this is over,” Michigan Lieutenant Governor Garlin Gilchrist said hours earlier. “We have healthcare workers transit workers, police, fire, EMS - all kinds of public employees who risked their lives to save lives and now lose their jobs,” Pelosi said. 

On May 18th several senators pushed for local budget relief:

 

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