Governors, mayors, and local officials are begging for help from Washington after Republican opposition halted attempts in the latest rescue package, enacted last week, to add to the $150 billion in federal money they’ve received so far.
The National Governors Association estimates states need a combined $500 billion in federal aid to close looming budget shortfalls or they’ll be forced to make major cuts. Organizations representing the nation’s cities and counties say they need $250 billion on top of that or will face the same prospect.
Now, as Congress and the White House begin fighting over whether to provide more help — and if so, how much — in the next rescue legislation, the fate of the US economic recovery could be riding in the balance.
Mark Vitner, a senior economist at Wells Fargo Securities, said state and local governments play a huge role in the US economy and estimated they’ll ultimately get $1 trillion in federal assistance, a number that still won’t be enough.
“There’s no way the federal government can make up all of this,” he said. “They could help plug the hole. They can’t replace everything that’s been lost. It’s too big.”
State and local governments last year accounted for about 8.5 percent of the nation’s $21 trillion total economic output, also known as the gross domestic product, according to Commerce Department data. That’s more than double the economic impact of the federal government, even with its trillions in spending and vast workforce.
Nearly 20 million people were on state and local government payrolls in March, about 13 percent of the US workforce, according to the federal Bureau of Labor Statistics. That’s more than any other individual industry, including health care (16.5 million workers), retail (15.6 million), and manufacturing (12.8 million).
The latest coronavirus numbers from Massachusetts
Personnel costs, including salaries for police, firefighters, teachers, and health care workers, were about 26 percent of state and local government spending in 2017, according to US Census Bureau figures, the most recent detailed data available. So when budgets take a hit, layoffs usually follow. In the aftermath of the Great Recession, which began in 2007, about 750,000 state and local government workers lost their jobs.
In Revere, for example, personnel is about 40 percent of the city’s budget, said Mayor Brian M. Arrigo. Back in February, the city’s finances were looking so good, officials were considering hiring more police officers, firefighters, and public works employees. Now the city is facing a loss of about $5 million in revenues in the next fiscal year. Revere has reserves to stay out of the red, but the lost revenue will be painful, with furloughs and layoffs a possibility, Arrigo said.
“The problem we face right now is pretty simple: The revenue we expect is not coming in," he said. “We still have over 50,000 people who are relying on us for safety, well-being, and protection and of course we’re not going to let them down.”
Boston officials have not detailed the effects of the outbreak on the city’s finances and are forecasting revenues will grow by 4.4 percent in the next fiscal year, which begins July 1. But Justin Sterritt, the city’s budget chief, said the recently released $3.6 billion 2021 budget contained adjustments and scaled-back ambitions because of the pandemic.
The two largest sources of revenue for state and local governments are income taxes and sales taxes, both of which suffer when the economy nosedives and people lose jobs or cut back on spending, said Josh Goodman, an expert on state fiscal health at the Pew Charitable Trusts. Exacerbating the problem this time are major losses of revenue from hotel and gas taxes, along with large increases in spending on public health care for coronavirus victims.
It all adds up to a looming financial disaster in state capitols, where governors and state legislatures are required to balance their budgets and the only way to avoid major cuts would be large tax increases that would further depress the economy.
The Massachusetts Taxpayers Foundation, a budget watchdog group backed by businesses, estimated the state’s revenue for the next fiscal year could drop $3.9 billion, or 15 percent, below past projections. New York said revenues could fall by as much as $15 billion in its fiscal year that started April 1. Illinois is expecting more than $7 billion in lost revenue through July 2021.
States increased their rainy day funds after the Great Recession to a total of $75 billion — Massachusetts has set aside $3.5 billion — to better withstand an economic downturn, but they don’t have nearly enough money to stem the expected losses from the pandemic.
“It looks like it’s going to be considerably worse than the Great Recession and it’s happening really fast,” said Elizabeth McNichol, a senior fellow at the Center on Budget and Policy Priorities, a Washington think tank focused on reducing poverty and inequality. “That’s going to require laying off workers and imposing really deep budget cuts at exactly the wrong time and it could make this downturn deeper and longer."
That’s what happened after the Great Recession, when state and local governments were still cutting jobs long after the private sector had started hiring again. The job losses came even after Washington provided $275 billion in aid in 2009, including picking up a larger share of state Medicaid costs.
So far in the wake of the coranavirus pandemic, Congress included $150 billion for state and local governments in the $2 trillion rescue package approved last month. And that money came with limits. It could only be spent to cover unbudgeted costs directly related to dealing with the outbreak. States and localities can’t use it to make up for revenue shortfalls.
Massachusetts Governor Charlie Baker and other state and local officials said they need more help from Washington.
"I think every state in the country is struggling with what the hit to their economy has done to their balance sheet and to their budgets,'' Baker said on CBS’s “Face the Nation” this month. “And if the feds are interested in sort of reopening the economy ... for states to be able to support that initiative, obviously, it’s important for the feds to support our efforts to fund the stuff we do.”
But Republicans in Washington balked at attempts by Democrats to include another $150 billion for states in the $484 billion follow-up rescue package enacted last week. Instead, Senate majority leader Mitch McConnell suggested that states should be allowed to file for bankruptcy if they can’t balance their budgets, something they can’t legally do now.
The comments provoked outrage from Democrats.
“When Mitch McConnell says he’s willing to let states go bankrupt, he’s saying our police and fire departments and emergency responders and teachers and city clerks who are still trying to provide death certificates for people who have lost their loved ones are all expendable,” said Representative Katherine Clark of Melrose. “We’ve seen the incredible sacrifices people are willing to make. They need our help.”
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McConnell’s suggestion also has drawn criticism from some Republicans and is highly unlikely to be enacted. The Democratic controlled House would have to approve any change in bankruptcy law. And the idea of state bankruptcies was floated during the Great Recession and received strong pushback from Wall Street, a major Republican constituency, because it would roil the market for municipal bonds.
President Trump and top administration officials have sent mixed signals on state and local government aid. After indicating last week he was open to more assistance, Trump asked on Twitter Monday “Why should the people and taxpayers of America be bailing out poorly run states (like Illinois, as example) and cities, in all cases Democrat run and managed, when most of the other states are not looking for bailout help? I am open to discussing anything, but just asking?”
House Speaker Nancy Pelosi told reporters last week that the next rescue bill will include money for state and local governments and said it should be roughly equivalent to the $700 billion Washington has provided for small businesses.
State and local officials like Revere’s Arrigo said federal assistance is imperative because raising taxes or fees to balance budgets in the face of the economic collapse would be “a recipe for disaster.”
“Every hour of every day we’re seeing the need and we’re seeing that there are problems and they need to be solved,” he said of the outbreak. “We have to solve them and will solve them, but it’s nice to have the support of the federal government to do that.”
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