States see no aid from Senate GOP for swelling budget gaps

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The economic stimulus plan released by Senate Republicans offers no new money for states and cities to cope with swelling budget shortfalls, leaving them to contend with a grave financial crisis that’s already forcing them to slash spending, furlough workers and delay projects as tax revenue disappears.

Senate Majority Leader Mitch McConnell and other top Republicans on Monday released a $1 trillion package, setting off negotiations with Democrats. The plan doesn’t include additional funding to address states and local government deficits, a stark contrast to the approximately $1 trillion that Democrats included in the bill the House passed in May. It does loosen restrictions on the use of previously allocated funds and would provide about $105 billion in funds for schools and $16 billion for expenses tied to COVID-19 testing.

But without broader aid from Washington, the budget crisis building in state capitals and city halls threatens to worsen the economic downturn by forcing governments to cut spending deeply, fire workers or raise taxes. After the last recession over a decade ago, such steps exerted a major drag on the recovery for more than two years, according to Commerce Department figures.

“It’s a big mistake to leave out funding for state and local governments because state and local governments are in dire need of funding,” said Lucy Dadayan, who tracks local finances for the Urban-Brookings Tax Policy Center. “The bottom line is the federal government should really act fast and help the state and local governments because we are in a national crisis.”

Most states have already allocated the bulk of funding they received from the CARES Act, limiting the impact of a GOP plan allowing that money to be used to fill budget gaps — instead of just covering virus-related costs, the National Conference of State Legislatures said in a statement on Tuesday.

“For many states it will take years to recover from the abrupt drop-off in revenue caused by this pandemic,” the group said.

States alone are projected to face budget shortfalls of about $555 billion through 2022, according to the Center on Budget and Policy Priorities.

While any aid in the Republican plan was expected to fall far short of what Democrats proposed — given their intention to hold the overall cost of the stimulus to $1 trillion — Wall Street analysts and local officials are counting on some money from Washington. Bank of America Corp. analysts have said they expect as much as $400 billion in aid by the third quarter, while Morgan Stanley has forecast they will get as much as $500 billion.

Any deal between Republicans and Democrats that ultimately leaves out such aid will deal a fresh hit to many states, including California, that have been counting on federal funds. State and local governments have already cut nearly 1.5 million jobs since the pandemic shutdowns began.

According to Moody’s Investors Service, as of July, five states enacted temporary spending plans, allowing them to briefly avoid some difficult decisions as they contended with the uncertainty of the coronavirus and waited for federal aid. That includes New Jersey, where lawmakers passed a three-month stopgap spending plan. Governor Phil Murphy has warned that tax increases may be necessary to cope with the fiscal fallout from the pandemic if no help arrives.

California’s budget deferred $12.9 billion in payments to schools and community colleges and borrows $9.3 billion from other funds to avoid steep cuts in the hope that Washington would send additional aid by October. Illinois, the lowest-rated state, relied on borrowing to plug its budget gap.

The leader of the American Federation of State, County and Municipal Employees union, Lee Saunders, said in a statement on Monday that Senate Republicans are “seemingly content to let state and local governments go bankrupt.”

The head of the National League of Cities, Clarence Anthony, said the Republican proposal “is out of touch with the grim reality facing communities large and small across the nation.”

“There will be no national economic recovery without a clear commitment from the federal government to address the staggering revenue shortfalls and skyrocketing costs that local governments have been forced to incur,” he said in a statement. The Republican proposal ignores “economists who have cautioned lawmakers about the devastating long-term impacts of failing to address local government revenue shortfalls.”

— With assistance from Erik Wasson and Laura Litvan

Bloomberg News
State tax revenues Coronavirus Finance, investment and tax-related legislation CARES Act State budgets