- States were in good financial shape before the coronavirus pandemic.
- But they now face massive budget deficits.
- Without immediate federal aid, states will start be forced to slash their budgets, laying off workers en masse, cutting funds for education and healthcare, and more.
- Michael Leachman is Senior Director of State Fiscal Research at the Center on Budget and Policy Priorities.
- This is an opinion column. The thoughts expressed are those of the author.
- Visit Business Insider’s homepage for more stories.
A week ago, President Trump, Democratic leaders in Congress, and the National Governors Association’s bipartisan leaders all expressed support for Washington providing fiscal relief for cash-strapped states in the next stimulus measure.
They recognized that, due to what’s becoming the worst economic downturn since the Great Depression, states are facing budget shortfalls of unprecedented size and — without relief — they’ll start laying off first responders, teachers, and health care workers and cutting spending in other ways that will deepen the recession.
Now, however, Trump, Senate Majority Leader Mitch McConnell, and other Senate Republicans are suggesting that the state budget crisis reflects the fiscal irresponsibility of Democrat-run states and arguing that Washington shouldn’t bail them out because that would only reward their profligacy.
But, as John Adams said, facts are stubborn things. And the fact is that states face a budget crisis not because they’ve mismanaged their finances. It’s because all over America, in states led by Republicans as well as Democrats, businesses have closed and millions have lost their jobs, and, as a result, state tax revenues have dried up at a record pace. States get 70% of their tax revenues from sales and income taxes, and both are collapsing because places where people shop are closed and the millions who are now laid off aren’t paying income taxes.
To prevent states from making deep budget cuts and imposing massive layoffs that would make the economic crisis even worse, the federal government must provide significant fiscal relief as soon as possible and ensure that it remains in place until the economy recovers.
States are facing a massive budget crisis
Unlike the federal government, almost all states must balance their budgets each year. As their current fiscal years draw to a close on June 30, their shrinking revenues are creating huge shortfalls that they must fill this spring as well as projections of more enormous shortfalls for the coming years.
At the Center on Budget and Policy Priorities, we project states will have a combined $650 billion in shortfalls from fiscal years 2020 through 2022. Many local governments will face shortfalls on top of that.
Without significant relief from the federal government, states will have to take drastic action to balance their budgets, such as slashing education and healthcare, laying off teachers and other workers, and canceling contracts with businesses. That would take money out of the economy at just the wrong time, making the recession deeper, delaying the recovery, and hurting millions of families.
States were in good shape before the pandemic
Far from mismanaging their finances of late, states did a reasonable job in recent years of preparing for a recession, with “rainy day” funds of about 7.5% of state budgets, which was higher than before the last recession. Their total reserves, which include the year-end balances in their general funds, were also higher.
Also in better shape were the state trust funds that support unemployment insurance programs. The problem is that nobody could have predicted that a global pandemic would send the economy into such a steep nosedive and eviscerate state finances so quickly.
States have hardly been overspending of late. State general fund spending for current operations — basic functions like schools, healthcare, the justice system, and public health — is significantly lower as a share of the economy than before the last recession. Frankly, states have spent too little in some key areas, shortchanging investments needed for future economic growth.
For instance, states have fewer teachers and other school workers than a decade ago, even though they now have many more students. State funding for higher education per pupil is down an average of 13% from about a decade ago in inflation-adjusted terms, forcing colleges to raise tuition and putting college out of reach for more families. And, as a share of the economy, states are spending far less on infrastructure than decades ago, shortchanging another key tool for economic growth.
Funding for critical services
McConnell’s suggestion that states would use fiscal relief to bail out their pension systems is badly off-base. For starters, they would put fiscal relief dollars into their general funds, not the separate trust funds that cover pensions.
While states and localities make payments into the pension funds to help cover future obligations, these payments comprise an overage of just 4.7% of state and local general fund spending.
Rather than help the states, McConnell has said that Washington should let them go bankrupt. That would do nothing to help the economy now, however, and it would hurt the states in the coming years.
Bankruptcy lets individuals and businesses ease their debt and cancel their obligations, but state debt isn’t high by historical standards and states should be able to meet those obligations when the economy recovers. Since the late 1800s, only one state (Arkansas in 1934) has ever defaulted on its general obligation debt.
Letting states declare bankruptcy could significantly raise their borrowing costs for major transportation and other projects because investors, who would worry about getting repaid, would demand higher interest payments.
Rather than turn an unprecedented state budget crisis into just one more partisan brawl in Washington, the White House and Senate Republican leaders should support the desperately needed fiscal relief that will protect the jobs of many thousands of workers, ease the deep economic downturn, and soften its blow for millions of families.
Michael Leachman is Senior Director of State Fiscal Research at the Center on Budget and Policy Priorities.