Budget Crises Make Mayors And Governors Say “Show Me The Money!”

A much larger injection of funds to state and local governments is what’s needed.  Without hundreds of billions of additional funding, we risk a greater economic crisis, a prolonged public health emergency, and a worsening of inequality and misery. 

In seemingly never-ending waves of bad economic news, the economic shocks caused by the pandemic are pounding state and local budgets.  Calls are growing for a federal bailout, without a major infusion of cash, up to $500 billion by some estimates.  Mayors and governors are like characters in the movie “Jerry McGuire,” saying to the federal government, “show me the money!”

Unlike the federal government, states (and the cities they charter and oversee) can’t run deficits.  We are now deep into annual budget seasons for cities and states, and the pandemic’s effects are driving revenue forecasts—and budget plans—sharply downward.  The majority of states start their new fiscal year on July 1, and the bad news is hitting them hard. Essential services—garbage pickup, emergency medical services, police, public education, and health care—all are threatened.  

Ohio’s March revenues were 10.5% below what they had forecast, $159 million; they will likely be much worse for April.  New York City Mayor Bill DeBlasio announced a budget with $6 billion in cuts, ranging from closing swimming pools to slower garbage pickups, but the Citizen’s Budget Commission says the cuts aren’t nearly deep enough, given growing revenue shortfalls. Michigan is forecasting a revenue drop this year between $1 billion and $3 billion, with perhaps up to $4 billion next fiscal year. 

Michigan’s wide range of estimates shows how hard it is to conduct accurate revenue forecasts in the storm of the bad economic news.  Analysts have been predicting deep losses in retail sales, which generate state and local sales tax revenues.  Those fears were confirmed on Wednesday when the Census Bureau announced an 8.7% monthly decline (6.2% year-over-year), the largest drop since this data series began in 1992.

Of course, the economic decline is driving all revenues down, not just sales taxes.  There is some hope that the federal government’s unprecedented levels of new funding, from direct household payments to vastly increased unemployment insurance to hundreds of billions of forgivable small business loans, will help the economy turn around quickly.  But any turnaround is months away at best, and that won’t provide any relief to state and local budgets.

In addition to this increased federal spending, the CARES Act provides $150 billion to states and larger cities; smaller cities will have funds allocated by their state.  But governors and mayors don’t think this is anywhere close to what’s needed, and are calling for much higher federal support.  The bipartisan National Governors Association wants an “additional and immediate” $500 billion for states, while local government leadership organizations are calling for $250 billion to go directly to local governments of all sizes

Any increased aid to state and local governments should prioritize services for the poor and people of color, who are the hardest hit by the pandemic.  They lack health insurance, are the front-line workers most at riskfrom providing essential services, are most at risk of being driven deeper into poverty, and suffer higher death rates than any other group.  Although the pandemic affects everyone, poor and excluded people are suffering the most and have the least resources to cope. 

In the municipal finance market, the Federal Reserve is taking another unprecedented move, buying up to $500 billion in short-term state and local bonds, again concentrated on states and larger cities.  But the Fed is doing this reluctantly, worried about picking “winners and losers” in the muni market.  They should worry in the long-term, as many governments use their public finance to support foolish schemes like sports stadiumsor luxury real estate or projects wrongly justified as “economic development.”

But the Fed’s actions are at this point primarily aimed at keeping the muni market open and liquid, not at generating new state and local revenue.  More state and city debt is not the solution to their current crisis or future well-being.  Increasing funding for direct spending and services is what’s needed.

 Economist Nathan Tankus (whose “Notes On The Crises” is among the most insightful and timely analysis these days) calls on the Federal Government to assume all Medicaid costs, pointing out the economic and public health absurdity of likely state cuts in health care for the poor.  It’s a good idea, and there are other functions where the federal spending (and oversight) role should increase, including a permanent stronger role in unemployment insurance, funding a substantial increase in teacher pay, and some type of universal or single-payer health plan.

But for now, a much larger injection of funds to state and local governments is what’s needed.  Without hundreds of billions of additional funding to them, we run the risk of a greater economic crisis, a prolonged public health emergency, and a worsening of inequality and misery.  Show them the money.

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