State and local governments brace for huge cuts as feds debate sending help for coronavirus-related revenue loss

WASHINGTON – Library employees and crossing guards were among the 380 city workers given furlough notices in Louisville, Ky., this month.

New York Gov. Andrew Cuomo warned last week that, without additional federal aid, the state will have to prepare for a 20% budget shortfall, which could hit schools, local governments and hospitals.

In Indiana, a state that President Donald Trump pointed to Wednesday as one that is doing “phenomenally well,” budget reserves could be exhausted by fall, according to one independent estimate. The state is distributing a record amount of unemployment assistance.

The latest coronavirus assistance package – which Trump signed into law Friday – includes nearly a half-trillion dollars to reload an assistance program for small businesses, send more funds to cash-strapped hospitals and expand coronavirus testing.

It does not include the hundreds of billions of dollars that congressional Democrats sought to replenish the coffers of state and local governments.

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“Fortunately, what they wanted to extract the most, I refused to go along with, and the White House backed me up,” Senate Majority Leader Mitch McConnell, R-Ky., told conservative radio host Hugh Hewitt Wednesday. “We’re not ready to just send a blank check down to states and local governments to spend anyway they choose to.”

McConnell also told Hewitt he would support allowing struggling states to file for bankruptcy – comments that drew an immediate pushback from governors and lawmakers, including some Republicans.

“The last thing we need in the middle of an economic crisis is to have states all filing bankruptcy all across America and not be able to provide services to people who desperately need them,” Maryland Gov. Larry Hogan, a Republican who heads the National Governors Association, told Politico Thursday. He expects Maryland’s revenue shortfall to far exceed its rainy day fund despite the state’s top credit rating.

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Trump weighs in

Trump bristled Wednesday when asked by reporters if he agreed with McConnell and whether the administration is withholding aid as an inducement to get states to reopen their economies faster.

“They have to be responsible for their own finances,” Trump said of other government entities. “We’ll see what happens.”

Trump had tweeted earlier in the week that after signing the latest bill, he’d begin discussions on the next package “with fiscal relief to State/Local Governments for lost revenues.” But he also, on Thursday, called it interesting that “the states that seem to have the problem happen to be Democrat.”

House Speaker Nancy Pelosi, D-Calif, said Friday she won't support an additional coronavirus assistance package unless it includes money for state and local governments.

One of the four rescue packages passed so far did include roughly $200 billion for those entities. The money was aimed at helping pay for new expenses related to the coronavirus. It didn’t address the severe revenue shortfalls those governments are now starting to see as shuttered economies reduce the collection of income and sales tax.

Dutchess County in New York’s Hudson Valley, for example, projects sales tax revenue could be cut in half, for a loss of about $50 million.

“When governors like ours talk about the need to establish testing sites to roll out antibody testing and to expand the tracing of positive cases, it is in fact county governments that are responsible for effectuating those expectations,” said Dutchess County Executive Marcus Molinaro, who lost his father to COVID-19.

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Worse than the Great Recession

The left-leaning Center on Budget and Policy Priorities estimates states’ budget gaps will be larger than during the Great Recession because unemployment is higher and sales tax revenue has plummeted at an unprecedented pace. Sales and income taxes contribute 70% of state tax revenue. Most state dollars are spent on education, health care and transportation.

While states have rebuilt their rainy day funds since the recession, they could shake all the pennies out of their piggy banks and the combined revenue shortfall would still be roughly $360 billion, the center estimates. That doesn’t include local governments’ funding losses or the additional expenses states face because of the pandemic. By comparison, state budget shortfalls reached about $230 billion in the worst year of the Great Recession, according to the center.

Some states are likely to take bigger hits than others, such as those heavily dependent on tourism, those disproportionately reliant on income taxes from high earners whose stock portfolios have shrunk, or states like Alaska and New Mexico that have a high concentration of oil-related industries.

And some states were in worse shape going into the crisis.

An unfair bailout?

Illinois’ longstanding budget problems include a massively underfunded pension system. The Democratic state Senate president put a target on Illinois’ back when he wrote federal lawmakers this month, asking for $41 billion in assistance, including $10 billion to help the pension fund.

Republicans in Illinois and elsewhere are calling the request a brazen attempt to use a global pandemic to get a federal rescue from a self-manufactured fiscal disaster.

“What I do not want is for this to turn into a bailout of those states and local governments who have been fiscally profligate over the years,” said Indiana Sen. Todd Young, a member of the GOP leadership.

The Wall Street Journal’s editorial page argued this month that sending more money to states will slow the recovery because a cash infusion would give governors an incentive to stay locked down for longer.

“Democratic governors in particular won’t take the political risk of restarting their economies against liberal opposition if they know the feds will underwrite the cost of lockdowns,” the editorial said.

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An administration official recently brought up Illinois' situation in an email to a local official in Iowa. The official also argued state and local governments haven’t sufficiently supported their requests for more funds, and alluded to the importance of ending stay-at-home rules that have hurt the economy.

“Considering that Iowa is positioning itself as a leader in reopening its economy (albeit on a phased basis), has the county contemplated increased revenue generation in the weeks/months ahead?” the official asked in the email obtained by USA TODAY.

Disincentive to reopen?

Ray Scheppach, a former longtime executive director of the National Governors Association who worked with states on the federal assistance they received during the Great Recession, said the economy won’t revive soon if states – which can’t run deficits the way the federal government can – are cutting spending and raising taxes to balance their budgets.

"It’s obvious (Trump) is trying to put pressure on because he figures, 'Well, they’re going to have to open up…quicker if they don’t get any more money,’” Scheppach said. But the administration, Scheppach continued, is “risking a much slower recovery” the longer they wait to send aid.

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Thomas Nelson, the top official in Wisconsin’s Outagamie County, called it a “really rich account” for the federal government – which is dripping in red ink – to complain that some state and local governments have mismanaged their funds.

“Talk about calling the kettle black,” Nelson said.

Matt Chase, executive director of the National Association of Counties, said the mismanagement argument and the concern that aid will be a disincentive to reopening state and local economies are two lines of opposition the association is battling.

“We’ve heard that from the White House,” Chase said on a call with reporters Wednesday. “What we have told them….is, 'They want to open their economies as soon as possible. There’s no amount of federal aid that would overcome what the markets and the economy would generate for us.’”

A White House official declined to comment on whether a desire for states to lift stay-at-home orders and allow shuttered businesses to reopen is delaying assistance. The official pointed to Trump's tweet in support of aid to state and local governments.

'Let the dust settle'

On Thursday, Chase told USA TODAY that his group is working with the administration and Congress to address concerns that the money would be spent wisely and he’s optimistic that both sides will come together in a few weeks.

“I think we’ve got to let the dust settle a little bit,” said Sen. Bill Cassidy, a Louisiana Republican who has teamed up with Democratic Sen. Bob Menendez of New Jersey on a $500 billion assistance proposal for state and local governments.

Cassidy said the help can’t look like a “money grab” and must have a clear rationale for how it’s allocated. His proposal would distribute one-third of the money based on population, one-third on how hard an area has been hit economically and one-third on how much it’s been devastated by the coronavirus.

For the larger justification of why the federal funding is needed, Cassidy pointed to New Orleans, where the taxes collected from the tourism on which the city depends have dried up.

"Now, you’ve still got to pay your police to open up the city. You’ve got to pay your sanitation workers to take away the garbage, fire department to provide protection," Cassidy said. "So how is the small business going to reopen if you don’t have fire? You don’t have police? You don’t have sanitation? It’s going to be very difficult, if not impossible."

Contributing: Michael Collins, Christal Hayes, Chris Rickett and Morgan Watkins, USA TODAY Network.

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This article originally appeared on USA TODAY: States are seeking federal help for COVID-related budget gaps