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Coronavirus threatens $500bn hole in US state budgets 

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Via Financial Times

The economic impact of shutting down local economies threatens to blow a $500bn hole in state tax revenues and force savage cuts to spending on education and other public services unless the federal government steps in with bailout funds.

Even as governors focus on the immediate battle against the pandemic, they are warning that a fiscal crunch is approaching that could eclipse the Great Recession a decade ago and tip some heavily indebted states into financial crisis.

Andrew Cuomo, the New York governor who has become a leading champion for state authority, said the budget issues have become even more acute following Thursday’s decision by President Donald Trump to leave responsibility for reopening the US economy to individual governors.

“Don’t give the states this massive undertaking that has never been done before and then don’t give them any resources to do it,” Mr Cuomo said at his daily news conference on Friday. “That is passing the buck without passing the bucks.”

As part of its spending package at the end of March, Congress approved $150bn to help states pay for hospital costs, supplies and training.

But governors say covering the extra spending related to coronavirus does not go nearly far enough, as the collapse in revenues resulting from the virus-related shutdowns will be even more significant.

“State governments have got precisely zero, zilch, nada in unrestricted funding” from Washington, Mr Cuomo said. 

Democrats on Capitol Hill have made another $150bn in funding for state governments a central demand for a fourth stimulus package, which is currently being negotiated with the White House.

But the Trump administration and Republican congressional leaders have refused to add the funding, insisting the new legislation focus solely on replenishing a now-empty $350bn fund for loans to small businesses.

The Washington stand-off has come as state comptrollers watch expected sales and income taxes drain away. “This event, it is not parallel to any prior event that we’ve ever had,” said Glenn Hegar, state comptroller for Texas. “So many people have been on unemployment so fast. Now what is the ripple effect into other portions of the economy? We just don’t know.” 

Animated column chart of US initial jobless claims (000s) - Mar/Apr 2020 compared with worst four-week periods in previous US recessions showing Over twenty million have become unemployed in the last four weeks

State capitals believe even the $150bn sought by Democrats in Washington will be insufficient. Last week, the National Governors Association asked Congress for another $500bn to make up for the collapse in tax revenue. On Thursday, the governors of three states that will be crucial in the coming presidential election escalated their appeal to Mr Trump.

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“The magnitude of the crushing economic impact this virus has had on our states and residents cannot be overstated,” the governors of Wisconsin, Pennsylvania and Michigan wrote in a letter to the president, telling him that without aid, “the damage to our state economies will be exacerbated by the cuts we know we will be forced to make”.

A study by the Center on Budget and Policy Priorities released on Tuesday predicted that the sum of state revenue losses could reach $105bn by June, and $290bn for the following fiscal year — far greater than 2010, the worst year of the last recession. The study also predicts another $105bn shortfall in 2022, bringing the total to $500bn over the next three years.

But no one knows yet when, how quickly and with what conditions the lockdowns will be lifted.

Maryland, the most recent state to update its revenue forecasts, said last week that it would lose $2.8bn just by the end of the fiscal year in June, or almost 15 per cent of the state’s annual general fund. 

“At the end of the day, I think it could be worse [than the Great Recession],” said Susana Mendoza, comptroller of Illinois. “When have you seen 10 per cent of the entire workforce go dark in the entire country that quickly?”

Unlike the federal government, America’s states must balance their budgets, which means that as tax revenues fall during a recession, they have to cut spending. States pay for primary and secondary education in the US, and are a significant source of funds for universities as well. They also pay for healthcare for the poor, state roads, and support cities and counties. 

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According to a 2019 study by the Pew Charitable Trust, a non-profit organisation, further cuts now would extend a “lost decade” — many states hadn’t yet returned to spending levels from before the last recession. State funding for universities is still down 13 per cent, driving up tuition costs. More than half of states haven’t returned to their 2007 levels of spending on primary and secondary education. State infrastructure spending as a percentage of GDP is at a 50-year low. 

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As they try to make plans for the year, states are essentially flying blind. 

Sales taxes data for April, the first full month of lockdowns, will not be available for most states until late May, according to Pew’s Joshua Goodman. States can get an idea of income taxes from the amounts that are withheld from paychecks, but even then, pay cycles lag by several weeks.

In Texas, Mr Hegar followed restaurant data published by the booking site OpenTable, until the bookings dropped to zero. His office also tracked data on hourly workers published by HomeBase, a scheduling service, and passenger counts from the Transportation Security Administration. 

Texas would probably revise down its projections for the year “in the billions of dollars,” out of annual tax revenues of about $50bn, he said. 

“There’s not an awful lot of hard data on what’s really going on, or how fast this will decline,” said Frank Rainwater, director of South Carolina’s board of economic advisers. When the board met as scheduled last week to update its projections for the year, they already knew that BMW had idled its manufacturing plant in the state. They assumed a 20 per cent national decline in GDP for the second quarter, which gave them a $500m loss by June. 

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The immediate challenge states face is managing cash flow, as they push tax payment deadlines out to the summer to give citizens a break. The Federal Reserve has offered to lend against future tax receipts, but so far only for the next five months.

Many states have spent the last decade building up their rainy day funds, bringing the median reserve well above its 2007 level, but few could last for long. Texas could run for 70 days on its rainy day fund; South Carolina, for 23.

Not all US states are equally prepared

Illinois, according to Ms Mendoza, could run for “30 seconds”. The state was paying 12 per cent interest on a backlog of $17bn in unpaid bills when she came into office in late 2016. After a bond deal, she was able to pay it down to $8bn. 

Now, she has let the state’s creditors know some terms will be extended again. She is prioritising education and day care, pensions and debt service payments, as well as anything that may be reimbursed by federal dollars, such as health insurance for the poor, or the coronavirus response. 

For everything else, she says, she is trying to be as open as possible. “I feel like Jimmy Stewart in It’s a Wonderful Life,” she said. “Because you’re having to tell people, I know that the state owes you this money. I know it’s your money, but I don’t have it all, right?”

Additional reporting by Peter Wells in New York

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