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The Budgetary Hangover from COVID-19

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.

By Philip Joyce
October 5, 2020

Based on an article, authored with Aichiro Probowa, in the Journal of Public Budgeting, Accounting, and Financial Management.

As hard as it is to predict when the pandemic will be behind us and life will return to something approaching “normal,” we can predict with some certainly that it will take even longer for budgets at all levels of government to recover from the effects of COVID-19. Depressing revenue streams and rising spending connected to the pandemic have blown a large hole in public budgets. These state budget problems result from both reduced revenues (particularly from income and sales taxes) and increased spending both for direct response (for example, testing) to the pandemic and for addressing its economic consequences.

Further, this is not destined to be a temporary impact, but rather one with effects that will be seen years into the future. State and local governments are likely to feel the greatest effects, while having perhaps the least flexibility to combat them.

The federal government has passed two main pieces of legislation to provide funds and relief to deal with the effects of the virus:

  • The Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136), signed by the President on March 27th, 2020; and
  • The Paycheck Protection and Health Care Enhancement Act (P.L. 116-139), signed by the President on April 24th, 2020.

Together, these two laws were estimated to cost more than $2 trillion, primarily resulting from support for small businesses, relief to individual taxpayers and extended and expanded unemployment benefits.

The only specific relief for state, local and tribal governments was $150 billion provided in the CARES Act; 45% of this was to be passed down to local governments.

These and other legislative changes, as well as the general economic malaise created by the pandemic, added more than $3 trillion to federal deficits between 2020 and 2021. The 2020 deficit alone, which was estimated in January at just over $1 trillion, was projected at $3.3 trillion in early September. The federal debt is estimated to stand at $22 trillion, or more than 100% of GDP, by the end of fiscal year 2021.

By April, stay-at-home orders extended to 42 states plus the District of Columbia. The shutdown of these states, although relaxed later in many of them, had obvious economic and therefore budgetary effects. The federal government can add to its accumulated debt without any certain plan for reducing that debt, but state and local governments must determine how, at least in the medium term, they are going to address the shortfalls that have resulted from COVID-19.

Not all states and localities are affected in the same way, in part because of differences in economic conditions (for example, key employers) from state to state. The National Conference of State Legislatures has done research on the reported state budget shortfalls in FY20, as a percentage of previously adopted budgets. In the more than 30 states for which NCSL was able to determine these budgetary effects, they ranged from roughly 1% (Maine, Utah, Virginia) to 12% in Nevada, 13% in Michigan and 15% in Washington. The estimated FY21 effects are substantially larger in virtually all states, with 25 of 39 states reporting shortfalls in excess of 10%; in 8 of those states the estimate is for deficits in excess of 15%, to a high of perhaps as much as 30%. These only represent the state-level effects. Clearly local governments, which face the same budget-balancing pressures, also face dire fiscal challenges.

Given the magnitude of these deficits, and the need for balanced budgets by states and localities, what are we to conclude about our immediate fiscal future? Several observations can be made:

  1. While states, by and large, had built up healthy balances in their rainy day funds since the Great Recession (from $29 billion in 2011 to $75 billion in 2019) those balances are woefully inadequate to enable these governments to deal with a fiscal crisis of this magnitude.
  2. Given the size of the state budget holes, local governments are unlikely to be able to rely on the states for much assistance to deal with local-level budget problems.
  3. States and localities are severely hamstrung in terms of actions they can take to combat the fiscal effects of the pandemic. For most, revenue increases will be off the table, and some of the largest areas of spending, such as elementary and secondary education and public health, are likely off limits as well.
  4. The assistance that has been provided by the federal government to support states and localities, while helpful, is insufficient to make up the difference. Additional federal support for states and localities has been held up by partisan disputes between the Democratically controlled House, the Trump administration and its Senate allies. Eventually, it seems that some additional support is crucial.
  5. We do not know how long the pandemic will last, but current trends in cases suggest that it will not end anytime soon, which likely means that most current estimates of its fiscal effects are likely to understate those effects.

In the end, one is tempted to quote Yogi Berra, who once famously said, “It’s tough to make predictions, especially about the future.” While I am relatively certain that he wasn’t talking about public budgeting, this caution never seemed more appropriate than it does today.


Author: Philip Joyce is senior associate dean and professor of public policy in the University of Maryland School of Public Policy. Joyce’s teaching and research interests include public budgeting, performance measurement and intergovernmental relations.

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