State governments face financial abyss with coronavirus

State governments are staring at budget shortfalls that will substantially exceed what they faced during the great recession, even before the full scope of the economic damage caused by the coronavirus pandemic is known.

Budget analysts, governors and legislative leaders around the country are already holding regular meetings to assess the damage, watching in real time as their revenue estimates fall short of worst-case scenarios mapped for a recession.

In increasingly urgent pleas to Congress, states have asked for $300 billion to $1 trillion to bail them out, and that may not even be enough to replace their lost revenue.

“This is going to have a very severe impact on the economy and on revenues, not only for this fiscal year but for the next fiscal year and several fiscal years to come,” said H.D. Palmer, deputy director of external affairs at the California Department of Finance.

Arizona is predicting a $1.1 billion gap. Illinois expects to be more than $4.6 billion short, while Pennsylvania could be up to $3.9 billion short.

New York analysts estimated they could see a budget gap of up to $7 billion — a projection made in the middle of March, long before the severity of the outbreak in that state was known. A worst-case scenario mapped out in Maryland projects the state could lose $2.8 billion in revenue in just the next few months.

Energy-producing states will get hit with a double debacle, as the price of oil free falls and their major sources of revenue dry up. Alaska forecasters say the state stands to face a $1.3 billion shortfall in the next two years. Wyoming expects a $2.8 billion budget hole.

Virtually all of those deficits and budget gaps are likely to rise in the coming months, as budget analysts get a firmer grasp on how long the economic shutdowns will last, and whether the virus flourishes again as social restrictions are eased.

“It’s something we’ve never sort of faced before. I know everybody is focused right now on what the revenue impact is going to be,” said Marc Nicole, deputy secretary of Maryland’s Department of Budget and Management.

In Maryland, senior officials in the governor’s office, the comptroller’s office and the treasurer’s office meet weekly to keep tabs on the state’s cash position, and a working group meets a few times per week to keep their estimates up to date. In Rhode Island, the state treasurer has already secured $300 million between two lines of credit just to keep from running out of cash.

States do not have the luxury of deficit spending like the federal government does. Forty-nine states are required to balance their budget every year, rules that force states to cut spending — usually to social programs — at exactly the time when those programs are most in demand. Vermont is the only state without a balanced-budget requirement.

States are already taking drastic steps to trim any costs they can. Hogan has implemented a hiring freeze for all state jobs that are not related to battling the outbreak. Michigan Gov. Gretchen Whitmer (D) cut her own salary and those of her senior staff, and Attorney General Dana Nessel (D) said her office would lay off a quarter of its staff. 

Whitmer and governors in Washington, New Mexico and New York have all vetoed spending projects in anticipation of major shortfalls on the horizon. 

The financial blow will not be as bad as it might have been. States spent much of the last decade building up rainy day funds after the last recession, and most states now have more in reserve than at any time in their histories. 

But those savings are going to be gone in a matter of months, experts said. 

“I wouldn’t be surprised if we see much more damage than during the great recession,” said Lucy Dadayan, a senior research associate at the Urban Institute’s Tax Policy Center. States “are going to need more stimulus money from the federal government to be able to navigate this crisis.”

In estimates made before the pandemic reached the United States, California budget officials assumed its losses would be $25 billion per year for the next two fiscal years, and $15 to $20 billion in several years after that. Those numbers are likely to be revised for the worse.

California’s surplus fund is up to about $16 billion, and by law the state can only spend half that amount in a single fiscal year, so the amount Gov. Gavin Newsom (D)has to mitigate the damage is about a third of what his budget forecasters say is coming.

“We go into this in a little bit of a stronger fiscal position than we’ve been in in recent years, because of the fact that we’ve paid off past debts, because the bulk of our spending has been one-time instead of ongoing, because we’ve built up significant cash reserves,” Palmer said. “That should not be construed by anyone to mean that very difficult decisions do not lie ahead.”

Congress has already appropriated $150 billion in emergency funding to the states through the CARES Act. But the latest round of coronavirus relief funding passed the Senate on Tuesday did not include the $150 billion Democrats wanted to send to state and local governments. The White House and Senate Majority Leader Mitch McConnell (R-Ky.) objected to that spending, though President Trump has said he would support money for state and local governments in the next coronavirus package.

McConnell said Wednesday the full Senate would debate how much to send to the states.

“I think the next debate, which I assume will relate to state and local government relief, needs to be when the Senate is back in session with full participation,” McConnell told reporters. 

Sens. Bob Menendez (D-N.J.) and Bill Cassidy (R-La.) have proposed a bill to spend $500 billion on state and local government relief.

Even as states begin to talk about how they plan to open their economies, budget analysts say the true scope of the crisis is not yet clear. But the speed at which the severity of the crisis announced itself is unlike anything economists have seen in modern history — and a far cry from what now seems like the glacial pace at which the world economy slid into the great recession.

“We didn’t know we were in a recession until two months later,” Nicole said of the 2008 crisis. “Here, you kinda knew it right away. You’ve got to begin to plan right away.”