Throughout much of 2020, analysts forecast devastating shortfalls in state and local budgets as economies went into lockdown and public health costs soared. States feared revenue losses on an average of eight percent, roughly in line with their experiences from the Great Recession. Their fears would have been realized if it weren't for three crucial factors: the federal government's unprecedented levels of aid, along with resilient consumer spending and strong high-end employment. Yet now the Biden administration is proposing the largest state and local aid package in American history, raising the question: Who actually needs this money, and why?
While America's real GDP fell by 3.5 percent in 2020, average state and local tax receipts stayed flat. Once you add in federal aid, revenues actually grew by 8.9 percent. A separate analysis of state budgets by JPMorgan found an average fall in revenue of just 0.12 percent, while 21 states saw their tax receipts grow for the year. Officials are quick to point out that budgets may still be tight for at least another year, if not longer, as the pandemic's effect wears on, and that flat revenues are nothing like the three percent growth they once anticipated for 2020.
Millions Under the Couch Cushions
But the picture that's quickly emerging, at the state level at least, is one of winners and losers, and with surprises in both ranks.In early January, for example, California Gov. Gavin Newsom unveiled a record-breaking $227 billion spending plan, including $600 stimulus checks to Californians — and a $15 billion surplus in revenue thanks largely to capital-gains taxes in a soaring stock market. "California is again swimming in money," declared the Associated Press. (A little more than a week later, Newsom penned a letter to President Biden calling for more federal aid.) The Golden State is hardly alone in finding hundreds of millions of dollars under the couch cushions: Arkansas, Idaho and Illinois collected more tax revenues in the first three quarters of 2020 than in the same period in 2019. Arizona is anticipating a $352 million surplus rather than the $1.1 billion deficit projected last April.
Then there are states like Hawaii, where cratering tourism has left the state in a $1.8 billion budget hole, with tax revenues not expected to recover until 2024. Florida and Nevada are also missing their frequent flyers after tax receipts plummeted by 7.9 percent and 13 percent, respectively. States dependent on taxing energy and mining, such as Alaska, North Dakota, Texas and West Virginia, have seen their own devastating budget hits. And sales-tax-dependent states like New York wound up in worse shape than those reliant on less volatile revenue streams like Vermont, where 32 percent of revenues come from property taxes. In all, 26 states saw their tax revenues decline in the first 10 months of 2020.
But every state's been a winner this past year with the federal government, whose aid to states and localities rose an astonishing 42 percent. What might have been a $331 billion budget shortfall due to COVID-19 instead came to a $165.5 billion dip, according to Moody's, and that's before counting $79 billion in state rainy day funds. Federal aid also propped up businesses and households, which led to economic activity and hiring that boosted state and local tax revenues, while also hiking taxable unemployment benefits. Having the Federal Reserve goose the stock and housing markets with super-low interest rates didn't hurt either.
Grabbing for Federal Dollars
Into this very mixed fiscal picture steps Biden's $1.9 trillion coronavirus relief bill and its nearly $350 billion in flexible aid for states, localities, territories and tribal governments. The states' $195 billion share of that sum alone would leave them with a combined budget surplus. And since the federal aid formula would in part be tied to unemployment rather than fiscal need, California would still receive funds worth roughly 17 percent of its entire general fund revenue. There's also the Biden plan's $130 billion for reopening K-12 schools, $20 billion for public transit agencies, $25 billion for public housing agencies, $30 billion in disaster relief funds, and an array of lesser billion-dollar sums for everything from home energy to cash assistance. Combined with the additional aid the administration hopes to give households and employers, America's states and cities are looking at a potential federal windfall of well north of a half a trillion dollars.No wonder then that some states are looking to grab as many federal dollars as they can. Gov. Andrew Cuomo has long claimed New York State needed $15 billion in federal aid to cover a $15 billion budget shortfall, and he is still asking for this sum even after revising his state's budget gap down to $8 billion. The governor is also cutting $160 million from the state's crippled mass transit systems, saying he will give it back only if New York gets its relief money. Never mind that New York likely still has billions in unspent funds from previous stimulus packages and has disbursed barely one percent of its education aid. The state's newly released budget plan intends to use federal aid as a substitute for normal, non-emergency state spending — with no spending cuts or tax increases — leaving in place significant deficits for the 2023-24 budget.
Why should fiscally profligate states like New York be rewarded more than states like Tennessee where unemployment is lower and budgets stronger? By not means-testing aid, the federal government can say it is not a bailout, just as the CARES Act focused on helping states and localities pay to fight the pandemic regardless of their fiscal state. But once federal relief goes beyond fighting COVID, even exceeding actual budgetary shortfalls as the Biden plan does, it actually does become a state bailout. When Illinois' Legislature marks the occasion of fiscal relief to increase pension payouts, you know something's wrong.
Federal relief to states and localities should aim at preserving basic services and fighting the pandemic, not covering up budget holes resulting from decades of fiscal mismanagement. Any relief bill containing unrestricted aid in excess of $100 billion is questionable at best. Same for any COVID relief that allocates less than one percent of its dollars to vaccination, as congressional Democrats are planning. The reality is that most states can manage their budgets just fine in the wake of the pandemic as long as they keep an eye on spending. In some cases, local governments are in worse shape financially than their states, but that's a problem that a state capital is better placed than Washington to manage — and one reason for the existence of rainy day funds in the first place. Better yet, sending financial relief directly to households and businesses will indirectly boost budgets across the board.
America should be concerned with the state and local budget crisis. But we should care even more about the governors and mayors who have governed well throughout this crisis, who showed they can curb the virus, manage their budgets capably, grow their economies and get jabs into arms to end this pandemic. That's who the Biden administration should really be helping.
Governing's opinion columns reflect the views of their authors and not necessarily those of Governing's editors or management.
