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Capitol Correspondence - 07.14.20

Big Picture: States Begin Re-Examining Their Budgets as Crisis Prolongs

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As reported by Governing:

“The new fiscal year is here but budget writers are still in the bargaining phase. Although it starts for most states and localities on July 1, so many uncertainties remain that budgets are effectively works in progress, with lawmakers still hoping for an after-the-last-minute rescue from Washington.

All but a few states have enacted budgets for fiscal 2021, but several have punted harder decisions until later this summer or perhaps the fall — either formally pushing back the start of the budget year or passing continuing resolutions to keep spending levels intact for a while yet, in hopes cuts can still be avoided. On Monday, California Gov. Gavin Newsom signed a new budget that is filled with asterisks. Billions of dollars’ worth of scheduled spending cuts will be canceled, if Congress comes up with an aid package.

That may well happen. Congressional Republicans have been wary of sending more aid to states, cities and counties, wanting to see whether the economy would recover without additional priming. There now appears to be a grudging realization that further aid is necessary. No one knows what that will look like, however, and help isn’t likely to come any time sooner than the end of the month.


Waiting on Washington may be the hardest part, but states and localities face other unknowns. For one thing, most states followed the feds in moving their income tax filing deadlines back, from April 15 to July 15. Since returns will reflect last year’s income levels, they should be pretty healthy. Still, quarterly payments that normally would have been due in June may come in short of expectations.

Then there’s the economy. With coronavirus cases surging, states are either putting the brakes on reopening plans or, to a limited extent, shifting them into reverse. Optimism that the disease would die down to an extent allowing the economy to shift into full recovery mode will have to be tempered for a while. That’s bad news for everyone. It also makes it difficult for revenue forecasters to know what type of receipts their jurisdictions can count on.


Last week, the National League of Cities released a survey of more than 1,100 municipalities. It found that three-quarters of them have already made spending cuts, while nearly two-thirds have either delayed or canceled capital projects. A third plan further layoffs or furloughs, on top of the jobs already lost.


Financial problems are so severe that it would be “just naive” to assume there won’t be a substantial increase in defaults, says Matt Fabian, a partner at Municipal Markets Analytics. As of last week, 33 municipal borrowers had disclosed default already this year, with about a dozen more already forecasted. These aren’t general governments but rather special districts or bonding authorities. Still, the nation is likely to see more defaults this year than at any time since the Great Recession, Fabian says.


Even assuming serious help does come from Washington, states and budget pain could be enduring. State and local revenues are always a lagging indicator. For years after the Great Recession, the economy grew but so slowly and unevenly that many communities and individuals felt as though the recession never ended. It took until fiscal 2019 for state revenues to return where they’d been pre-recession, when adjusted for inflation.”