Most state and local governments approach the end of the 2020 fiscal year on June 30, and by now many have estimated revenue losses and have determined where to cut the budget to achieve balance by the end of the fiscal year. Last week’s April employment figures showed a reduction of nearly a million people employed in state and local government (federal employment remained level).  Some of the labor reduction consist of unpaid furloughs, with the hope that the employees will be brought back once revenues return.  These numbers also set a baseline for spending in fiscal 2021 and most importantly, where they will have to make additional budget cuts.

The National Conference of State Legislatures compiled current estimates of state revenue losses for year-end 2020 and we added a few that reported separately.  Of twenty-three states with reports as of the end of April, losses total $25.2 billion.  That’s partly due to the postponement of income tax filings from April into the next fiscal year, whenever the federal government settles on an ultimate filing date for 2019 income.  Lost sales and excise tax revenues, gas taxes, and license fees, however, may not return.  That’s for three and a half months for about half the states.  Rough cut, double the amount and multiply by four to get an annual reduction for the sector — somewhere in the ballpark of $200 billion for a year.  Add back what you think you might see in FY2021 from the postponed 2019 filing and what you expect from the state and federal governments.  This is just the revenue side. Extra spending on unemployment and Medicaid at the state level adds to the deficit soup.  Higher costs for emergency personnel at the local level are partly covered with federal grants and loans, but the rest is own-sourced.

The 2020 filings, whether they are received in April 2021 or some later date,  are likely to look considerably worse, since 2019 reflects that happier time before widespread lockdowns.

At the local level, the National Association of Counties, NACO, published a survey of the nation’s 3,000 counties through 2021.  County revenues include charges and fees, sales taxes and gross receipts as well as income and license fees – approximately 42% of all “own-source” revenues. Property taxes make up much of the rest.   NACO estimates that counties face $114 billion in lost revenue and $30 billion in additional expenditures.  In our federal system, counties handle health and welfare services, including hospitals, nursing homes, mental health, child protection, jails, as well as law enforcement, fire protection and transportation.  The Medicaid formula, or FMAP, was given a boost that will help fund county health service.

Counties employ 3.6 million workers and have furloughed about 14% of the workforce.  Franklin County Pennsylvania has furloughed 25% of its workforce and Broomfield City and County Colorado, Carbon County Pennsylvania and Westmoreland County report that they have furloughed 10%.

Franklin County, Ohio is expecting a 25% loss in sales tax, or $75 million.  Los Angeles County, California also estimated a 25% loss, or $1.4 billion, in sales tax revenue.  Philadelphia projects a deficit of $650 million closing out the year and nearly $4.7 billion deficit to close in the coming fiscal year.

It is particularly bitter to hear the US Senate Majority leader decry state and local “mismanagement” as a reason for the federal government to forgo helping out with these losses. In fact, outside the Beltway, the sector managed to accumulate healthy reserves and rainy-day funds to gird against the possibility of recession.

Before March, state and local infrastructure investment was on a growth trajectory, as interest rates remained low and employment levels had returned to healthy levels.  The first chart shows cumulative growth for the first four months in each year between 2018-2020.  On a full year basis, annual investment in public infrastructure (water, sewer, roads, schools, courts and other public facilities) grew by an increment of $100 billion more from 2011 and 2019.  You can see the fall off between February and March in 2020, and modest recovery in the second chart below.

The market dislocation at the beginning of March spurred the Federal Reserve to help maintain liquidity.  It took the unusual action of including municipal short-term notes in its programs (and issued a third “FAQ” on the program yesterday, May 11).  Until that program and other assistance comes through (if), state and local governments are using reserves and rainy-day funds to buffer service and employment cuts.

Investment in infrastructure is likely to remain lighter for now, until calmer seas return.  Further, so-called trillion-dollar infrastructure investment that the president promised at the beginning of his administration will just have to wait longer.