Coronavirus' impact on states

The Fiscal Impact of COVID-19 on the States

The U.S. economy was strong as we started this year and the outlook was that it would fundamentally continue through 2020. The thriving economy had led to increased state revenues from taxes and other fees, which allowed governors and state legislatures to balance their budgets more easily and increase their “rainy day” funds.

Then, as the threat of the COVID-19 outbreak increased, state leaders took action and enacted the necessary steps to protect and safeguard families and communities from this deadly virus. They issued state emergency declarations that included orders for individuals to stay at home with exceptions for those considered essential service personnel. Examples of essential services, as defined by state orders, include the work of doctors, nurses, law enforcement and fire protection staffs, and, in most states, construction workers.

These state actions were unprecedented but vital because every state is susceptible to the threat of coronavirus outbreak. This has led to the economy at both the national and state level to slow. Some economic sectors, such as restaurants and entertainment venues, have even been forced to shut down almost completely within some cities and states.

NAIOP hosted a webinar this week to assess the extent of the fiscal impact on the states. The National Association of State Budget Officers (NASBO) Director of State Fiscal Studies, Brian Sigrit, led the discussion and outlined the virus’ impact on state revenues and budget projections.

The real challenge for states is their budget for fiscal year 2021, Sigrit said, because the pandemic’s full impacts on state revenue collections and other budget adjustments have not been completely realized this fiscal year, which ends on June 30 for a majority of the states. State revenues under the pre-pandemic economy (July 2019 to March 2020) remained very strong for most of the 2020 fiscal year. State leaders will now have to pass, enact and adjust their budgets for an entire fiscal year subject to the economic conditions related to the virus. 

Unlike the federal government, states are not allowed to operate with a deficit. They are required by law to have balanced budgets that align available revenues and expenditures. As states prepare to enact their operating budgets for the 2021 fiscal year while dealing with a slower economy and decreased revenues, governors and legislators will either have to reduce expenditures for government services or look for additional sources of revenue for their states. 

Sigrit explained that each state is facing a budgetary shortfall that cannot be covered by its “rainy day” funds; there is just not enough money in those funds. He continued that the scope of these shortfalls will depend on an additional federal relief package that provides flexibility for states to apply any relief to spending demands based on need, not just new COVID-19-related expenditures and revenue deficits. The $150 billion provided to state and local governments under the coronavirus relief bill was to be used for COVID-19-related relief. He said that each state will either have to increase revenues or cut expenditures, irrespective of their “rainy day” funds or additional federal aid.

According to Sigrit, the fiscal strengthen of states before the pandemic is shown by no state having to make midyear budgetary corrections for fiscal year 2019 in order to maintain a balanced budget. He said he does not expect that to continue, however, therefore NAIOP members must remain engaged with their chapters on this issue even if their commercial property commercial or professional services are in one of the 33 states that have adopted a budget for the 2021 fiscal year.

NAIOP chapters will need to closely monitor their state capitols during budgetary discussions in order to ensure that commercial real estate is not singled out as a source of new or increased revenue. As business restrictions are slowly lifted, the principles for a strong economy remain in place under new business protocols and practices to limit the risk of coronavirus’ transmission. Governors and legislators need to focus on economic policies that accelerate, not constrain, this. State tax collections will improve and strengthen under fiscal policies intended to spur economic growth and restore and create new jobs.

Visit the NAIOP Response: COVID-19 page for critical resources and knowledge to support you now.

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