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COVID-19 Takes Toll on State and Local Budgets

The gravity of COVIC-19’s impact on states and communities was not anticipated at the start of this year. The spread of the virus required states and local governments to take unprecedented actions including issuing stay-at-home orders and strengthening healthcare services; these actions have dramatically impacted state and local budgets.

Unlike the federal government, state and local governments are required to maintain balanced budgets with revenue equaling expenditures. They are not allowed to run a deficit or borrow from future revenue. The stay-at-home orders for nonessential workers and businesses, such as restaurants, gyms and movie theaters, have dramatically slowed the economy and led to double-digit unemployment. The lack of economic activity has resulted in revenue deficits for state and local governments from lost sales taxes, fees and other government revenue sources.

These revenue shortfalls have forced state and local governments to utilize “rainy day” funds and reevaluate existing expenditures in order to maintain a balanced budget. Governors, state legislators and local officials have had to take a hard look at their budgets, set priorities and determine where reductions can be made. This has included reducing government services, furloughing staff and either delaying or canceling infrastructure projects

Elected officials are making difficult decisions at a time when many are relying on their government to provide assistance to bridge the economic slowdown caused by the pandemic. In Wisconsin, Governor Tony Evers is calling for an additional $250 million in budget cuts to offset lost revenue related to the virus. This follows $70 million in spending reductions, mostly in higher education, that were made last May. It is unclear where these new budget cuts are to occur.

The impact of pandemic on budgets is not purely a revenue issue. State and local governments have had to reevaluate priorities and redirect funds from community programs to healthcare services for individuals and families affected by the virus. This has caused budgeted shortfalls in these community programs as well.

State and local governments turned to Washington for nearly $1 trillion in federal assistance during negotiations for a fourth federal relief package to address budgetary shortfalls related to the pandemic. The National Governors Association advocated for $500 billion in direct relief to states. Research by the National Association of Counties estimates that the pandemic’s impact on county budgets for Fiscal Year 2021 budgets will be $144 billion, while the National League of Cities has projected over $360 billion in lost revenue for cities between Fiscal Years 2020 and 2022.  

At this point, it is remains an open question whether Capitol Hill will pass a fourth pandemic relief package that provides budgetary assistance to state and local governments. Any federal assistance is certainly helpful, but the budgetary challenges for state and local governments are expected to continue in the current Fiscal Year 2021. 

Forty-six states started their fiscal year for 2021 on July 1. Many of these budgets were passed by their legislatures prior to the full economic impact of the pandemic crisis was realized. The revenue loss from a slowed economy had not been projected, nor incorporated in these budgets. 

Legislators are expected to return to their state capitols in most states for special sessions to resolve budgetary shortfalls and other issues related to the pandemic. They will make informed decisions on next steps for their state. However, some states, particularly ones that rely significantly on sales taxes for revenue, could not wait. The Nevada Legislature returned to Carson City last month to close a $1.2 billion revenue loss by reducing expenditures for health care and education.

Local governments will face similar challenges as the states, but they have one advantage. They are, at times, able to make budgetary adjustments more quickly than states because they meet more frequently and do not have to travel to state capitols.

It is important to monitor efforts to increase property taxes at the local level as revenue losses grow because of the pandemic. Property taxes are a significant and reliable source of revenue for cities and counties as the local economy may fluctuate at times. This is the case in Austin, Texas during this pandemic. The city council is currently seeking a 3.5% hike in property taxes for Fiscal Year 2021. The COVID-19 virus has caused budgetary challenges for state and local governments. However, the fundamentals for a strong economy remain in place. The lost revenue for state and local governments related to the pandemic will return as business restrictions are slowly lifted and the economy strengthens. This will occur on a regional and-state-by state basis depending on the containment of the virus.

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