Introducing the State Action in Fiscal Emergencies (SAFE) Project
By: Gladriel Shobe, David Gamage, Daniel Hemel, Ruth Mason & Darien Shanske
(Gladriel Shobe is the principal drafter of this essay and is thus listed first, with the remaining authors then listed in alphabetical order.)
State and local budgets are in crisis. The sudden decline in economic activity brought on by COVID-19 has dramatically reduced state and local tax revenues, creating extreme financial pressures for state and local governments. States are already evaluating ways to close their budget gaps, including tax hikes, social service cuts, and layoffs. Layoffs and service cuts would make things worse by taking money out of the economy at a time when employees and residents are already at their most vulnerable. This essay introduces Project SAFE (State Action in Fiscal Emergencies), an academic effort to help states weather the fiscal crisis by providing policy recommendations backed by research. We invite others with similar expertise to join our endeavor.
State and Local Budgets and COVID-19
During ordinary recessions, states face declines in tax revenue and increased demand for state services.[1] Because state governments generally operate under balanced-budget constraints, they must cut spending and increase taxes during economic downturns.[2] For example, during the Great Recession, state spending cuts fell primarily on education, health, and social services, and almost all states reduced employee compensation.[3] These spending cuts deepened the economic crisis and undermined the federal government’s efforts to restart the economy.[4]
This is no ordinary recession. The COVID-19 pandemic has already caused a breathtaking decline in state revenues. Nonessential business closures and social-distancing efforts have decimated sales tax collections, which normally generate about one-third of total state tax revenues. While people are still buying essential goods, such as groceries, these goods are generally subject to little or no sales tax. Income tax revenue, which normally generates about 35% of total state tax revenues,[5] has plummeted as unemployment has soared. New York estimated a $15 billion decline in revenue for 2021, and Michigan estimated declines of up to $3 billion in 2020 and $4 billion in 2021. Virginia expects revenue to drop by $1 billion in the final quarter of 2020 alone.[6] States saved in their rainy day funds, but no state’s savings are enough to ride out COVID-19.[7]
As revenues collapse, expenses swing in the opposite direction. States bear substantial shares of the costs of both unemployment and Medicaid. In the three weeks leading up to April 4, 2020, 16.8 million people — about 11% of the U.S. labor force — filed for unemployment benefits.[8] In addition, state Medicaid applications have risen rapidly, with Utah, for example, experiencing a 46% increase compared to this time last year.[9]
States are cutting costs to address budget shortfalls. Pennsylvania stopped paying about 20% of state employees.[10] Ohio Governor Mike DeWine asked state agencies to cut spending by 20%.[11] Governor Andrew Cuomo of New York put it bluntly, “We have no state revenues to speak of. We are going to have to dramatically cut spending. You can’t spend what you don’t have.” Localities feel a similar crunch. New York City Mayor Bill de Blasio plans to cut at least $1.3 billion from the city budget at a time when the city is facing a public-health catastrophe. And Cincinnati furloughed about one-fifth of its workforce, affecting almost 2,000 employees.[12]
COVID-19 Federal Relief Funding
The federal government has taken initial steps to help states and localities remedy their budgetary shortfalls. In light of increased state Medicaid expenditures to treat COVID-19, the Families First Coronavirus Response Act (FFCRA) provides that the federal government will temporarily increase its share of Medicaid expenses by 6.2 percentage points.[13] Under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), signed in March, the federal government will also reimburse states for half of the states’ share of unemployment benefits paid through December 2020. The CARES Act also provides for a $150 billion Coronavirus Relief Fund to be distributed among states and eligible localities to help cover direct COVID-19 costs.[14]
These federal aid programs are an important step, but they are dangerously inadequate. Congress attached strings to the $150 billion it approved for states in the CARES Act. States and localities may use the funds only for “necessary expenditures” incurred prior to December 31, 2020 that (i) resulted from the COVID-19 public-health crisis, and (ii) were not accounted for in the state or local government’s most recent budget. The intent behind these restrictions — to prevent states from using the funds for non-COVID-19 purposes — is understandable, but the bill fails to address the true issue states are facing. The state economic crisis is primarily attributable to sharp declines in state tax revenue, not new COVID-19 expenses.[15]
Moreover, $150 billion is not nearly enough to cover urgent state and local needs. Comparing the COVID crisis to the 2008 economic recession shows the scale of the emergency. During the last recession, GDP dropped by an 8.4% annualized rate during the worst quarter and state budget shortfalls totaled about $227 billion during the worst year.[16] Although we cannot yet measure the full effects of the COVID crisis, experts say GDP will decrease this quarter by a 40% annualized rate.[17] It’s no wonder that Governor Cuomo called the $150 billion federal aid package a “drop in the bucket.”[18]
Project SAFE
The unprecedented nature of the economic crisis caused by COVID-19 calls for novel and large-scale thinking about how state and local governments should address sharp and unexpected decreases in revenue and how the federal government should provide states the assistance they need. In the coming weeks and months, as part of Project SAFE, professors with expertise in law and economics, working with students and experts in other fields, will put forth proposals aimed at every level of government to help mitigate the crisis.
[1] See United States Government Accountability Office, Intergovernmental Issues: Key Trends and issues Regarding State and Local Sector Finances, (Mar. 2020) https://www.gao.gov/assets/710/705438.pdf.
[2] David Gamage, Preventing State Budget Crises: Managing the Fiscal Volatility Problem, 98 Cal. L. Rev. 749, 754–68 (2010) (discussing the fiscal volatility problem and the state budget “rollercoaster”).
[3] Tracy Gordon, The Brookings Inst., State and Local Budgets and the Great Recession (2012), https://web.stanford.edu/group/recessiontrends-dev/cgi-bin/web/sites/all/themes/barron/pdf/StateBudgets_fact_sheet.pdf.
[4] Nicholas Johnson et al., An Update on State Budget Cuts, Center on Budget and Policy Priorities (Feb. 9, 2011), https://www.cbpp.org/research/an-update-on-state-budget-cuts.
[5] Patricia Cohen & Tiffany Hsu, ‘Sudden Black Hole’ for the Economy with Millions More Unemployed, N.Y. Times (Apr. 9, 2020), https://www.nytimes.com/2020/04/09/business/economy/unemployment-claim-numbers-coronavirus.html.
[6] Jimmy Vielkind, Coronavirus Could Cut New York State Revenue by Up to $15 Billion, Cuomo Aide Warns, Wall St. J. (Mar. 24, 2020), https://www.wsj.com/articles/coronavirus-crisis-could-cut-new-york-state-revenue-by-up-to-15-billion-cuomo-aide-warns-11585056388?mod=searchresults&page=1&pos=1.
[7] Grant A. Driessen, State and Local Fiscal Conditions and Economic Shocks, Congressional Research Service (Mar. 20, 2020), https://crsreports.congress.gov/product/pdf/IN/IN11258 (stating that although there was projected to be roughly $62 billion in state rainy day funds at the end of 2019, “use of rainy day funds alone would likely be insufficient to bridge state financing gaps from a moderate or severe recession”); Michael Leachman & Jennifer Sullivan, Some States Much Better Prepared Than Others for Recession, Center on Budget and Policy Priorities (Mar. 20, 2020), https://www.cbpp.org/research/state-budget-and-tax/some-states-much-better-prepared-than-others-for-recession; Jared Walczak, State Strategies for Closing FY 2020 With a Balanced Budget, Tax Foundation (Apr. 2, 2020), https://taxfoundation.org/fy-2020-state-budgets-fy-2021-state-budgets/.
[8] U.S. Department of Labor, News Release (2020), https://www.dol.gov/ui/data.pdf.
[9] Shefali Luthra et al., Medicaid Nearing ‘Eye of the Storm’ as Newly Unemployed Look for Coverage, Kaiser Health News (Apr. 3, 2020), https://khn.org/news/medicaid-nearing-eye-of-the-storm-as-newly-unemployed-look-for-coverage/.
[10] Charlotte Keith, Pennsylvania Facing Up to $4 Billion Shortfall as Coronavirus Shutdown Upends State Budget, Pa. Inquirer (Apr. 8, 2020), https://www.inquirer.com/health/coronavirus/spl/pennsylvania-coronavirus-state-budget-shortfall-4-billion-20200408.html.
[11] Jeremy Pelzer, Ohio Gov. Mike DeWine Will Freeze State Government Hiring, Seek Big Spending Cuts Amid Coronavirus Crisis, Cleveland.com (Mar. 23, 2020), https://www.cleveland.com/coronavirus/2020/03/ohio-gov-mike-dewine-will-freeze-state-government-hiring-seek-big-spending-cuts.html.
[12] Bill Lucia, Cities and Counties Make Workforce Cuts as Coronavirus Financial Toll Mounts, Route Fifty (Apr. 2, 2020), https://www.routefifty.com/management/2020/04/coronavirus-city-county-state-government-layoffs-furloughs-leave/164312/.
[13] Families First Coronavirus Response Act (FFCRA), Pub. L. 116–127, §6008 (2020).
[14] Pub.L. №116–136, § 601, 134 Stat. 281 (2020).
[15] Letter from Mark R. Warner et al., Senators and Members of Congress, to Steven Mnuchin, Sec’y, Treas. (Apr. 7, 2020), https://www.kaine.senate.gov/imo/media/doc/2020%20-%20Letter%20to%20Mnuchin%20on%20Relief%20Fund_Final.pdf (Several Senators and Members of Congress have urged for broad use of the relief funds, arguing that “Unbudgeted costs can also come in the form of unexpected and precipitous revenue declines. . . . Inhibiting the use of Coronavirus Relief Funds to address revenue shortfalls is likely to lead to cuts in services and programs that otherwise can mitigate the indirect impact of COVID-19 at the state and local level; that will only make the health and economic crises worse.”); Greg Allen, For Counties, The Coronavirus Brings Major Budget Problems, NPR (Apr. 8, 2020), https://www.npr.org/sections/coronavirus-live-updates/2020/04/08/830186999/for-counties-the-coronavirus-brings-major-budget-problems (“The biggest challenge we have is the way the law was written. We cannot be reimbursed for lost revenue.”) (quoting Matt Chase, Executive Director, National Association of Counties).
[16] See Nicholas Johnson, Bipartisan Stimulus Agreement Contains Significant Funds for States, Center on Budget and Policy Priorities (Mar. 25, 2020) https://www.cbpp.org/blog/bipartisan-stimulus-agreement-contains-significant-funds-for-statesJeff Cox, Goldman Sees 15% Jobless Rate and 35% GDP Decline, Followed by the Fastest Recovery in History, CNBC (Mar. 31, 2020). https://www.cnbc.com/2020/03/31/coronavirus-update-goldman-sees-15percent-jobless-rate-followed-by-record-rebound.html.
[17] Patti Domm, JPMorgan Now Sees Economy Contracting by 40% in Second Quarter, and Unemployment Reaching 20%, CNBC (Apr. 9, 2020), https://www.cnbc.com/2020/04/09/jpmorgan-now-sees-economy-contracting-by-40percent-and-unemployment-reaching-20percent.html.
[18] See Legislative Analyst’s Office, State Budget Effects of Recent Federal Actions to Address Covid-19 (Apr. 5, 2020), https://lao.ca.gov/Publications/Report/4217 (“Only a small portion of the federal funding allocated to date . . . will assist [California] with the most significant source of budgetary strain that likely will result from the COVID-19 emergency: lower revenues.”).
