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Billion-dollar blows to US states crater spending plans

Amanda Albright, Shruti Date Singh and Danielle Moran, Bloomberg News on

Published in News & Features

The coronavirus is threatening to blow a massive hole in U.S. state and city budgets as millions of people stay home, workers are idled and the stock market flounders.

New York, the epicenter of the U.S. outbreak, is projected to lose between $10 billion and $15 billion of revenue in the fiscal year that starts Wednesday. Ohio state agencies are looking to cut 20% in spending, and Cincinnati is furloughing 1,700 city workers. Georgia may have to renege on a $1,000 pay raise for teachers that state House lawmakers had budgeted for in the coming year. California is already dipping into reserves and has warned state agencies not to expect full funding next year.

States, cities and counties rely on revenue from taxes on income, sales of goods and even on gains from the stock market -- all sources of money that the virus threatens to wipe out as the U.S. is poised for a recession. Despite the unprecedented federal stimulus package that includes $150 billion for states and municipalities, officials like New York City Mayor Bill de Blasio say more help is needed to make up the funds that local governments are losing, and House Speaker Nancy Pelosi has called for "significantly more" aid for states.

Moody's Analytics is advising policy makers to expect no less than a 10% hit to their general fund budgets, with the actual losses likely being much larger for most states, said Dan White, the firm's head of public sector research. That's calculated off a baseline expectation that second quarter gross domestic product will decline 15% to 20% from a year earlier, "which is almost unprecedented," he said.

The outbreak of the virus may mark a quick reversal in state finances, which had slowly improved after the recession. States had seen steep budget cuts after 2008 that caused them to cut services and funding for infrastructure and education. Many had started to rebuild with rainy day funds at a record high before the pandemic struck.

"We had big plans for next fiscal year because the economy was clipping on really well -- and then all of a sudden we are in a tail-spin headed right back to where we were before we righted the ship," said Jay Dardenne, commissioner of administration in Louisiana, which relied on sales taxes for about 40% of revenue in its fiscal 2020 budget.

 

New Orleans' outbreak of the virus has quieted the usually-bustling streets and led its annual Jazz & Heritage Festival, which attracts almost half a million people and their spending, to be rescheduled to the fall.

While the federal government's $2.2 trillion economic stimulus package will reimburse states for some of the costs of responding to the coronavirus outbreak, it doesn't address the revenue problem, according to Fitch Ratings. The funds, which states should receive within 30 days, are intended to be used for virus expense reimbursement, rather than "a pure cash flow injection," according to Fitch.

And the unprecedented shutdowns in economic activity have made it difficult for revenue forecasters to predict what happens next -- which is important given this is the time when states put together budgets for the coming year.

The economic shock from the coronavirus is likely to lead to a "very deep decline" in GDP during the second and third quarters followed by an improvement, whereas the slump was spread out over about nine quarters during the Great Recession, Moody's White said. He said some states may call special sessions to update the budget.

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