State, county and local government financial shortfalls are reaching dangerous levels as these entities continue to respond to the COVID-19 pandemic. The magnitude of the problem and potential courses of action are described below.
States see $500 billion gap by 2022. A study by the Center for Budget and Policy Priorities estimates state budget shortfalls of 10% for the current 2020 FY and about 25% in fiscal year 2021. By the end of FY 2022, the CBPP study forecasts a state revenue hole of almost $500 billion.
States’ own projections have already led to steep reductions in FY 2021 budgets. Because state Medicaid programs represent about one-fifth of those budgets, Medicaid programs also are seeing their share of cuts. In the absence of decisive federal action to plug the state budget gap, Medicaid provider reimbursements will probably be among the first to suffer.
Counties see $144 billion shortfall. Virtually all states and counties are suffering significant losses in tax revenue, increases in emergency and other costs associated with COVID-19, and growing demands for services due to rising unemployment, says National Association of Counties deputy executive director and director of government affairs Deborah Cox.
While the CARES Act was a vital first step in addressing state budget needs, it was only a first step, focused primarily on state, not county or local needs, Cox says. “The CARES Act legislation was designed to provide direct funding for states, and only at the last minute was modified to set aside some share of funding for counties and local governments,” says Cox.
However, she notes that CARES Act funds were allowed only for local governments with 500,000-plus residents, so just 130 of the nation’s 3,069 counties qualified. That left 95% of counties with no additional assistance at all, save for what they might negotiate from governors and state legislators.
Taryn Zmuda, chief economist at NACo’s County Innovations Lab, outlined the financial predicament of counties in greater detail. Zmuda says that U.S. counties have annual operating budgets totaling about $665 billion and that counties generate 71% of these funds from diverse local sources, ranging from property and sales taxes to energy production fees, license fees and court costs. Inflows from these sources have been sharply reduced since March due to stay-at-home orders, business shutdowns and rising unemployment. At the same time, she says that many counties—and especially the 1,900 counties that operate local public health departments—have been hit with added costs for everything from field hospitals and quarantine centers to housing for homeless persons, 911 emergency services, hospital and nursing home needs, and more.
Citing a soon-to-be published NACo study, Zmuda says that counties estimate a budget hit (decreased revenues and increased expenditures) of $144 billion—or about 14% of their total budgets—through the end of FY 2021. In response, local government leaders have already cut 1.2 million jobs—including 538,000 non-education jobs—since March to keep their FY 2020 budgets in balance. But most municipalities and counties see even bigger cuts in FY 2021 and have already prepared for major cuts in non-essential capital, infrastructure, maintenance and economic development spending, together with additional personnel cuts if needed. Zmuda says that the new study, “Analysis of County Fiscal Impacts related to the COVID-19 pandemic,” will be published on NACo’s website July 14.
The twin deficits—$500 billion for states and $144 billion for counties and localities—became the basis for a June 29 plea to Congress from a coalition of more than 170 major organizations nationwide, led by the National Governors Association, the Council of State Governments, National Conference of State Legislatures, NACo (and partners NACBHDD and NARMH), the National League of Cities, U.S. Conference of Mayors and the International City/County Management Association, among others.
But bringing Congress together around any single piece of legislation is proving to be a challenge. For example, the $3 trillion HEROES Act, got strong support in the majority-Democrat House but has not been not considered by the Senate. Another bill—the State and Municipal Assistance for Recovery and Transition (SMART) Act—championed by Sens. Bill Cassidy (R-LA) and Bob Menendez (D-NJ), has gained bipartisan sponsorship in the Senate but needs considerably more support to advance. According to Cox, this bill (S. 3752), which NACo and its coalition partners strongly support, would provide the $500 billion sought by states and the $150 billion sought by counties with allocations based on populations, state COVID infection rates, and lost revenues.
In early July comments, Senate Majority Leader Mitch McConnell (R-KY) appeared ambivalent about the SMART Act, instead outlining what might be a more modest approach focused on economic recovery efforts plus “essential protections.” He hinted at legislation focused on the needs of kids returning to school, unemployed individuals, liability protections for businesses rehiring workers and doing business amid the pandemic, and the push to develop a COVID-19 vaccine. Whether his remarks reflect a real policy shift or likely amendments to the SMART Act remains to be seen.
Until the time of McConnell’s statement, NACo’s Cox believed that the Senate leadership was softening its stance on direct assistance to states and counties, and was likely to produce a bill before its August recess. Cox says that NACo and its coalition partners remain “optimistic” that Congress will come through, but stresses that “we must continue to communicate the importance of an additional aid package that provides critical resources to state, county and local governments.”
Cox emphasizes that any funding package emerging from Congress must meet five key criteria to earn NACo’s support. It must:
- Be bipartisan
- Offer direct funding for counties and local governments
- Enable flexibility in use, including the ability to replace lost revenue
- Split local aid funding evenly between cities and counties
- Be provided with reasonable guardrails for funds.