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Higher Taxes, Layoffs, And Service Cuts: The State And City Budget Crisis Is Here

The recession is hitting state and city budgets hard in the new fiscal year that starts on July 1. They are responding by firing workers, reducing services, and even increasing taxes. Massive federal aid is the only real solution.

The new fiscal year for 46 states and many cities begins on Wednesday.  And a flood of red ink caused by the deep pandemic recession is forcing them to fire workers, reduce spending and services, and even raise taxes (one of the worst things you can do in a recession).  Without Congress providing up to $1 trillion in federal aid, non-federal government spending will shrink.  This hurts not only public services but the entire economy, and makes the recession longer and more painful.

The budget problem is widespread and deep.  According to Dan White at Moody’s Analytics, average state general revenues will suffer an annual fall between 14.8% and 19.5% this fiscal year.  Losses vary widely across states, but in Moody’s “severe” forecast, the smallest state reduction shows Pennsylvania’s general fund revenue falling by 8.2%.  Other states are projected to take bigger losses:  11.9% in Arkansas, 34.7% in New Jersey, 45.7% in Louisiana, and a whopping 79.6% in Alaska, which depends heavily on collapsing oil revenues.

States had been building reserves—“rainy day” funds—throughout the recent economic expansion that ended in February.  And most states “ended fiscal 2019 with budget surpluses” while initially increasing 2020 general fund spending by an average 4.8%.  Although some of those surpluses were saved, Moody’s now finds that “an unprecedented 34 states would see budget gaps (in the new fiscal year) of 10% or more even after using all reserves.”

City budgets across the nation are being hit as well, both from reduced state aid and from their own revenue losses.  The United States Conference of Mayors updates its “fiscal pain tracker” regularly, and reports continuing bad budget news.  From New York City (2019 population 8,336,817) to Oklahoma City (655,057) to Riverbank, California (24,881), cities are reporting falling revenues and hard budget choices.

By law, states and cities have to balance their budgets, and only have three basic ways to cope:  firing or furlough staff, reducing spending and services, and raising taxes.  And they are doing all three.

New Jersey schools plan cuts in support personnel and even teachers, at a time when they also must spend more on protective equipment and other health safety measures.  With a projected annual $9 billion revenue shortfall,  New York City is pursuing a budget with significant spending cuts and service reductions.  And cuts in Georgia’s state budget could result in over 1000 layoffs.

Cincinnati, Ohio furloughed around 20% of its workforce in March, with some agencies suffering 50% cuts in personnel, reducing a wide range of city services.  Miramar, Florida is cutting hours in many agencies, including 20% reductions in hours for police and firefighters.  And over 700 cities (so far) have announced plans to stop infrastructure spending, including roads, bridges, mass transit, and water and sewer systems.

Governments are even considering tax and fee increases, although economists warn that raising taxes in a recession just makes things worse by reducing jobs, income, and spending.  But the Mayor of Rochester, New York is proposing a “modest” property tax increase, while Nashville just raised property taxes by 34%.  And several places are considering raising taxes on high-income residents and businesses like Amazon and Walmart, whose profits have grown during the recession due to the shift to online shopping and home delivery. 

Financial markets are tracking the fiscal crisis and downgrading many municipal bonds.  From a shopping mall in Syracuse, NY to bonds from the Los Angeles Department of Water and Power, to the Port Authority of New York and New Jersey, to the KFC Yum! Center in Louisville, ratings are falling, driving up borrowing costs for states and cities.

Although the Federal Reserve has begun a historic direct purchase of short-term municipal debt, many cities and states aren’t using the new facility, because the interest rates are too high.  And adding additional borrowing (and interest costs) that must be paid back isn’t a sustainable solution for financially troubled governments.

The only hope for states and cities—and for the economy—is significant direct federal aid.  House Democrats have passed a bill authorizing close to $1 trillion, but the Republican-controlled Senate has thus far refused to negotiate.  The logjam may be breaking—a bill for $500 billion has been introduced by Senators Bill Cassidy (R-LA) and Bob Menendez (D-NJ), and is attracting other bipartisan sponsors.

But Congress adjourns soon for its July 4th break, so prompt action seems unlikely.  And if state and city budgets are cut radically, it will drag the economy down and make the recession deeper and longer. So states and cities are hunkering down—right now, they have no choice— and all of us will soon feel the service cuts and face possible tax increases.

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