As Relief Talks Resume, Don’t Forget Fiscal Aid

The fact that Senate Majority Leader Mitch McConnell indicates he’s now interested in a new COVID-19 relief package is welcome news, particularly if it leads to substantial new federal fiscal aid to help states, localities, tribal nations, and U.S. territories address their massive budget shortfalls. But properly addressing the problem will require much more than the plan from Senate Republicans in July or the “skinny” package from McConnell in September, both of which included no broad state and local fiscal aid and only modest school funding — mainly for schools that reopened in person despite the pandemic.

The long federal delay in providing adequate fiscal aid has caused serious damage. States and localities have laid off or furloughed 1.2 million employees since February. Most were let go in the pandemic’s early days and haven’t been rehired. States also cut spending, further slowing the economy and likely worsening structural inequities by race and income. Georgia, for example, cut school funding by nearly $1 billion.

Further, since many states are operating under budgets that they now know will not meet their balanced-budget requirements, they will need to make more cuts unless the federal government steps up with substantial additional aid. Tribal nations will also struggle, as the pandemic has hit their economies and people especially hard. So will U.S. territories that include Puerto Rico, whose economy has been weak or declining for years and whose residents face particularly widespread hardship.

Fortunately for states, their revenues for fiscal year 2020 (which ended in June in most states) came in at a higher rate than they expected. That’s mainly because this recession has been concentrated among lower-income workers, who pay less in taxes, and because federal aid — like expanded unemployment benefits — boosted workers’ incomes and purchasing power in the pandemic’s early months.

Much of that federal aid, though, is now expired or spent, and states still face considerably lower revenues, with unemployment high and business activity still down. We estimate that shortfalls for states, localities, tribal nations, and territories will total about $480 billion to $620 billion through state fiscal year 2022, and could reach even higher in the event of a double-dip recession. That’s similar to other forecasters’ estimates, including those from Moody’s Analytics.

The federal government provided some aid earlier this year, but far too little. After accounting for the federal aid provided to date, states will still face shortfalls of $350 billion to $490 billion through 2022. If states draw down their rainy day funds, which totaled about $75 billion heading into the pandemic, they and other governments will still face shortfalls of about $275 billion to $415 billion.

Moreover, these estimates likely understate the problem. For one thing, they don’t include states’ added costs to continue fighting the virus over the coming year. The main form of aid to states and localities for this purpose, the Coronavirus Relief Fund in the CARES Act, expires on December 30. But the virus very likely will remain a threat well into next year, forcing states to continue spending on protective equipment, testing, and other public health provisions, especially if cases surge over the winter.

Actual state needs could still end up higher than our current projections — particularly if the current surge in infections necessitates more restrictions on economic activity, which in turn raise unemployment. At any rate, our estimates don’t include shortfalls that states may face in 2023 or beyond.

In designing fiscal aid, federal policymakers would do well to include triggers to extend the aid or turn it off, depending on the state of the economy. With the economic outlook so uncertain, those triggers would enable states and localities to avoid further large layoffs and other spending cuts if the economy remains weak for several years.