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Contrary to Arguments, States Need More Federal Relief

South Dakota’s Governor Kristi Noem says her state doesn’t need more federal fiscal relief; it just needs the Treasury Department to let it use previously provided relief funds to cover revenue shortfalls. The argument apparently has gained traction among some congressional Republicans. But while that may work for South Dakota, the vast majority of states — blue and red alike — desperately need more federal relief to avoid laying off teachers, first responders, and health care workers, which would make the economic downturn even deeper and more protracted.

The COVID-19 pandemic has forced every state to take steps that have sharply slowed economic activity, leading to mass business closures and layoffs that have caused state sales and income tax revenue to plummet — even as state costs are rising rapidly to fight the virus and help people who’ve lost their jobs. As a result, states face massive budget shortfalls that CBPP projects will total $650 billion over the next year and a half, not including the direct costs of fighting the virus. The federal fiscal relief provided to date and state reserves can fill only a modest portion of that gap. Because states must balance their operating budgets every year, these shortfalls will cause states to lay off teachers, first responders, health care workers, and others at a time when the economy is already reeling in what’s becoming the worst downturn since the Great Depression.

The federal government has given states far too little fiscal relief so far. States, localities, and tribes received $150 billion from the Coronavirus Aid, Relief, and Economic Security (CARES) Act’s Coronavirus Relief Fund, but the Treasury Department has barred states from using these funds to help cover their revenue shortfalls. Governor Noem says that if Treasury lets her state use the funds for revenue shortfalls, she won’t need additional aid to avoid damaging layoffs and cuts.

That may be true for South Dakota — in part because of a significant quirk in the Relief Fund’s design established a minimum payment for each state of at least $1.25 billion. In South Dakota, that minimum payment equals more than $1,400 per state resident, far more generous than the $388 per resident that most states received. Further, while most states were required to share their allotment with cities and counties with populations over 500,000, South Dakota has no such localities, leaving the entire $1.25 billion allotment to the state government. That’s a hefty sum in South Dakota, equal to about 73 percent of its 2020 general fund budget. But the situation isn’t remotely comparable to what’s faced by most other states, red and blue alike.

Even in South Dakota, that may not be enough as the crisis ensues. The Congressional Budget Office projects that unemployment will still be at 9.5 percent at the end of next year (2021). As such, state revenues in South Dakota and elsewhere will likely be deeply weakened over three state fiscal years — the current one, the one that starts on July 1 in most states (including South Dakota), and the subsequent fiscal year that starts on July 1, 2021.

And, as noted, what may (or ultimately may not) be true for South Dakota is definitely not true for most other states. With $650 billion in projected state shortfalls plus direct COVID costs, even letting states use their full Coronavirus Relief Fund allotment for revenue shortfalls would still leave most states with rather massive budget gaps. The total relief provided so far, including what states are receiving from the Relief Fund (which currently can’t be used to fill revenue shortfalls), equals only about $175 billion.

The bottom line is that to balance their budgets, states will soon begin laying off teachers and other workers, causing unemployment to surge still higher, unless the federal government provides substantially more relief. Harmful cuts are already starting to materialize in states controlled by Democrats and Republicans alike. Georgia’s governor and legislative leaders, for example, are seeking 14 percent cuts in funding for schools and other state services in the coming fiscal year. Ohio Governor Mike DeWine has announced plans to cut $775 million from his state’s budget, with many of the cuts to education and health care. And New Jersey’s governor already is seeking $1 billion in cuts.

The economy is very weak. Having states make it even weaker by laying off teachers, first responders, health care workers, and others and cutting or ending contracts with various businesses will make the economic crisis even more severe. Unlike the job losses caused by the virus, states can avoid these layoffs — if the federal government steps up to the plate and provides the needed additional relief.