Federal Aid Delay Will Mean Damaging State Cuts With Long-Term Impacts

States need substantial federal aid — now — to stem the fiscal crisis caused by COVID-19 and the resulting recession. States’ revenues are plummeting and their costs are rising and, as a result, they face budget shortfalls that could total more than $550 billion through fiscal year 2022. Without substantial federal aid, they likely will address these shortfalls by deeply cutting education, health care, and other critical program areas; laying off even more teachers and other workers than they already have; and canceling contracts with many businesses.

State are about to make damaging, permanent budget cuts. Due to COVID-19, state revenues fell sharply and their costs rose dramatically when states had only three months left in their last fiscal year (2020). To balance their budgets while waiting for federal aid and assessing the full extent of the recession’s impact on their budgets, states used their traditional ways of addressing mid-budget shortfalls — tapping rainy day funds and other reserves, postponing projects, and furloughing workers. But many of these less-damaging budget fixes are no longer available for the current fiscal year.

States haven’t finished shaping their current budgets. Many state budgets for the current, 2021 fiscal year (which started on July 1 in most states) depended on revenues that are now expected to be substantially lower and did not fully account for costs that have risen.

• Six states delayed adopting a full budget for fiscal year 2021. Some of the six adopted short-term budgets; Vermont and New Jersey enacted three-month interim budgets and Pennsylvania’s 2021 budget funds most agencies through November. And fiscal year 2021 has not yet begun for several states. It starts September 1 in Texas and October 1 in Alabama, Michigan, and the District of Columbia.
• Almost half the states adopted their 2021 budgets before the pandemic. Most of these states are currently in the middle of a biennial budget that runs from July 2019 to June 2021, while some of them have one-year budgets that they adopted before April. Only a handful of these states have already adopted revised budgets. For example, Virginia — a state with a biennial budget — is waiting until August to adopt a final budget.
• Even states that adopted their budgets will undoubtedly revisit them as COVID-19’s toll on revenues and costs becomes clearer. California’s just-adopted 2021 budget, for example, includes $11 billion in spending cuts and payment delays that will be rolled back if the state receives substantial new federal fiscal aid.

Delay will mean deeper cuts. States incur expenses throughout the year. They cannot endure a lengthy wait for federal aid before they need to start cutting because the longer they delay, the fewer months they have in the fiscal year over which to spread the cuts. That would require the cuts to be a larger percent of spending.

Delay could turn temporary furloughs into permanent layoffs. States facing large budget shortfalls will delay or reduce aid to cities, counties, towns, and school districts. States and localities have already furloughed or laid off 1.5 million workers — more than twice what they did in the Great Recession of a decade ago. Without assurances that they will be rehired, these workers will begin looking for new jobs and governments will lose trained and experienced workers.

Spending cuts now could shortchange the state and local response to COVID-19. State and local cuts in health care also could shortchange coronavirus response efforts. They need to hire contact tracers and ensure that hospitals and clinics are fully staffed and have protective equipment and other medical supplies now.

Local governments that depend on state aid can’t plan. Schools, cities, counties, and other local governments depend on state support for close to one-third of their budgets. Uncertainty about state cuts to local aid if federal aid proves inadequate makes planning difficult for cities, counties, and school districts as well as the families, communities, and businesses that rely on state and local programs.

Early cuts show the damage that can ensue. States that include California, Florida, Georgia, Maryland, Nevada, and Tennessee have already cut programs including K-12 and higher education, health care, and transportation. More states will make cuts the longer they go without assurances that more federal aid is coming. Those cuts would worsen the recession, delay the recovery, and further harm families and communities.