Senate Republicans Only Offer States Nearly Meaningless “Flexibility”

The Senate Republicans’ reported economic relief plan contains no new fiscal aid for states and localities, whose revenues have collapsed due to COVID-19 and the resulting recession. While the plan reportedly trumpets the added “flexibility” that it provides for states and the most populous cities and counties, letting them use previous federal aid to offset their revenue losses, most of that aid is already spoken for or available for this purpose.

As we wrote yesterday, the plan’s only new aid would go to schools that reopen, regardless of whether it’s safe to do so — a wildly out-of-touch idea that uses schoolchildren in a risky economic experiment. States need substantial new fiscal aid for Medicaid, education, and flexible purposes to avoid laying off more workers and cutting services that would worsen racial and income inequities. Unfortunately, Senate Republicans are ignoring this looming disaster.

With so many businesses closed and workers laid off, state sales and income tax revenues have fallen sharply, even as states face much higher costs to fight the virus and help the rising numbers of people who need health coverage through Medicaid and other forms of public assistance. We project that state budget shortfalls will total $555 billion through fiscal year 2022, based on past recessions and economic projections from the Federal Reserve and Congressional Budget Office. Even after accounting for the federal aid provided so far, and assuming states spend all of their rainy day funds, state shortfalls still stand at nearly $400 billion. Local governments, too, face large shortfalls, as do tribal nations and U.S. territories including Puerto Rico.

States and localities already have furloughed or laid off 1.5 million workers and cut funding for schools, health care, and other core public investments. Without more federal aid, those layoffs will only grow and cuts to fundamental services will only continue, deepening the recession and adding to the harm it has already caused.

The Senate Republican plan reportedly would let states and big cities and counties use the CARES Act’s Coronavirus Relief Fund (CRF) to offset revenue losses, overturning Treasury Department guidance. That, however, would help states and localities only modestly, for several reasons.

For starters, some states have already allocated all of their CRF funding (such as California, Colorado, and Mississippi) or large parts of it (such as Iowa, Kentucky, Louisiana, New Hampshire, North Dakota, and South Carolina); and others, including Alaska and Minnesota, have promised nearly half the money to local governments. Indeed, Treasury told states to give nearly half their allocations — $50 billion of the $110 billion total — to small local governments.

Also, if states shifted their remaining CRF funds entirely to offset revenue losses, that could shortchange their pandemic response, since states and localities can use the CRF to cover direct COVID-related costs through the end of this year.

Plus, Treasury’s guidance also explained that states and localities may use the CRF to cover the payroll costs of public safety and public health workers, which they otherwise would have to cover with their own revenues. If states alone used the CRF to cover all payroll costs for these workers from March through December as the guidance allows, it would amount to roughly another $60 billion.

In sum, CRF funds are already allocated or promised to local governments, are already needed to address the public health crisis, or can already cover payroll costs for certain public workers. So, despite Senate Republican claims of more flexibility, they are really offering states almost nothing new, despite the historic state fiscal crisis. And small cities, counties, and towns would get nothing at all; since they received no direct funding from the CRF, making that fund more flexible would not help them.

States and localities need substantial additional fiscal aid through multiple mechanisms.

First, policymakers should further raise the share of Medicaid costs that the federal government covers — building on the 6.2 percentage point increase in March’s Families First Act — and extend the duration of that increase, as the National Governors Association and local government associations recommend. Increasing federal Medicaid assistance is a particularly effective form of fiscal aid.

Second, policymakers should provide aid that helps states fund K-12 schools and higher education institutions without insisting that schools open even if it’s not safe.

And third, policymakers should provide direct, flexible grants to states, localities, tribal nations, and U.S. territories that they can use to offset their revenue losses.