Loans No Substitute for Direct Aid to Help States Weather COVID Recession

Some Administration officials are arguing that states don’t urgently need more direct federal relief because they can borrow from the new Federal Reserve program to buy public and private debt, but that argument makes no sense.

Loans are no substitute for the direct aid that states need to avoid laying off workers and making other deep budget cuts that would worsen what’s already becoming the worst economic downturn since the Great Depression. Plus, many states could only use the loans to manage cash flows within a budget year, rather than closing the huge budget shortfalls that will force states to make dramatic cuts to meet their balanced-budget requirements.

The constitutions of some states — Arizona, Colorado, and Nebraska, for example — effectively prohibit states from using debt to cover budget shortfalls, which could make it impossible for them to seek the loans. And many other states require voter approval of debt backed by general tax revenue, which this debt would be. Placing those measures on state ballots and voting on them would take months, but states need help now.

State balanced-budget requirements may further constrain many states’ ability to borrow under the new Fed program. Thirty-nine states can’t carry a deficit from one fiscal year to the next, according to the National Association of State Budget Officers. As a result, states whose fiscal year begins July 1 — the vast majority of states — might have to wait until then to borrow from the Fed and then repay any loans by June 30, 2021, even though they will likely still face large shortfalls. Goldman Sachs, the Congressional Budget Office, and other forecasters expect unemployment to remain elevated through 2021.

Even states that don’t face these barriers will likely hesitate to rely much on loans to close their shortfalls, which would add to the large obligations they’ll face when the economy improves. These include repaying the large federal loans that many states will likely take out to ensure that their unemployment compensation programs can pay benefits to the millions of newly jobless workers, restoring harmful cuts (such as laying off teachers) they make during the downturn, and starting to rebuild their budget reserves in advance of the next downturn.