Some States See Better Than Expected Revenues, But Budget Outlook Is Still Tough

The Kentucky state capitol building, in Frankfort, on a foggy morning.

The Kentucky state capitol building, in Frankfort, on a foggy morning. Shutterstock

 

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Evaporating federal aid and uncertainty over what will happen next with the virus and the economic recovery are casting a long shadow over states’ finances.

In some states, the steep tax revenue declines predicted in the early months of the coronavirus outbreak haven’t materialized, with officials in recent weeks saying state budgets for this year appear more promising than initially expected. 

But even states where the outlook has improved are confronting the likelihood of significant financial pressure and uncharted fiscal terrain in the months ahead. And states and local governments remain on track to face billions of dollars in shortfalls and the need for spending cuts as they seek to balance their budgets over the next couple years.

“We were staring down some pretty dark forecasts, and understandably so given the speed and depth of the job losses and the business shutdowns,” Kentucky’s budget director, John Hicks told Route Fifty this week. “Things were better than expected in the last several months,” he added. “But we don’t quite know what to think about the near-term future.”

There are many factors still muddying the outlook for state budgets.

Federal aid, not only for states and localities themselves, but also to individuals and businesses, is drying up and the odds look increasingly dim that Republicans and Democrats will agree on another relief package in the next few weeks before Election Day. To what extent more federal dollars flow has major implications for state budgets.

It’s also unclear when the virus outbreak will finally subside and hard-hit sectors of the economy will begin returning to normal. States like Wisconsin and Colorado have had troubling upticks with cases and hospitalizations in recent weeks. Travel and tourism, retail, entertainment venues, bars and restaurants are among the business lines getting slammed as governments have imposed restrictions to stop the spread of the virus, and as people stay in more to avoid it.

This week, Arizona’s Office of Tourism said that in August alone visitors to the state had spent nearly $1 billion less compared to the same month last year, and that hospitality jobs supported by tourism and travel were down by about 113,000. Companies like Disney and American and United Airlines have plans for thousands of layoffs or furloughs, while the closure of about 500 of Regal Cinemas movie theaters across the U.S. will affect around 40,000 workers. 

The unemployment rate has improved since it skyrocketed in the spring, but millions of Americans remain out of work. And the Economic Policy Institute noted last week that Labor Department figures for September show long-term unemployment rising, with about 7.3 million workers unemployed for at least 15 weeks and 2.4 million for 27 weeks or longer. At the same time, the pace at which the nation was regaining jobs appeared to slow down last month.

Household and Business Aid Helped State Budgets

It isn’t only the direct federal aid to states and localities, provided in March by the CARES Act, that has helped to steady state budgets, according to experts. When Congress and President Trump earlier this year approved measures like expanded unemployment benefits, $1,200 “stimulus” checks and a payroll assistance program for businesses, it pumped billions of dollars into the nation’s economy. 

Hicks and others point to this aid as a key reason states didn’t see some of the deeper revenue declines they initially anticipated. The thinking goes that the federal money helped to prop up household incomes, consumer spending, businesses and, in turn, tax revenues. 

“My view right now is that we have been buoyed by the substantial amount of payments to individuals and to businesses,” Hicks said.

He noted a report he made to lawmakers that showed unemployment benefits, the Paycheck Protection Program that helped businesses to cover payroll costs and other emergency assistance programs poured about $15 billion into Kentucky, to businesses and individuals.

“That is substantial,” he said.

“With that amount falling away,” Hicks added, “we don’t yet know if economic improvement, if recovery, reopenings, is filling in that gap.”

Steve Lerch, executive director of Washington state’s Economic and Revenue Forecast Council, outlined a scenario in his state that was similar to what Hicks described in Kentucky.

The council issued forecasts in February, June and September. February’s projections were more-or-less rooted in a pre-virus world. June’s slashed expected general fund revenues sharply, by nearly $9 billion across the two two-year budget cycles covering 2019 to 2023. But September’s forecast was notably less bleak, restoring about half of the June cut.

Lerch said one big reason why the June projections turned out to be too pessimistic was an underestimate of the payments that flowed to people in Washington under the CARES Act. In June, forecasters didn’t have personal income data yet for the second quarter of the year.

“When you think that people have less money, you think they’re going to spend less money and that was a big part of why we’ve at least partially revised up our forecast,” he said. 

In late September, Moody’s Investors Service issued a report that said pandemic unemployment insurance, including federal payments of $600 a week on top of normal state benefits, along with the stimulus check payments of up to $1,200 many people received, made up more than 9% of total 50-state personal income from April to June.

This federal stimulus softened the blow to state tax revenue from the economic slowdown, the Moody’s report says. 

But the $600 a week added unemployment benefit expired at the end of July. By early September a program to provide an extra $300 a week was running out of money. The stimulus checks were a one-shot measure. And the Paycheck Protection Program closed in August.

“Additional federal stimulus would make a material difference in tax revenue if it were to provide similar support to incomes as the first round of aid,” the Moody’s report adds.

‘Still Not Great’

If and when lawmakers and the White House will be able to pull together a package that provides another infusion of federal economic support remains an open question. Senate Majority Leader Mitch McConnell suggested on Friday that he didn’t expect a deal on aid legislation before the Nov. 3 presidential election.

Some state leaders with troubled budgets are still betting that a compromise will emerge eventually—and in some cases staking hopes on Democrat Joe Biden defeating Trump and shifting the power dynamics around the aid debate. 

“If there is no (federal bailout) package by Election Day, then I believe the next president will provide federal aid,” New York Gov. Andrew Cuomo, a Democrat, said this week, according to CNHI news service, adding, “I believe the next president is Mr. Joe Biden.” Cuomo pegged the deficit his state faces at around $30 billion over the next two years.

Lerch emphasized that while Washington’s September outlook was an improvement, it’s far from rosy. “It went from really horrible to horrible,” he said. “It’s still not great.” 

“I’ve been kind of emphasizing, and I think most forecasters have, that there’s still just a whole lot of uncertainty about what’s going to happen,” he added.

He and Hicks both described retail tax collections that had been more robust than expected. Beyond just the federal stimulus, Hicks said this could be due to people spending differently than they did before the pandemic, but still spending—for instance buying more items at the hardware store for home projects rather than plunking down cash for a vacation or eating out.

There are other facets of the coronavirus economy that may reflect how many of the job losses so far have disproportionately fallen at the lower end of the income ladder, while many higher earners have gone on working from home and spending more confidently. For example, home purchases have been strong in Washington, and vehicle sales rebounded in Kentucky after falling in the spring. 

“We don’t have any good history to model this,” Hicks said. “The surprises are continuing.” 

Moody’s Analytics last month revised their estimate for shortfalls state and local governments will face through fiscal 2022 down to $450 billion, from $500 billion. 

This tracks with less dire revenue figures in places like Washington and Kentucky. But it also still marks a huge dent for state budgets. Moody’s Investors Service expects an outsized share of overall tax revenue declines in a handful of states hardest hit with virus infections, including California, Illinois, Texas and New York.

Brian Sigritz, director of state fiscal studies for the National Association of State Budget Officers, noted last month that what typically happens during a recession is that the worst state revenue declines tend to lag behind the slump in the economy. For example, he pointed out that if people earn less this year, that would show up in next year's personal income tax returns.

Sigritz said he expects many states will have to make adjustments to their fiscal 2021 budgets (most states run on fiscal years that begin July 1). But some are holding off for the time being, waiting for upcoming legislative sessions to begin, or to see what happens with federal aid, or how revenue forecasts continue to shape up. In the meantime, some governors have instructed agencies to identify cuts of 5% to 20%.

“Any additional federal aid to states would be helpful. Even with additional federal aid we’re still expecting states to have to make significant budget cuts,” Sigritz said. “It’s just that the cuts would be less severe than they otherwise would be.”

Bill Lucia is a senior reporter for Route Fifty and is based in Olympia, Washington.

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