The NCSL Blog

27

By Erlinda Doherty

States are entering the fifth month of battling the economic and health effects of the COVID-19 pandemic with no clear end in sight. 

$20 bill with Ben Franklin wearing maskWhile not all states are experiencing the same level of lost revenues, many are experiencing some degree of economic downturn. States have received federal resources for virus-related expenses, but not to replenish the revenue shortfalls they are experiencing.

As Congress develops what is likely to be the final significant federal response package, it is critical to understand the states’ need for such support.

1.  Are states sitting on a windfall from the CARES Act?

The Coronavirus Aid, Relief, and Economic Security (CARES) Act provided $150 billion to states, territories, tribes and some cities through the Coronavirus Relief Fund (CRF) for COVID-19 related expenses. These funds were used to pay for expenses related to the virus and efforts to respond to the resultant shutdown of the U.S. economy. As states with larger caseloads spent the money almost immediately, others awaited further clarification from the Treasury Department regarding allowable uses of the fund.  Now, most states have spent or allocated most of their CRF allocation; the majority have provided funds to local governments.  See more on state CRF actions.

2.  Will providing CRF flexibility alone solve state fiscal issues?

Expanding the usability of CRF at this point is too little too late. The CARES Act was enacted in March and most states have spent or allocated their CRF funds.  Due to recent spikes in cases nationwide, remaining funds will be needed for health expenses.

3.  Is additional, flexible state assistance a “bailout?”

States are not looking for a bailout. With balanced budget requirements, states are making difficult choices.  Many have furloughed public workers, postponed or canceled contracts, and delayed infrastructure projects. They are proposing and enacting budgets with reduced spending and tapping rainy day funds. States are extremely hesitant to increase taxes because it may stymie economic activity that does exist, and further burden citizens and businesses that are already struggling.

Providing additional flexible assistance will ensure those states hit hard by the pandemic and resultant economic difficulties can continue to provide critical services to, and support for, citizens and businesses. States are not looking for a “bailout,” yet they are facing drastic decisions about maintaining basic services. As in previous recessions, states need the federal government to step forward as the backstop. States support limits associated with any federal assistance to prohibit funds from being used to shore up public pensions or other systemic fiscal problems.

4.  Has the economic impact on states been overblown?

State-by-state data show variances in the severity of the swift economic downturn; however, all states have been affected—over half the states have documented a 5% decline in revenue and fear that could get worse. In many states, the effects have been more devastating--approaching 20% shortfalls.  While the full effect on state revenues is not yet known because the pandemic’s effect on state revenues is ongoing, the current declines have real budgetary consequences. See more on state actions to close budget shortfalls in response to COVID-19.

The Congressional Budget Office (CBO) has reported that states and localities have decreased spending in specific areas by $350 billion—an example of the actual effect revenue decreases have on state economies. The CBO also reported that the pandemic would cost the U.S. economy $7.9 trillion over the next decade.

History shows that state budgets continue to struggle long after a recession ends, and the current fiscal situation offers no exception to that trend. NCSL calls on Congress to provide additional flexible assistance to states.

Erlinda Doherty is director of NCSL’s Budgets and Revenue Committee.

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Posted in: NCSL, COVID-19
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About the NCSL Blog

This blog offers updates on the National Conference of State Legislatures' research and training, the latest on federalism and the state legislative institution, and posts about state legislators and legislative staff. The blog is edited by NCSL staff and written primarily by NCSL's experts on public policy and the state legislative institution.