The severe economic turndown spurred by the pandemic has led to a perfect 2021 fiscal storm (more like hurricane). While the long-term effects on state coffers of the sudden drop in revenues is unclear, legislators are preparing for the big unknown that awaits us all—life after COVID-19.
We asked legislators who are in the eye of the storm—fiscal and finance committee chairs—to give us their perspective on what’s needed and what’s likely to happen as we navigate the choppy economic waters ahead. So far, we’ve heard from three, but we’ll update this story as more lawmakers share their comments:
- Tennessee Senator Bo Watson (R), chairman, Senate Finance Committee.
- Wisconsin Representative John Macco (R), co-chair, Joint Legislative Audit Committee.
- Rhode Island Representative Marvin Abney (D), chairman, House Finance Committee.
While the current fiscal picture is grim, Watson sees a silver lining. “The economic reality is forcing us to work more closely with our local partners in government and in the private and nonprofit sectors,” he said. “This is forcing us to find efficiencies and new ways of doing things. That’s not a bad thing. This disruption is driving innovation and will create new opportunities unimagined before the pandemic.”
From left: Representative Marvin Abney (D-R.I.), Representative John Macco (R-Wis.) and Senator Bo Watson (R-Tenn.)
How might the budget process be different in the future with so much uncertainty around revenues?
Marvin Abney: First of all, a good budget is a good budget, no matter when it is implemented. If it is constructed on solid fiscal principles, it should survive some bumps in the road. It’s hard to say about the budget process, but I imagine the future uncertainty means that we need to take actions now to have built-in mechanisms that allow us to make adjustments more frequently than we would in normal circumstances.
John Macco: I’m afraid it won’t be different, but it must be. Using past departmental numbers as a basis for future budgeting will be unacceptable to me. When a paradigm shifts, everything goes back to zero. I will want to see substantive tradeoffs in old legacy expenses for new virtual or tech-system build-out needs. The process will be longer as department heads are not used to managing to new deliverables.
Bo Watson: Budgets may be presented and passed that allow for greater flexibility by the executive branch and increased oversight by the legislative branch, making it a more collaborative process. In Tennessee, we gave Governor [Bill] Lee and his team time to look at potential reductions, up to 12%, but the budget did not specifically identify those reductions. The administration will come back to the legislature during the first quarter of FY21 and present their recommendations based on the state’s revenue collections during that same quarter.
What are your expectations for state revenues in the coming months?
Abney: We revised our forecast back in May, and with the delay in the collection of the income tax to July it’s still hard to tell how close our estimates were. Our state is heavily dependent on revenues from the hospitality industry; therefore, a slower than projected return to normal will also have us taking a second look at those estimates.
Macco: We will be receiving new numbers in a couple of weeks, but Wisconsin’s revenue mix is such that I expect small, manageable change to state revenues in 2020. 2021, however, will be more substantive.
Watson: I think state revenues will be challenging. They certainly won’t meet the prior year. In Tennessee we have been really good at making very conservative revenue projections, and I think we did that again this budget, FY21. We have a history of planning for the worse and expecting the best. It’s one of the reasons why we are consistently rated as one of the best financially managed states in the country. We ain’t rich, so we know how to stretch a dollar.
What sort of budget pressures do you see ahead as your state deals with the ongoing impacts of the coronavirus?
Abney: I’m sure we share the burdens other states do—having to assist our neediest residents and struggling local governments at the same time the very revenues that would help us do that have dropped dramatically. It will be a very tricky balance.
Macco: Profound damage to health care infrastructure, hospitality, small business and tourism as a result of very bad decision-making by the governor and our three largest city mayors that have caused catastrophic unemployment and increased the need for support.
Watson: I think there are a multitude of budget challenges for states in the future. With the economy struggling, states will have to make some very tough choices. In Tennessee we have always focused our spending process with three philosophies: 1. Pay yourself first (our pension plan); 2. No/low debt (we are one of the least indebted states per capita); 3. Pay with cash (we don’t bond roads and bridges, and we pay for most of our projects with cash). The state will have to focus its spending on the essentials of state government for the short term: K-12 education, safety and security, and public health. Some things that we would really like to do will just have to wait.
Do you anticipate having to make midyear budget cuts later this fall?
Abney: I hope we are able to strike the right balance between unfounded optimism and punishing pessimism as we craft our overdue budget and avoid that fate.
Watson: We believe we have made good budget estimates for FY21 and do not anticipate midyear cuts beyond those contemplated in the FY21 budget. Our funding board and fiscal review teams have been very accurate in their projections over the years, and we have a lot of confidence in their estimates. Tennessee has prepared itself since the 2008 Great Recession by building up our various reserve funds to assist in weathering an economic downturn. Time will tell if we’ve done enough.
How has federal financial relief helped meet budget needs so far?
Abney: We are grateful and fortunate for the federal relief thus far and have used it to help direct response to the pandemic and targeted programs to help those harmed the most, including critical service providers, small businesses, school districts and those at risk of losing their homes. While we have been able to target some funding to alleviate state costs where allowable, we are most concerned about how to cover our lost revenues. We used budget reserves to end the fiscal year in the black, but the consequences to our FY 2021 budget without more flexible support are dire.
Watson: Federal aid has had a limited impact on budget needs in terms of replacing lost revenues for the state. The CARES Act was limited in the ability of states to use the money as replacement revenue; rather, the money was available only for COVID-19-related expenses. It would be more helpful to the states to have greater flexibility with the funding.
What is your expectation for future federal aid?
Abney: We need support to cover lost revenues. This is critical. Two-thirds of our state budget is dedicated to safety-net expenses and school aid or other support to local governments. Our projected shortfall from lost revenues and additional expenses is around 20% of our state-revenue-supported spending. We have avoided adopting a new budget that imposes those hardships with the expectation that additional federal help is imminent.
Macco: D.C. will need to do something. Focusing on economic development in business and farm support would be most helpful in driving unemployment down and would be the support for all other infrastructure issues. Our legislature submitted a formal letter to our congressional delegation requesting they not use this recession to bail out long-term fiscally bad-run states like Illinois, et al. Wisconsin made the tough calls the last 10 years. Aid should be directly connected to COVID-19 issues.
Watson: I expect Congress to continue to appropriate money for use at the state and local level, and we can expect the Federal Reserve to continue a monetary policy that attempts to maintain a stimulating effect on the economy. I don’t believe there is any disciplined fiscal policy being exercised at the federal level; it is simply providing money to prop up the economy until the COVID-19 pandemic stabilizes. Eventually, this kind of economic policy, or lack thereof, will have an economic consequence.
Where do you see the greatest hardship in your state because of budget cutbacks?
Macco: Small business, ag and education. Small business because for some illogical reason they are deemed “nonessential.” Ag as they are dealing with recession. And education as they simply don’t know how to lead or manage to a new paradigm and will fight any change in their monopoly. I am concerned that critical infrastructure, such as transportation or corrections, will see cuts by an administration that will trade those for a bigger education machine.
Watson: The greatest hardship in Tennessee due to budget reductions may be in some of the social services that are more a function of federal pass-through and matching dollars than true state dollars. Obviously, economic growth and development are essential to a capitalistic society, and any disruption in the economy creates a hardship across the spectrum of government functions in states like Tennessee that are sales-tax based for our revenues. For the near term we will be managing for “needs” and not “wants.”
Ed Smith is the former director of content for NCSL and hosts its “Our American States” podcast.
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