But Wednesday’s report by Moody’s Analytics, a private sector economic research firm, could also help illustrate a path for bipartisan agreement in Congress on next month’s fifth, and possibly final, COVID-19 response bill.
The study warns that doing nothing to address the economic perils of state layoffs and cutbacks could cost 4 million jobs. But it also says that significantly less money is needed than what's being called for by House Democrats, who passed almost $1 trillion in help for cash-poor states and local governments as part of a sweeping $3.5 trillion rescue package last month.
The Democratic bill combines $500 billion for state governments — as requested by the nation’s governors — and $375 billion for local governments, many of whom were left out of earlier relief efforts. The Moody study says that level of spending — rejected out of hand by Republicans — is likely beyond what's needed.
“The scope of aid being requested is certainly unprecedented in size and warrants significant scrutiny,” Moody’s says. “For example, the $1 trillion in aid recently approved as part of the house’s HEROES Act would be enough to raise the eyebrows of even the most aggressive advocates of fiscal stimulus.”
Instead, the firm — which is respected by both Democrats and Republicans — says that $500 billion in combined aid state and local aid is needed in total under its baseline scenario, with perhaps $120 billion being sufficient to get states through the 2021 fiscal year that starts next week. But it also warns that failure to act would have terrible economic consequences, adding to unemployment and cutting into gross domestic product.
Doing nothing, the report says, would create a severe economic drag that “could shave as much as 3 full percentage points for real GDP and erase about 4 million jobs.” The data comes as states grapple with a worsened fiscal picture amid the coronavirus pandemic, and an accompanying deep recession presents governors and state lawmakers with unappealing choices -- furloughs, layoffs, higher taxes and cuts to education and other core programs.
The Georgia legislature, for instance, is imposing 11% spending cuts, which means furloughs for state workers of up to 12 days and a $1 billion cut to public school grants. “Even with additional federal aid, states are still looking at significant spending cuts," said Brian Sigritz, director of state fiscal studies for the National Association of State Budget Directors. “But if additional aid is provided that states are able to use to address revenue shortfalls, the cuts would be less severe."
In Maryland, budget officials have filled in fiscal 2020’s $1 billion budget hole with relatively modest cuts, federal aid and borrowing from the upcoming year. But the bleak revenue picture only worsens in 2021 and 2022, and deferred spending cuts would start to bite without an infusion of federal aid.
“It helps us from making the worst cuts,” said Deputy Budget Secretary of Maryland Marc Nicole, who wants to avoid cutting aid to school districts. “Maybe what it lets us do is keep from cutting into the base.” Revenues are down 14%.
Unlike the federal government, which borrows freely to finance its operations, states must balance their budgets every year, which typically forces spending cuts in lean times such as now, which both conservative and liberal economists agree is harmful.
“The magnitude of the fiscal shocks estimated in this exercise is more than even the most well-run state or local government can handle without having to make substantive spending cuts or tax increases. These fiscal actions will have economic consequences, amplifying the business cycle and damaging the recovery,” Moody’s said.
Along with another $300 billion or so round of $1,200 stimulus checks, there’s a widespread assumption in Congress that state and local aid will be at the center of next month’s COVID-19 rescue bill. Pelosi’s bill would deliver a whopping $500 billion to states and $375 billion more to localities, figures that are sure to get whittled down by the GOP-controlled Senate, led by Mitch McConnell, R-Ky.
“By the end of June, many states and localities have to have their budgets balanced. But (McConnell) says he doesn’t seem to care about that,” Pelosi said last week. “Really? You don’t care about the fact that state and local governments, who meet the needs of people, need to have their budgets balanced?”
But skeptics of a big state aid package say it would be sufficient, for now, to provide greater flexibility for using the $150 billion state aid installment enacted in March and have states use up their rainy-day funds, which had been filled up with more than $100 billion in cash during good economic times.
“We may ultimately need large state bailouts, but it’s premature to commit hundreds of billions of dollars before we have exhausted all alternatives. There’s about 20 or 30 states that have the reserve funds to get through the next year," said Brian Riedl, a budget and economic analyst at the conservative Manhattan Institute.
But with a spike of COVID caseloads in states like Texas, Florida and Arizona, fears are growing of a worse-than-expected second wave and lingering economic destruction to state and local budgets that would be more damaging to the economy and require more federal aid to mitigate the potential loss of 6 million jobs.
“If we really get hit with a second wave and the economy remains shut down, then, yes, we will need a few hundred billion dollars for states. But I think, right now, the combination of rainy-day funds and more flexibility with pandemic grants can cover most of the gaps.”