One fact that has become abundantly clear is that Covid-19 will not stop imposing its will on state and local finance for some time. The damage done in the last quarter only really took place in the last month of March. All parties agree that this quarter is when the heaviest impacts are likely to be felt. This quarter is the last quarter for most states and localities with some exceptions. For most, the new fiscal year commences July 1. There are likely to be many adjustments made to the preliminary budgets before the final budgets are adopted. New York state has already adopted its budget for FY2021 that started April 1. It will probably be necessary for most states to revisit their adopted budgets by no later than mid fiscal year in order to allow any adjustments to take hold by year end.
As has been the case for some time, we have two parties with different views of the world and what needs to be done for states and localities beyond the actions that have already been taken in the CARES act. On the Republican side, caution is urged on adopting more aid for the states and localities. Initial estimates focused on $500 billion, but even that level is being questioned. On the Democratic side, the level being sought is for $1 trillion. If such a level were it to be adopted would cover the vast bulk of the financial hurdles especially if pension funding is left out of the equation.
By any reasonable analysis, these numbers are extremely large. And there now appears to be a growing acknowledgement that financing these amounts and incurring debt to accomplish the task will have its own set of implications. Reviewing some recent rating reports of the credit of the USA indicate that the growing debt burden is one of the areas of concern. As Chairman Powell professed, now is not the time to obsess about debt levels. That having been said, we still need to adopt a greater burden with eyes wide open for the long run.
In order to appreciate the scale, I have selected three states to provide some context. No states report exactly in the same manner. Funds and the number of funds and how they are accounted for vary considerably. Florida is anticipating a Total Budget of $93.2B that includes a General Fund Budget of $35.2B. Assuming that one third of the budget is at some level of risk, the amounts are $31B on the Total Budget and $11.7B on the General Fund Budget. However, Florida reports that it has already received $4.1B from the CARES act. It also reports that it has been able to adjust its FMAP or Medicaid reimbursement by 6.2% to 67.7%. Each of these developments will serve to take some of the risk away. But the state is dependent on the sales tax and to an extent tourism. A somewhat faster reopening will prevent more economic impact if the infection rate can continue to be managed down.
California anticipates a $146 billion General Fund Budget for the fiscal year. According to the budget discussion, approximately one third of the state is on MediCal (Medicaid in CA.). Only $23B of MediCal spending is derived from the General Fund. Many other funds contribute to the total. The bulk of state revenues are derived from the income tax and the sales tax. A smaller proportion is derived from the Corporate Tax. Unearned income derived from capital gains is also a swing item in the revenue picture. Given the swoon and recovery in the equity markets, it may be some time before we see an increase in realized capital gains. One third of the budget would approximate $48 billion. There are offsets for receipt of CARES act funds and other adjustments. This is just an illustration.
In New York State, the All Funds Budget is $176B and the General Fund is $81.3B. Adjustments would also need to be considered for CARES act funding and other adjustments. Experiencing a decline of one third would trim revenues by $58B and $26.8B for illustrative purposes. New York is also dependent on the income tax and to a somewhat lesser extent the sales tax.
If you take just the rough-cut amounts at risk for the greater figures, some $137B could be at risk for just 3 states. Last time I checked there are 47 more. If rounding is applied, you may easily see how at least $250B should be a rock bottom starting place.
I can appreciate the sensitivity of the pension discussion. That does not mean that the states have a holiday in paying their pension obligations if they do not have the funds. Paying late with interest could also become quite significant if necessary, in a negotiated scenario. If any prospective late pension payment consideration winds up in court, the consideration could be even more burdensome.
I hope and trust that Congress will have the most up to date inputs to make its decision on the important matter of supporting the states and localities. Being so close to the end of the fiscal years for most governments makes the task more daunting. I do not view providing aid in this instance as a bail out in the traditional sense. Others have called for bringing back advanced refunding to assist with restructuring outstanding debt that would most likely be for savings in this environment. The cost would appear to be relatively low in the current context.
John Hallacy
John Hallacy Consulting LLC
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