State and local governments are going broke

Since the coronavirus came ashore in the United States, we have seen a cascade of crises. Not enough tests, lack of personal protective equipment, 24 million newly unemployed, not enough ventilators, tens of thousands of shuttered business. But there’s another disaster looming, with implications just as dire: our states and local governments are about to go broke.

State and local governments are on the frontlines of the COVID-19 crisis. They address the economic calamity hitting our communities, area businesses and the people they employ. They deal with homelessness, unemployment claims, Medicaid patients, public hospitals, public schools, community colleges and public universities, delivering food aid, enforcing social distancing and public safety. They also address the urgent needs of the most vulnerable communities where poverty and racial disparities are already present, as we all face the COVID-19 crisis. 

However, our state and local governments are losing a ton of revenue at the moment, from taking in less in sales taxes to getting fewer toll dollars as people stay home. That, paired with state and local governments paying a lot more in higher safety net spending, is about to decimate their budgets and ability to fight this pandemic. 

This is what happened in the Great Recession last decade. To respond to the budget challenges of a suffering population, from 2009 to 2013 state governments cut hundreds of billions in spending. Think of what that meant for the salaries and number of jobs for teachers, first responders and other employees. Think of what that means for economic opportunity in these states.

In 2011, looking back at her time as governor of Michigan, Jennifer Granholm said on Meet the Press: “I cut more as a percentage out of government than any state in the country this past decade. And where is Michigan in terms of its economic growth? Cutting did not result in economic growth.” Michigan was not alone in that story.  

One of the contributors to the depth of and lengthy recovery from the Great Recession was even when the federal government was stepping in to stimulate the economy, state and local governments were rapidly cutting back. According to The Brookings Institution, for 22 of 26 quarters from the start of the Great Recession until halfway through 2014 shrinking state and city budgets were a drag on the economy.

Today, mayors and governors are ringing the alarm bell that this is happening again. Unlike the federal government, states and cities are very limited in their ability to borrow, so as they take in less revenue and spend more on fighting COVID, they have to cut spending. This will make our recession deeper and recovery slower. 

As Congress considers the next aid package, we need a Save Our States (SOS) Rescue Plan that stabilizes all communities who are on the frontlines helping Americans through this crisis.

Historically, every one percentage point increase in unemployment results in a $40 billion decrease in state revenue. Using this rule of thumb and combining local revenues, the Economic Policy Institute has estimated that states and cities will need at least $500 billion in additional aid to get through next year without savage cuts. The federal government has the ability and capacity to borrow this money to step in and support our states and cities. If we want to prevent a painful recovery from the COVID-19 crisis we need to get the needed funds to state and cities so they don’t cut spending to many essential areas.

To get funding to states, Congress should establish a state and city stabilization fund. The government would guarantee that as state and city revenues fall below their recent average, federal funds would be allocated to make up the difference. The federal government can come in and immediately relieve state budget pressures by putting more federal dollars to Medicaid spending. This will promote both public health and state budget health.

The federal government should also provide an additional $15 billion to help transit agencies cover operating costs — helping local communities as well as the frontline workers who need a way to get to work. We should also be increasing funds to the U.S. Postal System so communities stay connected and able to receive vital supplies.

Speaker Nancy Pelosi (D-Calif.) and Senate Minority Leader Chuck Schumer (D-N.Y.) have been pushing for $150 billion in additional state and local emergency funds in an interim package. We need that now. And yet, Senate Majority Leader Mitch McConnell (R-Ky.) has stone-walled needed aid to every governor and mayor in this country.

We don’t have time to wait. Throughout this health and economic crisis, states and local governments must be a steadying force to help people and communities survive and recover. Let’s stop starving them and give them the tools they need to help. It may just help the entire economy recover faster as well.

Zach Moller is the deputy director for the Economic Program at Third Way.