The fuzzy math behind state and local bailouts

With coronavirus cases surging and state and local governments implementing various shutdowns, Democratic Party leaders are calling for another $2.4 trillion federal stimulus spending while Sen. Mitch McConnell and Senate Republicans have pushed a $500 billion stimulus bill. One of the points of disagreement has been how much aid to give to state and local governments.

As Congress negotiates more COVID-19 aid, the discussion would benefit from better data. Distorted or stale estimates of the overall need for aid — and how it breaks down across entities — may result in windfalls for specific governments at the expense of federal taxpayers.

The original $3 trillion Health and Economic Recovery Omnibus Emergency Solutions Act, HEROES Act, passed by the House had egregious errors like a $2.15 billion allocation to the Northern Mariana Islands — a territory with only 54,000 people and 100 coronavirus cases as of mid-November.

Overall, the HEROES Act would have provided about $1 trillion to states, territories, local governments, transit authorities and school districts. But the aid amounts were based on projections from government advocacy groups that have not panned out. The National Governor’s Association asked for $500 billion in state support based on an initial estimate of three-year revenue shortfalls calculated by the Center for Budget and Policy Priorities. The National League of Cities (NLC) published a report estimating that cities, towns and villages would lose $360 billion for the same period.

But these analyses, performed back in April, could not foresee the rapid rebound in employment during the third quarter of 2020 or the recent news that COVID-19 vaccines seem increasingly likely to be distributed in 2021. The NLC study also assumed large declines in property tax and sales tax revenue which failed to materialize because home prices have held firm and increased e-commerce sales picked up the slack for decreases at brick and mortar retailers.

Individual state projections have also turned out to be overly pessimistic. For example, California Gov. Gavin Newsom’s May 2020 budget revision forecast a $54 billion budget hole, including a $32.2 billion revenue loss for the fiscal year beginning July 1, 2020. But between July and October state revenues exceeded the state’s pessimistic projection by $11.3 billion — suggesting that the full fiscal year revenue loss will be little or nothing. Although unemployment has spiked, job losses have been concentrated among those with relatively modest incomes. High earners remit the lion’s share of income taxes under California’s highly progressive system.

This is not to say that some state and local governments have not been adversely impacted by the pandemic — but the effects have mostly been limited to specific subsectors. Public transit systems are seeing sharply reduced farebox revenue; tourism-reliant cities like Anaheim (home of Disneyland) have experienced major reductions in hotel occupancy taxes, and energy producing states are receiving less severance tax revenues due to low oil and gas prices. But these localized issues are a far cry from the worst-case nationwide state and local revenue scenarios originally predicted.

The House’s second HEROES bill included a more modest $436 billion package of state and local subsidies, but even that may be far more than governments stand to lose. The new number appears to have been based on a September Moody’s Analytics report that estimated $450 billion in state and local fiscal shock over three fiscal years.

Moody’s forecast included $82.5 billion of additional state Medicaid spending as the newly unemployed were expected to swell caseloads — but the Congressional Research Service recently reported Medicaid enrollment had increased only 6.7 percent during the first few months of the pandemic, while industry rival S&P observed that Medicaid utilization was actually down. Although more people are enrolled in Medicaid, many of them may be skipping visits to medical practitioners for fear of exposing themselves to the coronavirus. Finally, extra state Medicaid expenditures are likely to be fully offset by increased federal aid, as the CARES Act already raised the Federal Medical Assistance Percentage by 6.2 points.

So, state and local governments may not even need the $436 billion in version two of the HEROES Act, let alone the $1 trillion in the first iteration. Further, whether federal taxpayers should offset the full budgetary impact of the pandemic is far from obvious. State and local governments carry reserves — or at least should carry reserves — to see them through economic downturns. The Moody’s report identified $72 billion of such reserves at the state level but did not include an estimate of local government reserves. And, of course, state and local governments can — and should — trim expenses as they have in response to previous economic downturns.

Before Congress passes additional stimulus spending, members should research and examine the current fiscal data at all levels of government across the country rather than rely on back-of-the-envelope guestimates made in the early stages of the pandemic.

Marc Joffe is a policy analyst at Reason Foundation, former senior director at Moody’s Analytics, and author of the study “Unfinished Business: Despite Dodd-Frank, Credit Rating Agencies Remain the Financial System’s Weakest Link.”