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States and Cities Face Financial Crisis Amid COVID-19 Pandemic

Strategic Insights

— 2 min read

As the COVID-19 pandemic continues to ravage the economy, states and cities are facing a severe financial crisis. With businesses shuttered and tens of millions of workers filing for unemployment, tax revenues are plummeting, leaving governments with gaping holes in their budgets for fiscal 2020 and fiscal 2021. The economic crisis is so severe that it's threatening to upend the financial stability of state and local governments, leaving them with no choice but to implement drastic measures, such as furloughing workers, freezing budgets, and even considering bankruptcy.

Key Takeaways:

  • Over 33 states are projected to face budget shortfalls of at least 5%, with 21 states facing shortfalls of 10% or more.
  • States and municipalities are experiencing a decline in all major forms of revenue, including personal income taxes, capital gains, corporate profits, sales taxes, and gas taxes.
  • The total state fiscal shock is projected to be $203 billion through the end of fiscal 2021, or 18-23% of last year's general fund revenue.
  • Even after accounting for rainy day funds and federal aid, states could face shortfalls of $360 billion or more.
  • Michigan estimated that state revenue could fall by $7 billion over the next 18 months due to social distancing and non-essential business closures.
  • Pennsylvania, which is projecting a budget deficit of up to $5 billion, has stopped paying nearly 9,000 state employees.
  • The federal government has already moved to help states and municipalities, including a $150 billion aid package in the $2 trillion relief package, but it only covers expenses incurred due to the public health emergency.
  • Most counties and cities cannot tap into this aid, and they say they need help too.
  • The National Association of Counties, National League of Cities, and US Conference of Mayors estimate that 98% of mid-size cities project a revenue shortfall this year.

Statistics:

  • $203 billion: total state fiscal shock projected through the end of fiscal 2021 (Moody's Analytics report)
  • 18-23%: percentage of last year's general fund revenue that the state fiscal shock represents (Moody's Analytics report)
  • $360 billion: potential state shortfalls, even accounting for rainy day funds and federal aid (Center for Budget and Policy Priorities report)
  • 7 billion: estimated decline in Michigan's state revenue over the next 18 months due to social distancing and non-essential business closures (Michigan estimates)
  • 500 billion: Federal Reserve program to buy up to $500 billion in short-term debt from states and large cities and counties (Federal Reserve)
  • 150 billion: aid package included in the $2 trillion relief package (Congress)
  • 98%: percentage of mid-size cities that project a revenue shortfall this year (National Association of Counties, National League of Cities, and US Conference of Mayors)

Sources:

  • Tami Luhby, CNN
  • Moody's Analytics report
  • Center for Budget and Policy Priorities report
  • National Association of State Budget Officers
  • National Association of Counties, National League of Cities, and US Conference of Mayors
  • Michigan estimates
  • Federal Reserve
  • Congress

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