Democratic sweep offers hope to cash-strapped states


Staring down a $3.8bn budget hole, the man in charge of the finances of America’s largest city last year urged Congress to send billions of dollars in aid to state and local governments facing shortfalls.

Scott Stringer’s call fell on deaf ears; Senate Republicans refused to include the money in the $900bn relief package passed in late December. 

Last week, the New York City Comptroller’s fortunes changed when Democrats won two run-off elections that gave them a majority in the Senate, and with it control of Congress and the White House. The victory — which Citigroup’s top municipal strategist called a “game changer” — paves the way for an injection of federal aid to parts of the country facing severe economic pain as the pandemic rages on.

“This was nothing like the 2008 recession or 9/11 . . . New Yorkers are still in deep economic pain,” Mr Stringer told the Financial Times. “We’ve spent billions on the response and we’ve lost billions in revenue.”

Total state tax collections in the US were down 3.2 per cent from March 2020 to November 2020 compared to the same period the year before, according to data from the Urban Institute.

More losers than winners: state tax revenues battered by pandemic

“There is a distinction between the haves and the have-nots,” said Cooper Howard, the director of fixed income strategy at Charles Schwab.

The situation has been acute for states with large cities such as New York and California, said Lucy Dadayan, a senior research associate at the Urban-Brookings Tax Policy Center.

Sales taxes have slid as destinations such as Broadway and Disneyland closed, lockdowns shuttered small businesses, workers stopped commuting and some residents moved out of state. Urban Institute data show state tax collections have dropped more than 3 per cent for the pair between March and November of last year versus the same period in 2019.

In states such as Hawaii and Nevada, taxes from hotels, resorts and restaurants have dried up. In Hawaii, taxes generated from companies are down nearly 80 per cent.

And as people around the world stayed home and cancelled travel plans, demand for crude oil slid, weighing on energy prices. States dependent on oil and gas — including North Dakota, Alaska and Louisiana — have suffered.

Bar chart of Sources of state and local government tax revenue (%) showing 35% of state and local government revenues come from property taxes

But in parts of the country including Michigan, Washington and Arizona, budget officers have found themselves far better off than their projections in April and May contemplated.

“State revenues continue to exceed projections even with the pandemic,” Kimberly Yee, the Arizona treasurer, said. “Arizonans are continuing to spend and many have stayed employed.” The state moved more swiftly to reopen its economy than some other states, and a buoyant housing market also helped to fuel the rebound.

While state and local governments have avoided the worst, they will need to cut as much as $236bn over the next 18 months or raise taxes if the Biden administration does not come to their support, according to Dan White, a director at Moody’s Analytics. That figure, which accounts for December’s stimulus bill, is expected to translate into job and service cuts.

“State and local governments have the ability to solve these problems on their own, but the economic impact of the measures they have to implement to do that are really significant,” he said, especially for those who kicked off 2020 with smaller rainy-day funds.

Chart of median rainy day fund balance relative to general fund spending that shows US states have tapped rainy day funds to weather the pandemic

States and cities have furloughed or laid off nearly 1.4m workers, far above the approximately 750,000 people who lost their jobs during the global financial crisis, according to the Center on Budget and Policy Priorities. The job losses and furloughs included 50,000 just last month.

The state of Georgia cut funding for primary education by roughly $1bn. Hawaii is reducing its support for the University of Hawaii and has moved to suspend pre-funding retiree health benefits to save $390m. Florida, which is one of the few states that did not pass a law to require online retailers such as Amazon to collect sales taxes — meaning it foregoes hundreds of millions of dollars in revenues a year it would otherwise collect if the purchases were completed in a physical store — has pushed state agencies to find savings.

Analysts with Oxford Economics have warned that the moves to curtail spending could weigh on the broader US recovery. State and local government spending accounts for about a tenth of US economic output, the research group said.

That has only intensified the need for federal intervention, economists have argued.

Aid to state and local governments will be included in a broader rescue package given that Senate majority leader Mitch McConnell will no longer have say over the legislation that makes its way to the floor for debate, investors and analysts said. Goldman Sachs reckons the Democratic party will pass a roughly $750bn stimulus package in the first quarter, with $200bn earmarked for municipalities.

The Senate win also opens the way for substantial infrastructure spending, which could take the pressure off state and local governments.

“Democrats are envisioning a broad definition of infrastructure — not just roads and bridges, but also a national broadband network, green energy, and school investment,” said Libby Cantrill, head of public policy at Pimco. That could lead to as much as $2tn in spending spread over a number of years, she added.

In Plano, Texas, which instituted a hiring freeze to cut costs, federal assistance last year helped the city provide food and shelter to residents in need, budget and research director Karen Rhodes-Whitley said. Extra stimulus could hasten the recovery.

Roughly 1,400 miles away, Connecticut Treasurer Shawn Wooden has been among those pushing for more aid from Washington. The state has turned to the $3.9tn municipal bond market and a rainy-day fund to help cover its budget shortfall, but Mr Wooden said federal aid was needed for municipalities until the “pandemic threat fades”.

“Towns and cities, small businesses and families need support from Congress,” he said. “The real economy is not recovering at the same rate for everyone.”


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