States Brace for Economic Disaster while Battling COVID-19


As states across the country deal with crowded hospitals and medical equipment shortages, there’s another problem looming not far in the distance — massive budget shortfalls.

States are required to maintain balanced budgets and cannot run up deficits the way that the federal government can. The strong pre-virus economy allowed many states to build up rainy day funds, but those funds are quickly being exhausted to deal with the increasing costs of COVID-19. 

According to the National Association of State Budget Officers, states ended the 2019 fiscal year with $72 billion in rainy-day funds, an increase of nearly $40 billion since 2007. These reserves would have allowed them to weather a normal economic recession, but not something as large as what’s happened so far with the coronavirus.

More than 10 million people in the U.S. have now filed for unemployment, which hits state budgets hard in two ways: they are the ones responsible for paying those unemployment claims, and they lose tax revenue as a result of fewer people being employed.

“States are very limited in the options available to them,” Jeff Chapman, director of the state fiscal health project at The Pew Charitable Trusts, told The Hill. “States have to balance their budgets, so when revenue falls precipitously like it is now they’re going to have to either raise taxes or cut spending. And both of those options are bad for the economy.”

This is one reason many governors were quick to declare states of emergency as the virus began to spread; doing so gave them access to federal resources. President Trump’s emergency declaration made $50 billion in emergency funding available to states.

“All the resources we can have on hand — to make sure if things get worse — we want,” said Missouri Gov. Mike Parson as he announced a state of emergency in mid-March, according to Time magazine

On top of unemployment concerns, states also draw significant revenue from the tourism industry that’s been completely shuttered as people are forced to remain at home. The suspension of everything from sports to concerts means millions in lost amusement tax revenue across the country, money that does not seem like it will be coming back anytime soon.

In addition to emergency funds, the federal stimulus package passed in late March included a $150 billion Coronavirus Relief Fund for state, local, and tribal governments. The funds will be allocated based on population size. 

While those funds will help states make due in the short term, it’s unclear how quickly the economy will bounce back after the virus and what the long-term impact on state budgets might be. The real effects might not be fully visible until a year or two down the road when the federal emergency money goes away.

The budgeting season for states is supposed to be happening now, but hearings have been postponed due to the coronavirus. Whenever the process resumes, legislatures will be faced with some tough decisions about rebuilding their emergency funds while dealing with the ramifications of an economic downturn.

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