U.S. states are bleeding cash as pandemic drags on with no stimulus in sight

·4 min read

Without state and local aid from new stimulus legislation, many state and local governments will find themselves swimming in a sea of red ink.

An analysis from Dan White of Moody’s Analytics estimated that the labor market will not recover all of the jobs lost during the recession until 2023.

The diagnosis, specifically for state governments, is even more chilling with a resurgent pandemic and stimulus legislation negotiations stalled: “The biggest risk factors that could cause us to slide into the more severe scenario from the baseline are a resurgence in COVID-19 infections nationwide, or a failure in Congress to pass another round of fiscal stimulus.”

After a massive drop in 2010, states had continued to make piecemeal progress towards improving their financial position.

And then the pandemic wreaked major havoc: Moody’s estimated that U.S. states could see a shortfall of about $434 billion from 2020 through 2022 without further stimulus.

“This chart shows that additional stimulus is as urgent as ever,” Angela Hanks, deputy executive director at Groundwork Collaborative, a progressive think tank, told Yahoo Finance. “We’re still facing a crisis on a number of fronts. … Ultimately, it’s only the federal government that’s going to be able to solve them.”

The pandemic that's affecting literally everyone’

White noted that “states that rely heavily on volatile tax structures such as energy taxes or very progressive personal income taxes will also experience larger than average amounts of fiscal shock.”

Some of the states that are likely to be hardest-hit include Florida, Louisiana, and Nevada.

Florida could see its net reserves erode by as much as 12% as a proportion of their 2019 revenue, followed by Nevada at 17%, and Louisiana at 20%.

(David Foster/Yahoo Finance)
(David Foster/Yahoo Finance)

And since states also have the responsibility to balance their budgets, Hanks noted, there are additional pressures on them as compared to how the federal government operates.

“When Congress passed the CARES Act in March, which included state local relief, that was incredibly helpful to making sure that states didn't have to force really painful budget cuts at a difficult time when the economic crisis and the pandemic that's affecting literally everyone,” she explained.

With no aid forthcoming, “we really are going to see states start to make some really tough decisions about where they need to cut,” she added.

States may choose to levy heavier taxes on the wealthy to raise revenue. They are already laying off staff, including in the education sector. Bus routes are also on the chopping block.

“We’re gonna have a lot of serious conversations about what our budget will look like next week," Pennsylvania State Rep. Malcolm Kenyatta recently said on Yahoo Finance Live. "And I don't know how we really deal with the massive holes that we’re going to have in our budget without direct support from the federal government."

(GRAPHIC: David Foster)
(GRAPHIC: David Foster)

Failed to lift the country’s most vulnerable communities’

Many parts of the country haven’t even recovered from the Great Recession from 2007 to 2009.

Subsequent U.S. economic growth “failed to lift the country’s most vulnerable communities,” a recent report by the Economic Innovation Group stated.

The group’s Distressed Communities Index (DCI), which looks at the health of U.S. communities based on their financial well-being and found that between 2000 and 2018, inequality had increased.

While households in prosperous zip codes had gained 8.7 million jobs over the 18-year period, households in distressed zip codes that had lost jobs on net.

(Economic Innovation Group)
(Economic Innovation Group)

“Numbers of jobs and businesses in distressed communities ... fell from 2014 to 2018, deep into the national recovery from the Great Recession,” the authors stated.

And now, with the pandemic, the “recession is likely already eroding away any modest improvements racked up at the tail-end of the 2010s expansion,” the report added.

“We know from the last crisis that we saw some really painful cuts at the state level that took a long time to heal,” Hanks said. “Whether that's cuts to education at the K-12 level and higher ed, to things like healthcare, infrastructure. There are all types of things that states need to spend money on that they will face challenges doing and certainly that will come at the expense of the state's residents.”

Aarthi Swaminathan is a reporter for Yahoo Finance, covering education. She can be reached at aarthi@yahoofinance.com. Follow her on Twitter at @aarthiswami.

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