April 19, 2024

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Governors brace for coronavirus budget cliff as tax dollars evaporate

Starting in the fall of 2008, California wrote and rewrote its budget three times in less than a year because projections quickly went into the dustbin within months of printing a new spending plan. Leaders in states across the nation are bracing for a similar year of drafting their documents in pencil, knowing that the situation will be hard to pin down until the world emerges from hibernation. Unlike the federal government, states and cities must balance their budgets each year.

Some states, like California, may be better prepared to weather the storm, sitting on a surplus and $20 billion reserve fund built after lessons learned from the previous downturn. But others will have to figure out which programs to cut for the first time in years. Illinois, for instance, doesn’t even have a rainy day fund. That was on Gov. J.B. Pritzker’s wish list for this year’s legislative session — which has now been put on hold.

States such as New York are already talking about building contingencies into their spending plan. Trigger cuts — a well-worn tool during the last recession — are already entering the conversation.

Washington, of course, can use its borrowing powers where states can’t, as it did during the 2008-09 recession with a massive public works package intended to create jobs and buoy local economies. Congress and the Trump administration are now discussing a package of more than $1 trillion in stimulus, and state and local leaders have begun to press for emergency federal aid to support sectors from transportation to dining.

“We’re going to need the federal government with us in a big way,” said New Jersey Gov. Phil Murphy, a Democrat who expects states will ultimately need collective federal aid of $3 trillion to $4 trillion. “And I think everybody recognizes that — and I don’t mean just New Jersey. We’re going to need help. This is beyond any one state.”

But Democrats in particular wonder if the Trump administration will be eager to increase funding to areas it previously slated for cuts, such as Medicaid and social service programs that would serve as a safety net for those hit hardest by coronavirus economic damage.

POLITICO’s reporters in state capitals and major cities throughout the country are watching the budget and economic impact of the pandemic closely — here’s a look at what’s happening in several major states.

Florida

Florida’s leaders are used to planning their budgets around hurricane-induced disasters and even oil spills. Coronavirus is different: Economists in the Republican-led Sunshine State say it’s difficult to forecast how hard the virus will hit the state’s tourism-dependent economy — the fourth biggest in the country — with theme parks and beaches now shuttered.

The pandemic played a big-money role as the Legislature wrapped up its two-month legislative session last weekend — lawmakers scaled back planned tax cuts and boosted the state’s $3.9 billion cash reserves by $300 million to prepare for the coronavirus response. The state has set aside $50 million for bridge loans, and laid-off employees can apply for unemployment assistance.

Gov. Ron DeSantis, a Republican who came to power as a close Trump ally, delivered a rebuke to Treasury Secretary Steven Mnuchin on March 17 after the secretary said the federal stimulus package should include rules to keep money from going to millionaires who don’t need it. DeSantis said federal red tape could delay aid for months. An early version of a House stimulus bill now scheduled to go before the Senate sought to distribute funds through the Social Security Administration.

DeSantis said he told has told Florida Sen. Marco Rubio that the first federal stimulus bill should be packed with assistance for people who will be left jobless. It also should include more bridge loan money for small businesses facing closure, he said.

The full picture of the coronavirus impact in Florida might not come into focus for some time. Lawmakers decided on $300 million in added reserves before Walt Disney Co. and NBCUniversal closed theme parks in Orlando and cities including Fort Lauderdale and Miami Beach closed beaches that were packed with spring break revelers. (For context, $3 billion of the state’s forecasted $36.5 billion in general revenue this year was expected to come from tourism sales tax revenue.)

California

Gov. Gavin Newsom insists his state is better prepared than most to deal with a downturn. California is working with a $222.2 billion budget and a record surplus and reserves. But the nation’s most populous state, which has the fifth largest economy in the world, is heavily dependent on tax revenue from wealthy earners and hence capital gains — making it particularly vulnerable to stock market swings. So expect a wild ride.

Last week, the UCLA Anderson Forecast lowered its expectations for GDP growth and trade but stopped short of predicting a recession. By Monday, UCLA economists had changed their minds. Monday’s revised report said the U.S. economy has entered a recession expected to last until September, and that California will suffer more than most.

California is expected to lose more than 280,000 payroll jobs by the first quarter of 2021, with more than a third of those in the leisure, hospitality, transportation and warehousing sectors, according to the report.

State Legislative Analyst Gabriel Petek, an influential voice on the state budget, said that “while the impact on state revenues is not yet clear, the extreme market volatility and rapidly weakening economic situation obviously have negative implications.” He issued a memo Wednesday projecting “several billion dollars” less in capital gains through mid-2021 and said the state would likely have to pass a stopgap budget before approving a full spending plan after its June 15 deadline.

Still, Petek pointed to California’s robust reserve fund as a buffer against potential budget cuts.

Christopher Thornberg, founder of Beacon Economics in Los Angeles, is taking an optimistic approach. While this is unprecedented at a national level, he said, regions have bounced back from such natural disasters fairly quickly. It’s not necessarily like the 2008 financial crisis, which had a long-term impact on the economy and permanent loss of jobs, he said.

“It’s business delayed, not business canceled. It’s spending delayed, not spending canceled,” Thornberg said. “If we’re looking at four weeks, it’s a hurricane. But to be clear, if this goes 40 weeks, California is not in a good position. … Our revenue system in the state is so hypersensitive to shifts in capital gains that if the stock market really did stay down where it is right now, we’re going to take a massive hit.”

New York

New York’s economy faces a massive hit: In a best-case scenario, tax revenues will likely be $4 billion lower than projected for the coming fiscal year, the state comptroller says, and New York City alone faces at least a $3.2 billion hit to its bottom line as travel dwindles and restaurants, bars and theaters close indefinitely, a steep loss in tax revenue that will extend for six months.

Financing the massive coronavirus response, meanwhile, is going to upend Gov. Andrew Cuomo’s previously planned efforts to fill a major Medicaid budget hole. State leaders are scrambling to finish their state budget this week, but Cuomo said the original forecast is practically moot now with an expected economic downturn in weeks and months to come.

The state was already staring down a roughly $6 billion budget gap, primarily due to a $4 billion Medicaid shortfall. Cuomo’s plan to address that relied on limiting the amount of local spending on Medicaid that is picked up by the state.

But the second federal coronavirus bill — which would give the state billions of dollars — would make that strategy “impossible,” the governor complained over the weekend, because it contains language prohibiting any changes to localities’ reimbursement rates. Sources close to the legislation say Cuomo is working with the New York delegation for language in additional federal coronavirus bills to allow him flexibility to move forward with his Medicaid savings plan.

The state’s comptroller, Tom DiNapoli, has long suggested New York’s reserves are not built up to withstand disaster or severe economic downturn. The budget Cuomo proposed would get the two largest statutory reserve funds to under $2.5 billion, about 3.1 percent of General Fund expenditures, and far below other large states such as California, Texas and Michigan.

In the City, Mayor Bill de Blasio has enjoyed an unprecedented economic boom since taking office in 2014; he’s expanded the city budget from $75 billion six years ago to a proposed $95.3 billion for the upcoming fiscal year. That streak has now ended this month, with a city economy dependent on tourism and entertainment grinding to a halt.

As bad as the picture is now for the city, it still has room to get worse. De Blasio and Cuomo are looking at plans to potentially shut down roads, bridges, tunnels and trains to halt travel in and out of the city. That would drain city coffers further and could have ripple effects for national and global markets.

Texas

Texas is used to booms and busts in the oil and gas sector blowing a hole in the state’s $110 billion annual budget. It’s got a rainy day fund that has more than $11 billion. “The ups and downs are nothing new for us,” said Jerry Mouton, mayor of Deer Park, which has a Shell manufacturing site. “It’s a normal part of the budgeting process. I’m not overly concerned.”

But the oil and gas downturn is coming at the same time as the outbreak — meaning that state budget writers will have to make some tough decisions when they gather in Austin for the next session in January.

An oil production tax provides 6.1 percent of the state’s revenue and natural gas production tax generates 2.7 percent. That, combined with an expected plunge in sales tax from shuttered restaurants, hotels and businesses and a lack of income tax, means Texas will have a tough time cushioning the blow.

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