States and Cities under Fiscal Pressure: The Tales of Woe Rev Up Again

Expect more fiscal pain, state and local governments

Sep 11, 2020

Well, Congress has had a nice time off for looting and riots, a few got to do an “emergency session” over the U.S. postal service, but now they’re back in session.

So now it’s time for WON’T ANYBODY THINK OF THE POOR GOVERNMENT EMPLOYEES?

No! Don’t Cut the Orchestra Subsidies!!!!

Mary Williams Walsh at the NYT: With Washington Deadlocked on Aid, States Face Dire Fiscal Crises

Local officials are slashing funding for everything from education and health care to orchestra subsidies.
Alaska chopped resources for public broadcasting. New York City gutted a nascent composting program that could have kept tons of food waste out of landfills. New Jersey postponed property-tax relief payments.
Prisoners in Florida will continue to swelter in their cells, because plans to air-condition its prisons are on hold. Many states have already cut planned raises for teachers.
And that’s just the start.
Across the nation, states and cities have made an array of fiscal maneuvers to stay solvent and are planning more in case Congress can’t agree on a fiscal relief package after the August recess.
House Democrats included nearly $1 trillion in state and local aid in the relief bill they passed in May, but the Senate majority leader, Mitch McConnell of Kentucky, has said he doesn’t want to hand out a “blank check” to pay for what he considers fiscal mismanagement, including the enormous public-pension obligations some states have accrued. There has been little movement in that stalemate lately.
……
Collectively, state governments will have budget shortfalls of $312 billion through the summer of 2022, according to a review by Moody’s Analytics. When local governments are factored in, the shortfall rises to $500 billion. That estimate assumes the pandemic doesn’t get worse.

Okay, budget shortfalls of about $300 billion over two years.

=squint=

That’s not quite the same ballpark as $1 trillion over two years.

Some states are trying to save cash on their pension contributions. Kentucky has delayed its payments to the state workers’ pension fund, already one of the most poorly funded in the country. Colorado and Maryland are among the states planning to reduce their contributions. Some, like California and New Jersey, had recently committed to raising their contributions to cover past underpayments — but now can’t afford to do so.

Oh dear lord.

Yeah, funny that the states that are most strained in making pension contributions are ones that haven’t done full pension contributions even in good years.

State officials say they have little choice but to keep cutting if more aid doesn’t arrive. All but one state, Vermont, are legally bound to balance their budgets every year, and Vermont does so voluntarily. They can’t borrow their way out of a cash crunch, the way Washington can, because they have laws limiting how much bond debt they can carry. If they veer too close to the limit, lenders will start demanding higher interest rates and the rating agencies will downgrade them.

Hmmm. Yes, they are required to do so, and yet Illinois has managed for years to not even pay regular vendors bills. That doesn’t sound very balanced to me.

Glenn Hubbard, an economic conservative who was chairman of the Council of Economic Advisers under President George W. Bush, said he agreed that federal money should not be used to prop up failing state pension funds. But he acknowledged that the states’ cash needs were becoming urgent and said there wasn’t time for a complete overhaul of troubled state pension systems.

Isn’t that convenient?

I can think of all sorts of responses to this. First, in a crisis, yes, the states will have to cut back on non-essentials, including subsidies to public radio and orchestras. Maybe Bill de Blasio can cut his wife’s staff, which isn’t huge savings, but would look good if he has to cut 20K NYC employees. I highly doubt his wife’s stuff is all that essential.

Oh wait, they’re going to borrow money instead of cutting expenses. Mmmm.

Back to the NYT:

For the sake of speed, Mr. Hubbard said in an interview, Congress could send the states money with a simple, and probably breakable, rule that it not be used to reduce taxes or bail out pensions. Public pension reform, which would be grueling, could come later.

“Probably breakable” rule?

Oh, I think I know what he means.

No time or will to attach strings to the money

I assume this is the “We’ll send them money with strings attached“ approach, but with the understanding the strings won’t stay attached.

As I wrote:

The main problem with all these proposals is that there is no way the strings would stay attached. It would require an ongoing will to enforce something that could be un-enforced after just one year.

As it is, this is all moot, because the Senate bill not only does not include any bailout funds for governments, it was just blocked by Senate Democrats from progressing any further.

(By the way, I don’t mind a filibuster, but I think it needs to be real, as opposed to just voting to block the bill. I want to see senators reading from a dictionary and other time-wasters. If it’s so important to block the vote, then it’s important enough to actually put some effort into it.)

In any case, the Democrats have made the stand that yes, we need to shovel money directly to states and local governments. Republicans want to send money directly to individuals, plus a smattering of other categories, like schools. States and local governments would get their bailouts indirectly (tax the recipients of that federal assistance).

There is a season for reform, and this is not it.

I agree that now isn’t the time to do public pension reform. There has been essentially nothing developed in Congress in dealing with the problems of public pensions. (There have been some Congressional hearings, but not much in the way of legislation that has progressed anywhere.)

I would say that the same goes for multiemployer pensions, except that Congress has actually been working on MEP reform for years. But given the dynamics of the current Congress, this is really not the time to address it, either. (Though Central States Teamsters fund, even in an up market, is going to run out of money in the next 5 years, and take the PBGC with it.)

I think the easiest rule for doling out money to governments is to estimate the amount the federal government is willing to shovel into the states/cities, and do it on a per capita basis. One trillion is obviously too much. However, I don’t think it should necessarily cover the estimated $300 billion shortfall over the next two years.

Yes, I know some places, especially urban areas, are disproportionately affected, but at this point, if you’ve got to do it rapidly, make it very simple.

Saying governments can’t use the money for this or that is idiotic. Cash is fungible. If cities/states use the money for, say, the schools, then the tax money they do have from elsewhere can be the supposed separate source for pension payments.

In any case, there is deadlock right now.

Blame Illinois for the lack of aid

For what it’s worth, we wouldn’t even be having this public pension bailout discussion right now if it weren’t the pigginess of Illinois politicians who made it explicit in their bailout request.

We would simply be talking about revenue shortfalls in general, and not necessarily where the money would be spent, if Illinois politicians hadn’t brought it up in the first place.

Sure, Mitch McConnell might have mentioned failing pensions if the Illinois folks hadn’t mentioned it first, but he never seems like the guy to get out in front of an issue.

States with cap in hand – throw those caps at Illinois for not getting what you’re asking for.

Tales of Woe

Here is a panoply of tales of woe:

Love that “fails to advance”.

The hive mind really kicked in for that one:

Stephen L. Miller @redsteeze

Watch how a narrative unfolds in real time

The bill “failed to advance” because Republicans couldn’t get 60 votes total (only got 52) to advance the bill. This headline from the AP: Virus bill blocked in Senate as prospects dim for new relief is a bit more neutral than “failed to advance”.

Mostly negative on bailouts

I have done a search for pro-bailout stories, but for some reason, I can’t find them. Usually it’s just the tales of woe, as above. Implicit in the “We have to cut budgets!” is the argument for a bailout. It’s in the “news” stories. The anti-bailout pieces are in op-eds.

Michael LaFaive and Joe Coletti: No more bailouts for state and local governments
Reason: Could a Federal Loan Program Help Fix Ailing State Public Pension Plans?
Davis: No federal bailout for Illinois
Reason: States Aren’t Getting a Federal Coronavirus Bailout. Most Will Be Fine.
Washington Examiner: Trump is right to oppose the Pelosi blue-state bailout

Do the numbers add up?

The people here: States Continue to Face Large Shortfalls Due to COVID-19 Effects compile a table of estimated impacts by state (and DC and Puerto Rico), from official state estimates.

I noticed several things about this piece.

First, within their text, they talk about individual states in isolation, and don’t add up the numbers from all the states they do have. They put them into a hard-to-use-for-calculation table (I had to drop it into Excel and then use a lot of text functions to turn it into numbers). They give percentage impacts, with their own color-coding for severity.

The highest projected impact, percentage-wise, is for Massachusetts, which has a high end of 31% impact in FY2021, of almost $10 billion. But they provide a very wide range.

Now, most of the states listed on that page have closed FY2020, and many of them had minimal revenue impacts in that period (most have fiscal years ending June 30). The table on that page isn’t easy to use (I had to do a lot of manipulation in Excel), and then not every state is down there for FY 2020. Of the 50 states (plus DC and Puerto Rico), I have 41 with FY2020 impacts. The FY2020 impact totals $50 billion.

For FY2021, I have 46 states reporting projected impacts. That totals $131 billion. The states missing from this sum: Alabama, Connecticut, Nebraska, North Dakota, Puerto Rico, South Dakota, West Virginia).

Too few states report estimated FY2022 impacts as of yet, so I won’t use those numbers.

So we have an estimated $180 billion in revenue impacts over the next two years.

Sure, they may be underestimating for the purposes of budget-making. Maybe their estimates assume some federal funds. I don’t know.

I used the numbers given in the table, and I estimate for the whole group, it’s a 7% impact for FY2020, and 14% impact for FY2021.

Yes, those are large drops in revenue for states.

But $180 billion nowhere near $1 trillion.

Also, it doesn’t match up with the drops here.

I mean, twice the estimates we see from the states is at least in ballpark range, for government purposes. It’s a hell of a lot closer than $1 trillion.

What’s next?

In the annals of stating the obvious, this is pretty damn obvious: November will decide the fate of economic bailouts in blue states

The only remaining solution is federal bailouts. If Democrats control both the White House and Congress next year, they may likely pass bailouts for blue states. This would force taxpayers to subsidize decades of spending with the guise of coronavirus relief. The Heroes Act provides the taste of what Congress could jam into its hastily passed “emergency” legislation. There simply appears to be no appetite to cut back on spending.
The 2020 election offers a slate of candidates to answer questions about hundreds of issues. One critical question we have to ask before handing lawmakers, governors, and the next president power to pass bailouts for failing states is whether or not they learned from their own errors in the past. If not, their mistakes soon will be the responsibility of us all.

Let me point out something equally obvious: “blue states” will have pretty much no influence on whether Congress or the Presidency goes to the Democrats. Because their representatives and senators are already all Democrats. Their electoral college votes are going to the Democratic candidate. It was going to happen no matter who the Dem candidate was.

There is a reason that neither Democrats nor Republicans waste much time on Election Day activity here in New York: it doesn’t matter much. We know what the result will be even before we go to the polls (the local races are a bit different.) They come here only to get money from us.

So it may behoove people in the non-blue states to think about some of the other repercussions for voting for not only a Democratic President, but also Representative and Senator. Do they want to be paying (or future taxpayers… which will probably be them if they live long enough) for states getting way more than their revenue drops? Do they want to shovel more money into Illinois?

I wrote this back in January 2017: Tales of the Obvious: No Such Thing as Risk-Free; Don’t Do Stupid Stuff

But anybody who has mindlessly parrotted “But government doesn’t go out of business!” knows precious little history, even covering the very short period of U.S. history.
Government goes out of business all the time, and overspending and over-borrowing is a common theme throughout Western history, at least. I just went through a really good lecture series on the Black Death in Europe, and one part was the effect the huge population drop had on public finance. As a result of the Black Death, all sorts of things went into abeyance, like the construction of cathedrals (very expensive) and wars (also very expensive). It wasn’t just a matter of lack of bodies and expertise to get these things done (though that was related), but there just wasn’t enough people to tax to support these projects.
It’s happened before. There’s no reason what happened before can’t happen again. Assuming that is far more foolish than assuming something that has never happened will not happen.

Now, COVID has nowhere near the mortality impact of the Black Death, and the fiscal impact – maybe a total of 15% of state budgets – is nowhere near the economic devastation Europe dealt with in 1348-1349, when the worst wave hit.

But it may just be reasonable to look at these state budgets and see what can be cut.

This actually happened during the Great Recession – government payrolls were actually cut in 2009 and 2010. Take a look at the graph of the revenue shortfalls up there – $230 billion in FY2010.

There was no bailout of the states in 2009-2010. That’s why people were talking about state bankruptcy back then. Many states sucked it up and actually spent less. They did not need to declare bankruptcy.

And while CBPP inflation-adjusted the revenue impacts, they did not provide what percentage of state budgets those were. I am very willing to bet state budgets grew much faster than inflation from 2010-2020. The revenue shortfall amounts from the Great Recession almost definitely took a larger bite out of the budget for the same amount.

So states and localities are just going to have to suck it up until January, at the earliest.

Mitch McConnell and other Senate Republicans negotiated their bill down to $500 billion or so to get it to pass the Republicans (Rand Paul voted against, but only Repub to do so.) The Senate is not going to pass a $3 trillion+ in total monstrosity from the House, and Pelosi has no interest in negotiating. This is an election year tool. The Democrats blocked the Senate bill from even proceeding, so there’s a House bill with no chance of passing the Senate, and a Senate bill that can’t even get through the Senate. Trump isn’t even a part of this.

So various groups may be wargaming outcomes: could be Dem House and Dem Senate… with Trump as President (boy, the media will really enjoy that combo). Could be all-Dem Congress and White House, as with Obama in 2009-2010 (which he lost in the 2010 election). Could be Dem President, Dem House, and Repubs barely hang onto the Senate. The assumption is the Dems get to keep the House. But all that is for January 2021, when the “new” people come in.

In the meantime, I recommend states and localities look to cut back at least a little.

STUMP - Meep on public finance, pensions, mortality and more

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