COVID-19 aid for states and localities: How dire is the need?

A decade ago, the Great Recession broadly undermined state and local government finances, which economists say dragged out the recovery for several years. 

The coronavirus pandemic, by contrast, has had a more uneven impact, cratering state and local revenues in some places, while barely touching others. 

Still, Democrats aren’t taking any chances. They say they want to head off another needlessly slow recovery by including $350 billion in aid to states, cities, counties, territories and tribal governments in the next COVID-19 relief package. Republican leaders, for their part, have objected, saying the help isn’t needed and that it would reward poor fiscal management by Democratic officials in states and cities.

We went looking for data to referee these arguments.The plain truth is that too many numbers remain unclear for either side to back up their positions with rock solid data. There’s data to say that the pandemic has put pressure on state and local governments. But quantifying the total impact isn’t easy.

It would be nice to know how much revenue state and local governments have lost, and how much more they’ve had to spend on public health and in other areas due to the pandemic. But the information that’s available today is spotty, especially at the local level.

And even more uncertain is how much more they will need to spend to deal with the damage done by the virus.

Congress has already passed several bills, including the $2.2 trillion CARES Act in March, that have taken some pressure off state and local governments. The Paycheck Protection Program for businesses and additional payments to the unemployed bolstered state and local tax revenues that might have otherwise fallen short. 

The latest report from the National Association of State Budget Officers shows state revenues for fiscal years 2020 and 2021 are down about $135 billion compared with pre-pandemic budget plans.

Notably, revenues have not fallen as much as state leaders feared at the outset of the pandemic. 

Republican lawmakers such as Sen. Rick Scott of Florida have dismissed the need for aid to states and localities as "blue state bailouts" that will be used to fill budgetary holes caused by Democrats’ past bad spending decisions.

In reality, the situation varies widely among states, and the patterns don’t fall along political lines.

Tracking by the Urban Institute, a Washington-based policy center, shows that in the pandemic period of March through December, 26 states reported lower total tax revenues than a year earlier, while 21 reported growth.

Nationally, in the pandemic period, revenues were down only about 2%, or about $14 billion.

Scott's home state, Florida, showed a revenue drop of 10.2%, while Georgia, its neighbor to the north, saw a rise of 2.7%. The variety stems from differences in state economies — Florida relies more heavily on the hard-hit tourism industry — as well as the mix of income and sales taxes that states rely on.

Calculating the impact on local governments is particularly challenging.

"We don’t have comprehensive data for cities and counties," said Lucy Dadayan, director of the state tax and economic review project at the Urban Institute. "We do know that the need is greater at the local level than the state."

One proxy statistic that can be used to measure the pandemic’s impact is employment. 

Between February — the month just before the pandemic hit — and December, the number of state and local government workers fell by more than 1.3 million. About three-quarters of these job losses came at the local level. Overall, state government employment fell by 6% from its pre-pandemic level, local government employment fell by nearly 7%, and employment in local education fell by nearly 8%.

In a November survey by the National League of Cities of about 900 cities, 40% said they had implemented layoffs, furloughs or hiring freezes. Many had cut infrastructure spending. About 60% said their revenues had gone down by 21% on average, and about half said expenses had risen by an average of 17%.

One estimate from the Brookings Institution, a policy research organization, puts the combined drop in revenues over three years — 2020 through 2022 — in the range of $200 billion to $300 billion. But that deals only with revenues. The scale of new expenses remains unclear. 

The key question facing lawmakers, said Louise Sheiner, senior fellow at Brookings, is how much the states and localities should spend to recover lost ground. She gave the example of education.

"We have kids who have not had school," Sheiner said. "What should they be spending to make up for the loss of education? Anything that they can do on that will be worth it. With their balanced budget requirements, you need to give them the money if you want them to do that. Otherwise, it’s probably not going to happen."

In various ways, Washington has already earmarked about $400 billion for state and local aid. That includes $150 billion for reimbursement of unbudgeted costs states incurred due to the pandemic, such as meeting new public health needs. There was also $14 billion for mass transit systems. In aggregate, that would be more than enough to close the apparent revenue gap, but Federal Reserve Board economist Byron Lutz said the topline numbers reveal little.

"It misses some really important factors," Lutz said in a Feb. 10 Brookings webinar. "The first is that COVID has generated new expenses, and some of these expenses will continue to be present and create demands at least for next year and probably beyond that. And it’s very unclear how large these expenditures are."

Sheiner said that, as a rule, she would err on the side of being generous.

Where experts most disagree is on what should be done going forward.

Under one school of thought, "states and localities already have received a lot of money," said libertarian economist Daniel Mitchell. "Sending more funds would be throwing good money after bad."

But other economists warn that holding back on state and local assistance risks slowing the economic recovery.

One study of the aid to states in the 2009 stimulus bill found that each $100,000 in outlays resulted in an additional 3.8 job-years, most of which were outside the government, health and education sectors, noted George Washington University economist Bryan Stuart. (A job-year equals one job lasting one year.)

While targeted funds for coronavirus expenses and households affected by unemployment are probably the top two priorities for a fiscal rescue package, aid to states "is crucial to make sure they don't hold back the recovery — by firing people or not rehiring them — and that they don't cut crucial services," said Jay Shambaugh, a GWU political scientist.

In a December article for the free-market American Enterprise Institute, economist Jeffrey Clemens and his co-authors argued that there’s a good economic case for Washington to send money to state and local governments. Given the latest numbers and the late December aid package, Clemens told PolitiFact that the aid can be downsized from what Democrats first proposed.

"I would continue to support some additional aid, perhaps targeted at critical pandemic response activities," tied to public health and health care, Clemens said. "But numbers in excess of $100 billion in additional unrestricted aid, let alone $350 billion, are quite difficult to justify at this point."

With Democrats able to pass the next COVID-19 relief bill using their bare majorities in the House and Senate, some state and local aid is expected to be included in the final package. But what is the best way to distribute it?

Clemens, for his part, said that simple is best: Cash aid should be allocated based on population. Otherwise, he said, politics distorts the outcome.

Gary Burtless, a Brookings economist, said Washington shouldn’t overload money with too many conditions. But he added that there should be rules against states swapping federal dollars for money they had already planned to spend.

"Generous federal help should be provided with the proviso that states and localities maintain their previous level of spending on items that seem crucial in the emergency," Burtless said. 

Burtless’ list of essentials includes health care, education and infrastructure.

The wide variation in states’ experiences suggests that Washington should take a more targeted approach, some experts said.

"I would look at the unemployment rate, the decline in a state’s gross domestic product, and the revenue shortfall," Dadayan said. "It’s a better way to direct the money to where it will help the most."

Meanwhile, particular sectors that have been hit hard will need assistance, possibly including transit systems and higher education, said Douglas Holtz-Eakin, president of the center-right American Action Forum.

CORRECTION, Feb. 12, 2021: This version corrects a misidentifcation of a source in the original story. The scholar quoted was Jay Shambaugh, a professor of economics and international affairs at George Washington University, not David Shambaugh, a political scientist at George Washington University.