Six months ago, the economy and state revenues were riding high. In nearly all states, budget officials were projecting better-than-expected numbers: a billion dollars more than initially expected in Colorado, nearly $1.2 billion more than budgeted in North Carolina.
In short order, it all came crashing down. And it did so in a way that no one predicted. The COVID-19 global pandemic began taking hold in the U.S. in March and halted major portions of the service economy, slowed other business sectors through uncertainty, and wreaked havoc on the stock market. It had immediate implications on jobs and consumer spending and for states, a nearly immediate effect on income and sales tax revenues.
Budget shortfalls expected across all 50 states between 2020-2021
Budget shortfalls across all 50 states between 2020 and 2021 are expected to total as much as $500 billion, according to the Center on Budget and Policy Priorities.
“We’ve never modeled anything like that where sectors of the economy just stopped,” said North Carolina Budget Director Charles Perusse.
To be sure, the influx of federal stimulus money approved in March has been essential to states’ financial survival. It’s helped cover additional Medicaid costs, provided money for COVID-19 medical response, and helped pay for additional costs of distance learning, to name a few. But a financially resilient government is one that can adapt quickly, has backup plans in place, and can work within its unique constraints. From an aggressive rainy day savings strategy in D.C., to innovative economic tracking in Colorado, to a disaster response plan in North Carolina, each place offers a unique lesson.
Early this year, the District of Columbia hit a fiscal milestone: For the first time, it had a fully stocked rainy day fund. More than $1.4 billion — the equivalent of 60 days’ worth of spending — was stored away between four different reserve funds in case another downturn hit. It wasn’t long before the city needed it.
Budget Director Jennifer Reed credits the city’s rainy day savings policy, which was changed after the last recession to increase the size of the fund and dedicate budget surpluses to filling it until it hit the 60-day mark. “If we had not had our reserves built up the way we did, it would have been really bad,” she said. “We most likely would have had to resort to things like layoffs and furloughs, and we certainly would not have been able to provide a [funding] increase to schools.”
D.C. wasn’t just ready with its savings. Knowing that the record-long economic expansion had to end sometime, officials had required agencies in 2019 to have a 5 percent cost-cutting plan at the ready. Those plans were immediately put into action this spring. Between those measures, the rainy day savings, and federal aid, the city is projected to resolve a $1.5 billion budget shortfall over two years without major cuts to any key government function. In fact, school funding gets a slight boost.
But because of a requirement capping the city’s debt as a percentage of its revenue, the city also had to dial back some planned investment in infrastructure projects and lower its actual debt load. On the one hand, the requirement capping debt at 12 percent of revenue is financially prudent. But on the other hand, Reed said, it means putting off some infrastructure investments, such as a planned IT overhaul of its purchasing system.
Looking ahead, Reed says officials are keeping an eye on how the new push for telework could affect the city’s revenue in 2022 and beyond. The city of about 700,000 normally swells to a daytime population of more than 1 million people. But if fewer people are commuting, that could have an impact on things like commercial property and sales tax revenue. “We’re keeping an eye on people’s patterns,” she said. “I really think it’s going to change in the long term, both in the revenue base for our city and where people live and work.”
The Centennial State went from expecting a roughly billion-dollar surplus in 2020 to a nearly $1.5 billion deficit, with only a few months to close the gap before the fiscal year ended on June 30. The numbers for fiscal 2021 are projected to be even worse. All told, the state is expecting a 16 percent drop in general fund revenue over two years.
“It was faster and deeper than what happened in the Great Recession,” said Budget Director Lauren Larson. In the last recession, for example, Colorado didn’t hit its unemployment peak until spring 2010 — more than two years after the U.S. economy began shrinking. “Think about the time you [normally] have to build up a government response. Whereas this time we were all of a sudden hit.”
Part of Colorado’s immediate response was to draw about $600 million from its budget reserves. But doing so reduced the state’s financial cushion by two-thirds, leaving little wiggle room for fiscal 2021. The budget reserve might have been bigger but for a constitutional limit on how much the state can earn in revenue. The nearly 30-year-old Colorado’s Taxpayer Bill of Right caps the state’s annual revenue growth, and any surplus on top of that growth is to be returned to taxpayers. It meant that for fiscal 2019, not only did the state have to issue taxpayer refunds for going over the revenue cap, it also drew on budget reserves to cover some spending increases.
Larson said the administration had previously begun implementing a 5 percent cost-savings plan with agencies and in April went back to that plan and increased the request. Between those cuts and some one-time tactics like sweeping money from various other accounts, drawing down on reserves, and transferring some marijuana tax revenue to cover core services, the state managed to balance its budget through fiscal 2021.
Keeping tabs on the numbers — or budget forecasting — is a more uncertain practice than ever as the economic effects of the pandemic fluctuate from week to week. Colorado’s budget department is taking a unique approach to forecasting by making use of newly available data provided by apps and other companies to gauge local economic activity. OpenTable, for example, is supplying daily restaurant reservation data, which helps government economists follow spending activity at a hyperlocal level. Apple is also providing mobility data for free, which gives a snapshot view of driving and transit usage.
Budget Director Charles Perusse will be the first to admit that his state’s comparatively fortunate budget position is partly by accident and partly due to policy. North Carolina operates on a two-year budget, but the governor and Legislature never agreed on a spending plan for the current 2019-2021 year. So the state was still operating on 2018 spending levels, which allowed more than $2 billion in unappropriated revenue to accumulate. The amount is expected to cover the state’s projected 15 percent revenue shortfall through 2021.
North Carolina has also jumped into developing its spending-and-response plan. The state has had a lot of practice in this area as several 100-year floods have ravaged different parts of the state in recent years. “This was sort of a similar process,” Perusse said. “You make sure you have reserves in place to ameliorate the revenue loss and you get organized to tap federal money for the rebuild.”
The governor and Legislature acted quickly to pass a $1.5 billion pandemic appropriations package in April that directed spending to response and prevention. Using federal CARES Act money, the package outlined priorities and processes on things like wraparound services related to additional mental health needs, domestic violence, and housing. Among other things, the bills also included additional investment in K-12 education, specifically for at-risk youth and for school nurses, social workers, and psychologists.
In the spirit of collaboration that often emerges among government officials during difficult times, Perusse said he has shared the package with his peers in other states and a few are referring to it as a guide.
While uncertainty dogs every day, one thing is clear: This is far from over. State and local governments are expected to continue facing budget gaps for the next three years. During the last recession, federal aid dried up after 2010 — exactly when government budgets experienced their hardest years. In order for states and cities to continue to manage their budget and not resort to severe service cuts, continued support from Congress is vital. State and local officials say that not only means more aid for COVID-19 expenses, it also means a more flexible relief fund to help with future budget shortfalls.
“We’re really engaged with our congressional delegation on additional stimulus dollars,” says Larson. “There’s really no scenario where states aren’t in a tight position in 2021 and beyond.”