How the Coronavirus Will Harm State and City Budgets

U.S. state and local governments, on the front lines of the response to the pandemic of a new coronavirus disease, COVID-19, are projected to face record budget shortfalls. A distressing combination of dwindling tax revenues, record unemployment, and rising health costs will push many to consider major cutbacks to infrastructure and education—of which states and cities are by far the primary funders. Many still bear the scars of the 2008 financial crisis, which forced painful spending cuts to public services.

Even before the pandemic, many subnational governments were grappling with ballooning costs, including health care and pensions for public employees. Some had already sought bankruptcy protection.

In response to COVID-19, many states and municipalities have already made cuts, frozen spending and hiring, laid off workers, and drawn down rainy day funds. The federal government has stepped in to provide aid, but some say more is needed.

Unlike the federal government, states cannot run operating budget deficits. Every state in the union, with the exception of Vermont, has some type of balanced budget requirement—though many states have in the past used gimmicks, such as selling assets and then leasing them back, to circumvent the law. Under state laws, most municipalities must also keep balanced books. The cost of borrowing is also greater for subnational governments, as their bonds typically carry higher interest rates than U.S. Treasuries.

The deep economic recession of December 2007 to June 2009 and slow recovery put many subnational budgets in unusually dire straits. Depressed tax revenues, elevated spending on social welfare programs such as unemployment insurance and Medicaid, and, in many cases, rising personnel costs squeezed public purses. The situation was particularly bleak at the local level, where many balance sheets were battered by the collapse of home values and property tax revenues.

Despite federal aid, states were compelled to slash spending by $290 billion and hike taxes by $100 billion to try to close the budget gap, according to the Center on Budget and Policy Priorities (CBPP). States continued to lay off workers for years after the recession and cut back on infrastructure and education spending. State support for public higher education dropped by 13 percent, on average, in constant dollars between fiscal years 2006 and 2011. California, with the largest state budget in the country, cut its transportation spending by 31 percent from 2007 to 2009; Texas shrank its funding by 8 percent.

In some cases, spending levels have not recovered. By 2017, some states’ education funding was still more than 10 percent below prerecession levels. Total public infrastructure spending, meanwhile, fell in real terms by nearly $10 billion between 2007 and 2017, according to the Brookings Institution, and a larger share now goes toward maintenance than toward new projects.

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