The devastation created by the coronavirus has not spared anyone, including state governments. Many are now looking at massive spending deficits, as high as $25 billion in the case of California. The holes in their budgets are likely to persist past this fiscal year, and states will be eyeing the federal government for a much-needed bailout. While it makes perfect sense to help states with coronavirus-related financial problems, federal aid should not be going to state governments who have been spending frivolously for years.
According to the Center on Budget and Policy Priorities, a progressive think tank, states’ overall budget shortfalls will be an estimated $500 billion from 2020 through 2022 due to coronavirus. Even after accounting for states’ rainy day funds, which are at historical highs for most, the fiscal hole is still expected to be around $360 billion. This is primarily due to astronomical decreases in tax revenue from significant industries. According to Goldman Sachs, states will lose about 90 percent of their expected revenue in the areas of casino gambling, packaged tours, sports and entertainment.
After the Great Recession a decade ago, many states began creating hefty rainy day funds. Most states have more considerable rainy day funds than at any other time in their history. Wyoming, for instance, has reserves equal to 109 percent of their annual government expenditures. Many cannot use them all in a single fiscal year. California has $16 billion in reserves but can only spend half in any given year and is expected to have budget shortfalls of at least $25 billion for the next two fiscal years, with billions more in the years to follow.
Other states that have been hit hardest by the virus — like New York — are expected to see a $61 billion deficit over the next four years. Illinois needs $20 billion to help fund their state pensions and municipalities after it is expected to lose about $7 billion in lost taxes in fiscal years 2020 and 2021.
This is not isolated to blue states. Arizona, Alaska, Ohio and Wyoming are all facing billion-dollar deficits caused by the coronavirus. Ohio’s Republican Gov. Mike DeWine is looking to slash 20 percent of the state’s budget to make up for its shortfalls, but even that will not stop the bleeding.
Under current federal law, states cannot declare Chapter 9 bankruptcy to reorganize their debts. They can, however, default on debt, though it has not been used in nearly a century. The Bank of America Global Research said that if states were to file for bankruptcy, it would knock down the $3.8 trillion municipal bond market: “It will be highly disruptive to the municipal bond market broadly and will result in significantly higher borrowing rates at a time when those costs are least absorbable.”
So while it seems obvious to most people that states undergoing extreme fiscal hardships due to the coronavirus should get some federal aid, it should not be used to prop up insolvent local governments or state pension and unemployment funds left unattended to even before coronavirus. Illinois had terrible finances long before the coronavirus ever ravaged the state. The Land of Lincoln already had a bill backlog of $7.45 billion. The budget issues facing Illinois are so bad that in 2015 and 2017, the state struggled to pay lottery winners. This does not even take into account the $137 billion in unfunded liabilities for government workers’ pension and healthcare plans, which are entirely unsustainable.
So far, Illinois’ Democratic Governor J. B. Pritzker has rejected the idea of solving his pension debt with bankruptcy, and some analysts believe he is more likely to opt-out of paying this year’s pension contribution to make payroll, with the hopes that the state’s economy improves in the future.
Some states like Ohio, Illinois, New York and California have been on a spending spree the last few years. For instance in 2019, Ohio increased spending by 4.5% but did nothing for it’s underfunded pensions and unemployment funds.
Congress looks like it is likely to act. There is a bipartisan bill in the Senate authored by Republican Bill Cassidy and Democrat Bob Menedez to offer state and local governments $500 billion in relief, but it should come with strings attached.
The federal government should not endlessly subsidize lousy policy choices that governors, both Republicans and Democrats, have made over the last decade. Spending money on illegal immigrants, overcompensating government employees and denying specific tax revenue like fracking natural gas should not be rewarded by a federal bailout dug these states into a hole, the coronavirus turned it into a crater.
So if Congress chooses to help state governments, they should do it only as a temporary band-aid for this crisis, not give carte blanche to states with reckless spending habits.
Jim Renacci represented Ohio’s 16th congressional district as a Republican from 2011 to 2019. He is the chairman of Ohio’s Future Foundation.