Virus’ impact on state government could be worse than Great Recession

Fifth-grade teacher Chandra Lewis conducts a math lesson for her students at Cliftondale Elementary School in College Park. (Alyssa Pointer/Atlanta Journal Constitution)

Fifth-grade teacher Chandra Lewis conducts a math lesson for her students at Cliftondale Elementary School in College Park. (Alyssa Pointer/Atlanta Journal Constitution)

The Great Recession forced state governments across the country to lay off or furlough millions of workers and cut services to everything from schools to parks, but some warn the coronavirus pandemic could cause even more economic pain.

Predictions are that states could combine to face up to a $500 billion shortfall over the next few years without more federal aid as unemployment remains high and businesses shutter or struggle to regain their footing.

In Georgia, collections from income and sales taxes — which provide most of the revenue that pays for the salaries of 200,000 teachers, university staffers and state employees, and to fund billions of dollars worth of services — are expected to plummet and likely remain well below what the state originally projected in the likely recession ahead.

Georgia got a head start on holding down spending, freezing hiring for thousands of open jobs last fall when Gov. Brian Kemp ordered spending cuts, a move that had nothing to do with the pandemic but now appears prescient.

Georgia also has hefty reserves — about $2.7 billion — to help pad state finances during the downturn.

But some experts predict that won’t be enough here and across the country, where officials say they will have to consider furloughs and layoffs. Some states are already predicting major shortfalls for fiscal 2021, which begins in Georgia on July 1, and they are already cutting spending for universities and other areas of government. All at a time when states’ health care costs — thanks to the coronavirus and more people becoming eligible for Medicaid — are rising.

Richard Ravtich, a former lieutenant governor of New York and a board member of the Volker Alliance public policy group, said Americans have a special relationship with state and local governments not found in many other countries. That relationship may be tested in coming months.

“There is such a significant difference in the relationship in city and state expenditures and federal expenditures that doesn’t exist in the rest of the world,” he said. “Most essential services that the public benefits from are paid for by state and local governments.

“It’s not terribly easy to reduce the level of expenditures without having dramatic impact on the nature of services the public is dependent on.”

Big impact on Georgians

Through Georgia’s state’s budget, taxpayers help educate 2 million children, provide health care to more than 2 million Georgians, build roads and bridges, manage parks, investigate crimes and incarcerate criminals, and regulate insurance firms and utilities, along with dozens of professions. The state issues driver’s licenses and helps pay for nursing home care for the elderly.

The state is a major provider of basic medical coverage and treatment for mental health and drug addiction, and it helps fund public health programs that are fighting the pandemic.

Besides paying salaries, it also helps make sure that hundreds of thousands of ex-teachers, university staffers and state employees receive pensions and health care.

State officials say it’s too early to determine how much income and sales taxes will fall, or how austere the budget for fiscal 2021 will be.

Lawmakers suspended the 2020 session in March due to the pandemic, but they will have to return before the end of June to pass a budget.

Kelly Farr, the governor’s budget director, said Georgia traditionally is late to go into a recession and late to come out. The was true in 2008, when the Great Recession had been going on for months before Georgia tax revenue tanked enough for officials to notice and act.

Over the course of three or four years lawmakers cut everything, some areas more severely than others. School and college funding was deeply reduced, teachers and other employees were furloughed, the school year was cut back in some districts, and the budgets of some agencies have only recently begun to approach 2007 levels.

But this time there may be no lag because much of the nation shut down at the same time. And some early estimates are painting a grim picture of what lies ahead.

Georgia State University fiscal researchers came out with a report last week saying the state and local governments could see up to a $1.27 billion loss in sales tax revenue from a few key sectors of the economy this year because of the coronavirus shutdown and its aftermath.

University System of Georgia Chancellor Steve Wrigley said last week that financial losses are accumulating from an abrupt systemwide closing of campuses that triggered $200 million in reimbursements in student housing and dining hall costs.

That revenue loss will climb to $340 million to $350 million through the summer as other funding sources dry up, including income from canceled camps, professional learning programs and study abroad courses, he said.

“I expect that the state is experiencing a decline in revenues that likely will result in a major reduction in funding for all of public higher education,” Georgia State University President Mark Becker said in a letter to faculty and staff.

During the Great Recession that meant tuition hikes, but this time around the Board of Regents has held those costs to students in check.

The most detailed overall analysis so far is coming out Monday from the Georgia Budget and Policy Institute think tank, which estimates a likely $1 billion shortfall this fiscal year and possibly a $3 billion shortfall in fiscal 2021. That’s more than 10% of the current state budget.

Federal help

The $2 trillion federal coronavirus relief program is expected to help the state pay for skyrocketing costs associated with the pandemic. However, that money can’t be used to make up for the downhill slide of tax revenue to pay to keep state government running and pay salaries.

Matt Fabian, a partner and head of market and credit research at Municipal Market Analytics, a Massachusetts-based research firm, said the federal government is also offering short-term borrowing — to be paid off in a few years — to help states get over short-term revenue shocks.

One shock comes from the decision to move the deadline for filing income tax returns from April 15 to July 15. That change — while great for some taxpayers — means they'll be paying what they owe in the next fiscal year, leaving a hole in state finances for the fiscal year that ends June 30.

State and city groups have said while federal aid so far is appreciated, it doesn’t go nearly far enough to mitigate the impact of the shutdown and likely recession ahead, and they are lobbying hard for more.

The National Governors Association, for instance, has asked Congress for $500 billion in additional funding to fight the tax revenue decline. Unions and left-leaning groups have echoed those calls.

Some states have already passed fiscal 2021 budgets and are projecting massive shortfalls. New York expects tax revenue to drop by $10 billion, Colorado about $3 billion, Arizona more than $1 billion.

With oil prices low, energy-revenue-dependent states in the West and Southwest could be hit even harder.

“No one is going to escape the impact of this recession,” said Elizabeth McNichol, a senior fellow with the Center on Budget and Policy Priorities, a liberal think tank.

The group said the federal help states have received so far and their reserves won’t be nearly enough to allow them to continue providing the same level of services. If the recession persists and is as deep as some economists predict, states could see a bigger decline in revenue in the upcoming fiscal year than they did during the worst year of the Great Recession, it said.

Susan Wachter, a professor of finance and real estate and co-director of the Penn Institute for Urban Research at the University of Pennsylvania, said massive state and local government layoffs and cutbacks would prolong the recession, creating a kind of second-wave downturn.

But Ravtich said governments also may spend the next several months examining what they are spending money on, and whether they need or can afford it, a kind of review Georgia budget leaders say they already do.

During the Great Recession, for instance, the Georgia Senate held hearings in between legislative sessions to more closely go over how state agencies were spending taxpayer money.

“There has not been a lot of talk (nationally) about whether to re-examine what government should do,” Ravtich said. “That’s an issue that has to be raised and discussed.”