CBO letter supports effectiveness of state and local coronavirus aid

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The CBO estimate of a $350 billion drop in state and local purchases of goods and services is already happening, said Mike Wallace, National League of Cities program director for community and economic development.

The nonpartisan Congressional Budget Office estimates spending by state and local governments will fall by $350 billion in this year and next because of the COVID-19 pandemic.

This new independent estimate bolsters the argument for additional federal aid to state and local governments.

Additional federal funding for state and local governments would increase output by reducing the size of tax increases and spending cuts enacted by many of those jurisdictions to balance their budgets,” CBO also said in a letter to Speaker Nancy Pelosi dated Tuesday.

Pelosi issued a statement Wednesday describing the letter as “chilling confirmation of the life-and-death stakes of Congress’s action to stem the economic hemorrhaging from COVID-19.”

“Now is not the time to take our foot off the gas,” Pelosi said, repeating her recent calls for the Senate to consider the House-passed HEROES Act.

CBO now estimates that economic activity will be $3.9 trillion below its January estimate for economic activity in 2020 and 2021. CBO said its updated estimate also takes into account “the mitigating effects of the four laws enacted in March and April” to address the pandemic.

The drop in state and local purchases of goods and services will account for 9% of that drop, CBO said.

State and local groups such as the National Governors Association, the National League of Cities and U.S. Conference of Mayors have been making similar arguments, pressing for another round of aid before most of them begin a new fiscal year on July 1.

But some key U.S. Senate Republicans have delayed taking any action before next month.

The window for Senate action will be short. The Senate currently is scheduled to be in session for three weeks between July 20 and August 7 before beginning its traditional month-long recess until after Labor Day.

The House approved $915 billion in state and local aid in the HEROES Act, which is unlikely to be considered in the Senate.

But there already are three original Senate Republican cosponsors for the SMART Act, which would provide $500 billion to state and local governments.

The SMART Act would direct one-third of the funds to states and localities based on the number of COVID-19 cases they have. Another third would be based on population and the last third would be based on revenue shortfalls.

One sixth of the $500 billion would go to counties and another sixth would go to local governments.

There also are two Democratic bills sponsored by Sens. Jack Reed of Rhode Island and Kirsten Gillibrand of New York to provide additional aid to state and local governments.

The new CBO letter signed by CBO Director Phillip Swagel pointed out that “federal assistance for state and local governments will help pay for rising expenditures related to the pandemic as state and local tax revenues fall.”

Swagel’s letter, a copy of which was sent to House Republican Minority Leader Kevin McCarthy, also said that additional aid to state and local governments would have a bigger impact than “other provisions, such as business tax provisions and refundable tax credits.”

CBO qualified its evaluation of business tax provisions and refundable tax credits by adding that “the size of the effects would depend on the specifics of the provisions and the corresponding extent to which businesses and households spent the funds they received.”

Additional federal aid for state and local governments would produce as much as a dollar-for-dollar increase in economic output if it is used to fund some policies recently enacted in the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

National League of Cities official Mike Wallace said the CBO estimate of a $350 billion drop in state and local purchases of goods and services is already happening.

“It sort of fits in the loss of revenues that we are projecting as well, said Wallace, NLC program director for community and economic development. “There are also service cuts and payroll cuts that cities are trying to put off as long as they can.”

If additional federal aid is not approved in July, Wallace predicted there will be “a cratering of local budgets.”

“The federal government really needs to be there by July, and if it comes and goes, cities are going to be looking at long-term cuts and long-term layoffs,” Wallace said.

The NLC is ready to work with congressional lawmakers on legislation that has funding that is fair, appropriate and equitable with legal guardrail to ensure the money is well spent, Wallace said.

Wallace emphasized that the Senate and House need to begin negotiating on a compromise package as soon as possible. “The longer we wait, the more desperate the needs are going to be for cities,” he said.

Emily Brock, director of the federal liaison center for the Government Finance Officers Association, described the CBO letter as “extremely helpful.”

“I think CBO confirms what we all know to be true,” Brock said, “which is that state and local governments spend for infrastructure and infrastructure creates jobs and jobs drive the economy.”

The budget shortfalls of some big cities are staggering and by order of magnitude smaller cities have significant shortfalls as well, Brock said.

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Coronavirus CBO NLC State and local finance Washington DC