Failure to provide additional federal aid would have dire impact

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Mark Zandi, the chief economist of Moody's Analytics, said a failure to provide additional federal aid to state and local governments would “exacerbate the downturn significantly.”

The number of state and local government employees laid off because of the pandemic would at least double to 3 million people if the federal government doesn’t enact another round of coronavirus emergency aid.

That’s the grim warning from Mark Zandi, chief economist of Moody's Analytics, who said a failure to provide that aid would “exacerbate the downturn significantly.”

The layoffs would be “coast to coast,” Zandi said during a webcast discussion Thursday sponsored by the liberal-leaning Center on Budget and Policy Priorities. “It's not, you know, a state here, state there. It's not a blue state, it's not in a red state. It's every state, every local community is going to struggle.”

State and local government layoffs already have been triple the amount of job losses that occurred during the Great Recession, according to Lee Saunders, president of the American Federation of State County and Municipal Employees.

The HEROES Act already passed by the House has about $1 trillion for state and local governments, but the Senate has not yet taken similar action.

Senate Majority Leader Mitch McConnell hopes to unveil a Republican proposal by the time the Senate reconvenes on July 20, but he’s not made a dollar commitment to state and local governments.

Treasury Secretary Steven Mnuchin told CNBC on Thursday that he conferred a day earlier with McConnell and White House Chief of Staff Mark Meadows about a new package.

The bipartisan SMART Act proposed by three Republican senators led by Sen. Bill Cassidy of Louisiana and three Democrats led by Sen. Robert Menendez of New Jersey would divide up $500 billion among states, counties and local governments.

In addition, 24 Democratic senators are asking for another $32 billion for public transportation through the end of 2021 that would be in addition to the $25 billion approved in the CARES Act, the $2 trillion relief package signed into law by President Donald Trump March 27.

House Speaker Nancy Pelosi said Thursday the overall $1 trillion limit some Republicans have mentioned for the next coronavirus emergency relief package would only be a starting point in negotiations because it would be insufficient.

Pelosi insisted that $1 trillion in federal aid is needed for state and local governments with another $1 trillion for unemployment benefits and direct payments.

“So, a trillion dollars is: OK, that is an interesting starting point, but it doesn't come anywhere near,” Pelosi said.

Pelosi said the $1 trillion for state and local governments would be the equivalent to half the cost of the 2017 Tax Cuts and Jobs Act passed by Republicans, which she described as a “tax scam.”

“The Fed is spending trillions of dollars to shore up the stock market,” Pelosi said. “That may be a good thing to do. We think we should spend trillions of dollars to shore up America's workers, and there is a path that is a good investment, that is stimulus, that keeps people from losing their jobs and helps people get jobs by being a stimulus and having consumer confidence, spending, injecting demand into the economy, job creating.”

The Moody’s Analytics economist predicted the state and local budget shortfalls will get worse because the economy “doesn't appear like it's gonna get back to where it was, anytime soon.”

“It's already showing up in income tax revenue and sales tax revenue,” Zandi said. “Ultimately it’s going to start hitting property tax revenue. And that will be obviously very devastating to local government and to education, to teachers and funding of K through 12.”

Zandi described the shortfall as “a very significant budget hole that, if it isn't filled, is going to do very significant damage to the economy and to communities across the country.”

The sponsor of Thursday’s forum, CBPP, estimates state budget gaps will total around $555 billion through June 30, 2020. State rainy day funds and the federal assistance already approved by Congress will narrow that gap to about $400 billion.

But local governments, tribal governments and territories such as Puerto Rico also have shortfalls.

Bob Greenstein, president of CBPP, said the job losses have increased the number of Americans applying for Medicaid health services.

The National Governors Association earlier in the week called on the Trump administration to extend the national health emergency that’s set to expire July 25. An extension would continue the eligibility of states for enhanced Medicaid reimbursements under FMAP (Federal Medical Assistance Percentages ), funding for testing the uninsured, and critical regulatory flexibilities, NGA said.

Moody’s Investors Service said in a report Thursday that “additional extraordinary federal aid is a fiscal 2021 wild card.”

The credit rating service said eight states began the July 1 fiscal year with either a partial spending plan or no enacted plan due to the uncertainty of revenue or additional federal aid.

“Delayed budgets indicate weakness,” Genevieve Nolan, a Moody’s vice president, said in the report. “In challenging times such as the coronavirus pandemic, states have numerous policy tools to respond to economic and fiscal uncertainty. Partial spending plans allow governments more time to gain insight into how revenues and expenditures are taking shape. But they can also push off hard decisions, making eventual cuts more difficult because of reduced time to adjust spending through the rest of the fiscal year.”

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Coronavirus State and local finance Moody's Analytics Moody's NGA Washington DC