Rainy day funds alone won't bail out states from coronavirus economic woes

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Seventeen states have already begun drawing down their rainy day funds or fiscal reserves to deal with the coronavirus health crisis, according to the National Conference of State Legislatures, and 24 states have enacted supplemental appropriations.

The report gives a clue about how states have begun to shoulder the cost of battling the pandemic and the fiscal effects of the shutdown to try to prevent its spread.

States had a record $113.2 billion in surplus funds and reserves to use for cash flow liquidity in fiscal 2019, or 13% of general fund spending, according to the National Association of State Budget Officers. The $72.3 billion in combined rainy day and reserve accounts, however, appears insufficient to cover the shortfalls.

Sen. Robert Menendez, D-N.J. has proposed a $500 billion State and Municipal Aid for Recovery and Transition (SMART) Fund. His original cosponsor is Sen. Bill Cassidy, R-La. The lead sponsor in the House is Rep. Mickie Sherrill, D-N.J.

Forty-six states have fiscal years that end June 30 and will need to address revenue shortfalls from the sudden drop in sales tax collections, the three-month delay in the income tax deadline to July 15, or both.

The National Governors Association has requested $500 billion in direct federal aid to the states to help cover their anticipated additional costs related to coronavirus.

Sens. Bill Cassidy, R-La., and Robert Menendez, D-N.J., have proposed a $500 billion State and Municipal Aid for Recovery and Transition (SMART) Fund for states that would be distributed based on population, COVID-19 cases and revenue losses at the state level.

Rep. Mickie Sherrill, D-N.J., plans to sponsor a bipartisan House version.

A bipartisan group of 137 House lawmakers signed a letter sent Monday to Speaker Nancy Pelosi and Republican Minority Leader Kevin McCarthy of California asking for the inclusion of $50 billion for state departments of transportation in the next round of emergency legislation, supporting an identical request from the American Association of State Highway and Transportation Officials.

A report released Tuesday by the Pew Charitable Trusts highlights how federal financial aid is an integral part of how states respond to disasters.

States have five tools for addressing disasters: statewide disaster accounts, rainy day funds, supplemental appropriations, transfer authority, and state agency budgets.

Pew said early estimates show that even in states with substantial reserves, withdrawing all saved funds may not be enough to cover coronovairus-related gaps.

“The states that have had fiscal challenges for a long time, that in some ways never recovered from the Great Recession, such as Illinois and New Jersey, and that have very little in reserve, are states that we would expect to be having some of the greatest challenges,” said Josh Goodman, a state fiscal health specialist at Pew.

Some states — such as New York, Georgia and Alaska — already had budget challenges prior to the health emergency, Goodman said.

“Policymakers should understand that while states have some maneuvers they can make to manage, cannot routinely borrow to pay for operating expenses,” said Goodman.

Budget cuts and tax increases enacted by states can deepen a recession and delay economic recovery.

In Washington, the first state to become a coronavirus hot spot, the legislature authorized the transfer of $175 million from the budget stabilization account to the state’s disaster response account for distribution to state and local agencies to respond to the outbreak. An additional $25 million was appropriated from the budget stabilization account for a COVID-19 unemployment account.

Arizona has appropriated $55 million from its budget stabilization fund to its public health emergencies fund,

Georgia has transferred $100 million from its Revenue Shortfall Reserve, and Maryland has enacted a budget amendment authorizing Gov. Larry Hogan to transfer up to $100 million from the state’s Revenue Stabilization Account.

The supplemental appropriations by states range from the $5 million Alabama transferred from the state’s general fund to its Department of Public Health to the $600 million California transferred from its general fund.

California designated $500 million for any purpose under the governor’s proclamation of a state of emergency and $100 million for school districts to purchase personal protective equipment and pay for disinfecting buildings.

New Jersey has seven appropriations measures pending while its legislature has already sent Gov. Phil Murphy a $10 million transfer from the general fund for healthcare and residential facility sanitization.

In New York, which has suffered more pandemic deaths than any other state, the legislature has temporarily broadened the definition of disaster to include disease outbreak and permitted Gov. Andrew Cuomo to issue any directive necessary to respond to a state disaster emergency while also making a special appropriation of $40 million.

Across the country in Kansas, that legislature has appropriated $65 million for the state’s coronavirus response.

The Minnesota legislature has authorized $330 million in coronavirus aid that include $200 million from the general fund into a newly created COVID-19 Minnesota Fund. According to NCSL, Minnesota also has appropriated $6.2 million to COVID-19 related veteran assistance, $9 million for food bank programs, $11 million for tribal nation grants, $26.5 million for emergency service grants; and $40 million in transfers to small business loan programs.

Meanwhile, state and local governmental groups are renewing their plea for Congress to give them broad latitude on how to spend the federal aid they have already been allocated.

The National Association of State Treasurers sent a letter Monday to Congress asking lawmakers to retroactively amend the CARES Act to provide additional flexibility for the $150 billion Coronavirus Relief Fund to be used to cover lost revenues. Sen. John Kennedy, R-La., introduced the Coronavirus Relief Fund Flexibility for State and Local Government Act that would provide that flexibility.

Kennedy’s bill, S.3608, has Sen. Martha McSally, R-Ariz., as the only original cosponsor.

A separate Senate bill introduced by Republican Sen. Dan Sullivan of Alaska, S.3638, would “allow Coronavirus Relief Fund payments to be used to replace revenue shortfalls resulting from COVID-19.”

Original cosponsors of the Sullivan bill include Republicans Lisa Murkowski of Alaska, Kevin Cramer of North Dakota and Shelley Moore Capito of West Virginia. Sens. Sheldon Whitehouse, D-R.I., and Angus King, Ind-Maine, also are cosponsors.

The NAST letter — also signed by NCSL, the Government Finance Officers Association, Council of State Governments and National Association of State Auditors, Comptrollers and Treasurers — also requests “additional flexible grant aid to provide the certainty needed as states, territories and local governments continue to combat the COVID-19 outbreak.”

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Coronavirus State and local finance Pew Charitable Trusts National Association of State Treasurers GFOA NCSL NGA Washington DC