States facing rating downgrades, budget cuts as Washington dithers

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“While many states have begun implementing cuts under the assumption it’s easier to spread those cuts over a full fiscal year, we're also seeing states wait to see if the federal government will provide additional aid,” said Shelby Kerns, executive director of the National Association of State Budget Officers.

States are accelerating budget cuts as the Trump administration and Congress appear nowhere near a deal to provide additional federal aid.

Rating downgrades also are spreading, participants were told at a virtual conference being held this week by the National Association of State Auditors, Comptrollers and Treasurers.

Experts who spoke at NASACT conference sessions Tuesday and Wednesday emphasized that the state revenue shortfalls from this year’s recession have been larger and much more sudden than during the Great Recession.

They also highlighted the lingering uncertainty whether the robust federal aid that was approved in the early months of the pandemic will be allowed to expire without being renewed to soften the impact on state and local governments.

“We're closely watching state revenue forecasts to understand the magnitude of expected revenue decline,” said Shelby Kerns, executive director of the National Association of State Budget Officers. States are projecting revenue declines of 12% to as high as 40% in the current fiscal year.

“While many states have begun implementing cuts under the assumption it’s easier to spread those cuts over a full fiscal year, we're also seeing states wait to see if the federal government will provide additional aid,” Kerns said. Some states also are hoping the federal government will loosen the strings on the aid it previously approved.

Congress approved $150 billion in aid to the states through a Coronavirus Relief Fund that was part of the CARES Act, but state and local government officials say almost all of that money has been obligated.

West Virginia received $1.25 billion in Coronavirus Relief Funds, according to Ann Urling, deputy chief of staff to Gov. Jim Justice.

The governor allocated $200 million to cities and counties for pandemic-related reimbursements; $150 million for small business grants; $25 million to address individual delinquencies on utility bills; $687 million for unemployment and $50 million for broadband, Urling said.

“We've received a lot of pressure, especially from our municipalities, because they thought they were entitled to 45%,” Urling said. “They thought we were just going to give it to them carte blanche and, you know, they would be made whole and we could all move along.”

However, the legislation enacted by Congress did not specify how much of the funds that states received were required to be shared with local municipalities. Governors have had discretion on how to allocate the money, although some states require approval by the legislature.

Earlier this month the chief economist for Moody’s Analytics predicted the U.S. economy will dip back into a recession if Congress and the Trump administration don’t agree on additional federal aid for state and local governments. Economist Mark Zandi said that scenario could produce additional 1.5 million to 2 million layoffs of state and local government workers over the next 12 to 18 months in addition to the 1.3 million already laid off.

Separately, the Washington-based Tax Policy Center released a report Tuesday that preliminary second quarter data shows state revenues suffered double-digit percentage point declines compared to the same quarter of 2019. The report covered personal income taxes, corporate income taxes, and sales taxes which together account for around three-quarters of all state tax revenues.

“Declines were widespread across the states and are primarily due to the COVID-19 pandemic and subsequent business closings, which hit state coffers like an economic tsunami,” said the Tax Policy Center. “States also delayed due dates for income tax returns, which pushed receipts out of the second quarter.”

Since the March onset of the first stay-at-home orders related to the COVID-19 pandemic, S&P Global has downgraded its ratings of Alaska and Wyoming.

S&P also has shifted to a negative outlook for nine states – Hawaii, Illinois, Michigan, Minnesota, Oklahoma, New Mexico, New Jersey, Nevada, and Alaska, as well as the territory of Guam.

The outlook for two others -- Connecticut and New Hampshire -- has been moved to stable from positive.

“Entering into this recession, many states were rated lower than leading into the Great Recession,” Carol Spain, director of state government ratings for S&P Global Ratings, told the NASACT conference.

Spain said the downgrades that occurred following that earlier recession during the period of 2014 through 2017 were primarily attributable to rising pension costs and the downturn in the energy sector. States also were grappling with a prolonged period of slow revenue growth while pension and Medicaid costs continued to increase at rates that were higher than inflation.

“Recessions have a long tail on state finances and we expect that states will experience lingering budget challenges beyond the timing of a vaccine,” Spain said.

Kentucky Budget Director John Hicks said state governments have entered a period “between the next congressional action or inaction.”

“It took us 10 years to return back to pre-Great Recession spending, no telling how long it's going to take us now to return back to pre-COVID spending,” said Hicks.

Kerns of NASBO also predicted a long period of budget difficulties.

“While there are still more unknowns than knowns, it is likely that states will be grappling with the impact of COVID-19 for years to come,” Kerns said.

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Coronavirus State and local finance State budgets Washington DC
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