On Thursday, June 25, I listened to a Special Briefing on COVID-19: Unemployment, and State and Local Fiscal Consequences. It was co-hosted by The Volcker Alliance and Penn Institute for Urban Research (IUR) with the following panelists: Timothy J. Bartik, senior economist, Upjohn Institute for Employment Research; Marcia Van Wagner, vice president-senior credit officer, Public Finance Group, States Team, Moody's Investor Service; and Matt Fabian, partner, Municipal Market Analytics.
The panelists discussed the COVID-19 pandemic’s impact on unemployment, the deterioration of the finances and credit outlooks of states and localities, and the role of further federal assistance and loans to governments, companies, and individuals.
Moderated by William Glasgall, Volcker Alliance senior vice president and director of state and local initiatives, and Susan Wachter, co-director of Penn IUR, this briefing was the eleventh in a series of 60-minute online conversations featuring experts from the Volcker Alliance’s national research network and Penn IUR, along with other leading academics, economists, and federal, state, and local leaders from around the country.
William Glasgall mentioned some related news stories to start the conversation:
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New York City is contemplating 22,000 layoffs.
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California is working on a budget with $14 billion in cuts, which will only be restored if the federal government comes up with an aid package.
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The National Association of State Budget Officers (NASBO) reported that state rainy day funds were at a record high of 8.3 percent of general fund expenditures, which is almost $75 billion. This gives many states, but not all, a considerable cushion to get through the first year of the coronavirus pandemic.
Next up was Timothy Bartik, who is nationally for his research on unemployment. Bartik discussed his forecast for unemployment as states reopen, the impact of the shutdown and recovery on state and local government revenue, and his recent proposal to target federal assistance so that it efficiently responds to job losses.
Bartik’s main point was that state and local budget problems from the pandemic are very large and, if adequate federal aid is not forthcoming, then it will cause serious damages to the national economy.
In his introduction of Marcia Van Wagner, Glasgall highlighted that the current crisis is not just an unemployment crisis, it is a credit problem for the $4 trillion municipal markets. Ms. Van Wagner provided an overview of ratings today and how they will shift ratings over time as the economy evolves. She agreed that the current situation is dire. She mentioned state and local governments are very highly rated because they have strong management tools that enable them to navigate difficult economic and fiscal times. Van Wagner said the larger state governments can pass their problems onto smaller governments, such as school districts, local governments, and high education institutions. Those entities will feel more pressure to make ends meet. States can raise revenues and make cuts, but shouldn't expect many payment defaults.
Van Wagner claimed that there is a lot of uncertainty about additional federal aid and Moody’s is looking at whether governments are doing a cut-now or cut-later approach. Moody’s is looking at how states are managing this uncertainty, which will be an important factor. They think governments that are postponing acting are risky and can expect to see a rise in debt and an increase in pension costs. For states that have pension burdens, there is currently a lot of volatility in the pension asset market.
In her introduction of Matt Fabian, Ms. Wachter said he keeps an eye on early defaults. Fabian said there have been increases in municipal defaults. As of last week, 33 municipal borrowers had reported a payment default, which is the highest rate since 2012. More payment defaults are expected when governments have to make their July payments. (But the number is not in the hundreds.) So far governments have been able to borrow from private banks.
Fabian asserted that deficit borrowing is critical to get governments through the near term and federal aid would be appreciated. It would be naïve to assume we won’t have payment defaults.
These comments were followed by a robust Q&A session.
Since 2009 Truth in Accounting has been highlighting the budgeting problems of many state and city governments. Our latest Financial State of the States and Financial State of the Cities revealed that most states and cities were woefully unprepared for any crisis much less the one we are experiencing now. The speakers on this panel asserted that without federal aid the negative impact on state and local governments would ripple through the economy. While we take no position on whether the federal government should provide additional aid, we do believe that if Congress does provide aid, certain conditions should be considered. These conditions include working to eliminate the budgeting gimmicks that have put the states $1.5 trillion in debt while government officials were claiming their budgets were balanced and fixing the accounting of the general fund.