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Cities and states brace for economic ‘reckoning,’ eyeing major cuts and fearing federal coronavirus aid isn’t enough

Many, already cash-strapped, are now in dire straits, facing plunging tax revenue and spiking costs.

Unemployment applications are stacked as city employees in Hialeah, Fla., hand them out to people in front of the John F. Kennedy Library on Wednesday. (Joe Raedle/AFP/Getty Images)

New York could lose $10 billion in tax revenue. Pennsylvania has ceased paying 9,000 stuck-at-home state employees to save cash. In Illinois, an unprecedented crisis is brewing thanks to billions of dollars in unpaid bills.

The economic carnage unleashed by the novel coronavirus nationwide hasn’t just shuttered businesses and left more than 17 million Americans seeking unemployment benefits — it has also threatened city and state governments with financial devastation, according to local leaders, who say their ability to maintain roads, schools and basic social services is at risk at a time when their residents need help most.

Many states and cities that were already cash-strapped are now in dire straits, facing plunging tax revenue and spiking costs.

“I do think cities across the country are looking at some degree of austerity,” said San Antonio Mayor Ron Nirenberg (I), who predicts his municipality will face as much as a $100 million shortfall. “This is a reckoning for us.”

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Local residents aren’t shopping or traveling, as they heed orders to stay at home, contributing to major gaps in city and state incomes. Meanwhile, the normally reliable bonds that states, cities and counties issue to fund projects or make up for lost revenue are becoming less attractive to investors, jeopardizing local governments’ efforts to offset the costs of a deadly pandemic.

The result could be massive budget cuts along with layoffs or furloughs of city and state workers around the country, many local leaders fear. In response, federal officials have sought to stanch the bleeding: On Thursday, the Federal Reserve and the Treasury Department announced a new $500 billion effort to purchase short-term debt from states and large cities and counties. But many cities, particularly smaller ones, won’t qualify for the assistance. Democratic lawmakers are also looking to direct more dollars to states and cities, but that effort has gotten bogged down in the Senate.

The aid offered by Washington has been a mixed blessing, leaving some governors, mayors and analysts in recent days fearful that the money is too restrictive — and the Federal Reserve’s new program isn’t expansive enough — to spare the country from a dire economic crisis still to come.

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The stakes are sky-high for San Antonio and other local governments across the country, which unlike the nation’s capital generally cannot rack up deficits even in times of crisis. To close the gap, Nirenberg said, the Texas city may have no choice but to look at “streets and sidewalks, parks, libraries, culture programming, social services” and a range of areas for potential cuts.

The 2008 recession offers a grim historical reminder about the lasting consequences of extreme austerity that left major civic programs and workforces gutted — slashes in spending that in some cases were not restored.

Absent significant aid, local schools again stand to face massive reductions and infrastructure projects are at risk of being halted or abandoned outright, experts said. Funding for local arts is likely to run dry. Wait times for city and state services — including at unemployment offices, already overwhelmed by historic demand — could grow because of substantial furloughs or layoffs in government workforces. And some localities may face an impossible choice to raise taxes at the risk of further impeding hard-hit local businesses.

Phoenix, for example, is already preparing for $26 million in potential cuts, said Mayor Kate Gallego (D), pointing to sharp, sudden decreases in tax revenue compounded by the fact that Major League Baseball, normally a regional boon during spring training, remains sidelined. In response, local officials have started calculating how to implement possible reductions of up to 25 percent across the board, she said.

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In Ohio, revenue fell $159 million short of expectations last month, according to budget officials. Maryland Gov. Larry Hogan (R) has predicted “massive budget problems” given the billions of dollars in coronavirus expenses the state has already incurred and on Friday froze all non-coronavirus state spending, expecting state tax revenue could fall by as much as $2.8 billion over the next three months. The D.C. government has frozen hiring and will forgo salary increases to deal with a $607 million budget hit.

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A surplus that once existed in Minnesota is evaporating, leaders there said this month, while the governors of Kansas and Vermont anticipate the worst effects to come next year. Nationwide, these and other states combined may face anywhere between $158 billion to $203 billion in “fiscal shock” through the 2021 fiscal year, according to Dan White, the head of fiscal policy research at Moody’s Analytics.

The pain could be especially pronounced in Illinois: The state has a backlog of $8.3 billion in unpaid bills, according to its comptroller, a fast-accelerating problem compounded by pensions it can’t afford and bond ratings that already range between barely stable and negative. Even with federal aid, economists fear Illinois may flounder in the current downturn — resulting in major reductions in staff and services — then struggle to rebound as quickly as its peers. A spokesman for Gov. J.B. Pritzker (D) did not respond to a request for comment.

“Illinois is one of the most concerning states right now,” said Jared Walczak, the director of state policy at the Tax Foundation. “They have very little by way of options to raise additional revenue. They are going to face serious difficulties.”

Chicago faces similar trouble with rising debt and pension costs, prompting analysts at Moody’s Investors Service to declare the Windy City in December “one of the cities least prepared for a near-term recession.” On Thursday, city leaders signaled they’re still trying to calculate the long-term effects on their budget.

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To shore up the market, federal officials said they would begin buying up to $500 billion in short-term notes directly from states as well as larger cities and counties, pledging to take further action if local government finances continue to sour. The move is significant, given the fact that states rely on financing debt to fund their operations — yet that debt has become less attractive, with less friendly interest rates, in the midst of a recession.

“I think you’ve seen in a very short period of time a flipping of the market, especially where it pertains to government,” said Mark Polancarz, the Democratic executive of New York’s Erie County, which includes Buffalo. “Some governments are going to have problems repaying these notes if their primary source of income is revenue derived on a strong economy.”

The Fed typically is reluctant to enter the market for municipal bonds out of concern it would be picking winners and losers. But many local leaders were left scrambling in recent weeks, after the U.S. government delayed the April 15 deadline by which most Americans file their taxes. States followed suit, yet the new July deadline threatened to deprive local governments of critical tax payments before the close of their current fiscal year.

Some analysts took a different view, fearing the Fed only had articulated a short-term vision by opting for short-term notes over longer-term municipal bonds, given the fact the coronavirus is likely to trigger an economic downturn that spans well beyond the next fiscal year.

“If it’s the start of something, it’s good news, and it definitely helps in easing the liquidity crunch states and local governments are facing,” said Vikram Rai, the head of Citi’s municipal strategy group. “If the Fed is going to stop here, it’s a bitter disappointment.”

The $2 trillion stimulus package signed by President Trump last month also seeks to aid cash-strapped local governments directly, authorizing $150 billion in payments to states and large cities. But the money quickly has become the subject of controversy nationwide because of restrictions on how it can be accessed.

Local governments can’t tap this pot of funds to close budget gaps; they only can front the costs for coronavirus-related expenses. The formula for allocating the money also threatens to deliver less direct aid to smaller cities that may need it most. And the $150 billion price tag may prove insufficient over the course of a pandemic that could last into next year, prompting city and state leaders to urge Congress in recent days to call for adding more.

The new coronavirus aid package put forward this week by House Speaker Nancy Pelosi (D-Calif.) and Senate Minority Leader Charles E. Schumer (D-N.Y.) seeks to remedy some of the gaps, offering an additional $150 billion to help local governments “manage this crisis and mitigate lost revenue,” the lawmakers said this week. Republican senators have not agreed to the additional funding, though, with some saying they should wait and see how the first batch of money is spent.

“While they moved really swiftly to approve it, we’re waiting,” said Jessica Kinard, the budget director in Portland, Ore. “We don’t know what will come to us directly or what will come from other jurisdictions.”

Some governments entered the coronavirus crisis with more cash on hand than they had in 2008, meaning they’re a bit better positioned financially to weather the storm, said Erlinda Doherty, a budget expert at the National Conference of State Legislatures. But few can handle a lasting major dent to their revenue that may be on the horizon as a result of the coronavirus, which erased years of economic gains in a matter of mere weeks — leaving local leaders bracing for impact.

“We’ll see how long the stay-at-home orders last, how quickly we get testing,” said Adrian Hayes-Santos, a city commissioner in Gainesville, Fla. “I think they’re going to have to do another bill.”

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More than 1,100 miles to the north, Mark Washington said he’s confronting similar economic headaches. With the economy at a standstill — and tourism to the craft beer destination fully disrupted — the city manager of Grand Rapids, Mich., said sales and local income taxes are dwindling. The shortfall could end up being 5 to 15 percent of the general operating budget or “maybe even more,” he said.

On the table soon could be cuts to city programs or possibly furloughs or job cuts, something Washington said he didn’t want to do — not the least because Grand Rapids hasn’t returned to the staffing levels it had before the 2008 recession. For now, he said, he needs the federal government to make a “direct infusion into our city.”

Nirenberg, the mayor of San Antonio, sounded a similarly fearful note. With declining tax revenue — and the realization the “bond markets are stressed” — he emphasized that federal aid dollars needed to flow quickly into cities and states nationwide.

“Right now, the federal government is placing tourniquets,” Nirenberg said in the days before the Fed’s announcement. “It’s immediate relief, but won’t begin to approach what we’ll need.”

Darran Simon, Patricia Sullivan, and Erin Cox contributed to this report.

Coronavirus: What you need to know

The latest: The CDC has loosened many of its recommendations for battling the coronavirus, a strategic shift that puts more of the onus on individuals, rather than on schools, businesses and other institutions, to limit viral spread.

Variants: BA.5 is the most recent omicron subvariant, and it’s quickly become the dominant strain in the U.S. Here’s what to know about it, and why vaccines may only offer limited protection.

Vaccines: Vaccines: The Centers for Disease Control and Prevention recommends that everyone age 12 and older get an updated coronavirus booster shot designed to target both the original virus and the omicron variant circulating now. You’re eligible for the shot if it has been at least two months since your initial vaccine or your last booster. An initial vaccine series for children under 5, meanwhile, became available this summer. Here’s what to know about how vaccine efficacy could be affected by your prior infections and booster history.

Guidance: CDC guidelines have been confusing — if you get covid, here’s how to tell when you’re no longer contagious. We’ve also created a guide to help you decide when to keep wearing face coverings.

Where do things stand? See the latest coronavirus numbers in the U.S. and across the world. The omicron variant is behind much of the recent spread.

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