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A bind for area governments: Virus shrinks their budgets just as public need soars

The platform is mostly empty at the Silver Spring Metro station Wednesday morning.
The platform is mostly empty at the Silver Spring Metro station Wednesday morning. (Bill O’Leary/The Washington Post)
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The economic damage wreaked by the novel coronavirus will force the Washington region’s state and local governments to cut spending at a time of increased public need, making it harder to relieve the distress of laid-off workers and struggling businesses, according to officials and analysts.

Although there is much uncertainty over how long the pandemic will last, area governments are bracing for a wrenching change that will abruptly end an era of flush budgets. Many liken the potential impact to that of the 9/11 attacks and the 2008 recession combined.

“This has the potential to be worse than the Great Recession, because you’re shutting down entire industries,” such as hotels and restaurants, said Jeffrey S. DeWitt, the District’s chief financial officer.

“It’s not unthinkable that we would hit 15 percent to 20 percent unemployment numbers in the District. I don’t think we’ve ever seen those kinds of numbers in the District before,” he said. “How long that lasts depends on how long the event lasts.”

Area governments’ capacity to absorb the blow will depend greatly on how much help they get from the federal government. In hard times in the past, federal Washington has provided critical extra funds for rising demands, such as for health care and food stamps for the poor.

The good news for the region is that its governments start with abundant cash reserves, thanks to years of economic growth in the nationwide expansion that economists say the virus has slammed to a halt.

Virginia has nearly $2 billion in reserves, Maryland has $1.2 billion in its “rainy-day fund,” and the District begins with the equivalent of 77 days worth of spending.

But those buffers are going to shrink as tax revenue drops and demands rise.

“That’s the greatest difficulty in government, that your revenue goes down and your expenditures go up during a recession,” said Andrew Schaufele, director of the Maryland comptroller’s Bureau of Revenue Estimates. “We are certainly preparing for that.”

Early signs point to the sharpest drop in economic activity in memory. Unemployment claims in Maryland rose fivefold in a week; in Virginia, claims spiked even more. Local 25 of the hotel workers union, Unite Here, reported that more than three-quarters of its 7,200 members were out of work.

“It’s not a slowdown. It’s a shutdown, basically,” Virginia Finance Secretary Aubrey Layne said.

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Alexandria City Manager Mark B. Jinks said Wednesday at an emergency City Council meeting, “Sometimes it feels like we’re on a surfboard with a tsunami at our backs.”

State and local governments have begun looking at ways to cut hundreds of millions of dollars from their spending.

The Maryland Senate has already curtailed a costly overhaul of the state’s K-12 schools over economic concerns springing from the pandemic. Virginia Gov. Ralph Northam (D) is expected to seek amendments or make adjustments in the budget recently passed by the General Assembly. DeWitt warned the D.C. Council on Wednesday that the District would have to reduce spending by $500 million to account for lost revenue if the shutdown of the tourism and hospitality industries lasts until June.

In the Washington region, the jurisdictions hit hardest at the start are likely to be the District and the two state governments. That’s because they rely more than county governments on sales tax and income tax for revenue.

Sales-tax receipts are expected to drop quickly as economic activity dries up. Income-tax revenue will follow, although much of the impact will be delayed until next year, when individuals will report lower capital gains as a result of the recent stock market collapse.

County government budgets rely more on property taxes, where the impact will be felt only if a general economic downturn reduces home prices and thus assessments.

“The long-term fundamentals for home and real estate values won’t change much,” said Jeannette Chapman, director of George Mason University’s Stephen S. Fuller Institute for Research on the Washington Region’s Economic Future. “We’re not in ‘Mad Max’ land yet.”

D.C., Maryland restaurants, bars must shut down as Virginia reports second coronavirus death

Still, Chapman and other economists are expecting an economic downturn. Her initial forecast, issued Wednesday, is for an economic contraction from April to December in the nation and the Washington region.

“Unless there’s a vaccine developed like, next week, this will cause a recession nationally, and it will flatten out our economy,” Chapman said. “Right now, my assumption is that there will be some return to normal life in June. Obviously, if it’s longer than that, it will have a larger impact.”

Chapman predicts the Washington area will fare slightly better than the nation as a whole because its economy is based comparatively little on manufacturing and thus is less vulnerable to international supply-chain interruptions.

Also, a relatively high share of workers in the region are able to work remotely.

Other observers think the federal government’s presence in the region means it will be less affected.

“In times of uncertainty, [the federal government] is a pretty good buffer,” Layne said. “They’re not going to stop paying federal employees. They’re not going to stop shipbuilding [in Hampton Roads].”

Layoffs intensify, leading to soaring unemployment claims as coronavirus closures continue.

He added that decisions by the White House and Congress on the size and shape of relief packages would determine how much pain the state government in Richmond will experience.

“It all comes back to how much money the federal government gives us, as to how severe the revenue reductions are going to be in Virginia,” Layne said.

Officials and analysts said state and local governments should move quickly to provide small businesses with grants, loans and relaxed regulations to prevent layoffs.

“The most important thing that government can do right now is put money in the hands of business owners,” said Yesim Sayin Taylor, executive director of the D.C. Policy Center. “Not a lot of them have a lot of cash on hand or immediate access to credit.”

Another important form of assistance could be aid to renters, but available funds could disappear quickly.

“We have a rental assistance program with more than $500 million in reserves that could help a lot with the community,” said Richard S. Madaleno Jr., director of Montgomery County’s Office of Management and Budget. “In some sort of crazy, complete meltdown, that could be gone in a month.”

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