COVID-19 will have a devastating effect on state, local government and school district budgets

Right off the bat, please understand that I consider the public health crisis to be the number one issue and the number one priority for this world, this nation, this state and Western New York. No one can be comfortable with the world as it is today without that focus.

But for this country, state and region to function properly, to provide the support and assistance needed by health care professionals, it is important to have governments who are well managed and in a position to be of assistance. That need, however, is far from being settled at this moment.

As we watch the effect of the closings of businesses, government offices and not-for-profit agencies we see the growing list of the at least temporarily unemployed, with record numbers of people filing for unemployment insurance. Federal legislation will help shore that up, thankfully, so that some of the worst of the financial pain can be mitigated.

But the federal government has a somewhat easier go of it. They are not required to balance their annual budgets.  The Federal Reserve can literally print money to circulate around the country.  State governments, counties, cities, towns, villages and school districts, on the other hand, face the much tougher reality of eating up reserves, to the extent they are available, and then to face cutting services and raising taxes in order to balance budgets.

The New York State budget for 2020-21 is due to be approved by March 31, four days from now. Prior to the coronavirus pandemic hitting full force, the state was already facing a huge budget deficit for the new year, amounting to about $6 billion; the state funds total budget is less than $90 billion.  Publicly, at least, we have not received a good look at what Governor Andrew Cuomo and the State Legislature could or would do about that.  But as it turns out now, that $6 billion hole may be just a drop in the bucket.

As noted in a previous post, State Comptroller Tom DiNapoli, at the request of the governor, projected that as of March 12th (less than three weeks ago) the pandemic would add another $4-7 billion to the 2020-21 budget deficit that must be closed.  Governor Andrew Cuomo’s Budget Director, Robert Mujica, more recently said the gap is more like $9-15 billion.

While it is not often acknowledged, state revenues over the years have been a major source of funding for local governments and school districts. It has been common, however, that when the state has had major financial problems it has passed them along to the locals.

The size of state aid varies depending on many factors such as need, political pull and ability of local governments and schools to fund their own needs. Some get much more than others.

The latest from the Governor and his Budget Director is that they are proposing to report the state’s revenue shortfalls on a quarterly basis and then share the shortfalls proportionately with local governments and schools. The Legislature would have to give him permission to operate in that manner, and they probably will.

Cuomo explained yesterday that “[n]o one is held harmless. No one is protected from reality. Ask any family out there…

“First, we are going to adjust downward our revenue projection from the initial budget. Then, we’re going to ask to do something that we’ve never done, which is to adjust the budget through the year to reflect actual revenue…

“We know the revenues are down – we don’t know how much. We don’t know when the economy comes back, we don’t know the rate at which the economy comes back, and we don’t know what Washington may do to address this situation in the future, if anything. So, you don’t know … but you have to do a budget with all those unknowns.”

 The Albany Times-Union reported yesterday that the Governor then “offered an example for local governments, school districts and other entities that will be affected by the updated plan: In the initial budget, an institution may be allocated $100, but the state then doesn’t have $100. Instead, it can provide $95 – but only if the state receives $95. Officials would then touch base with stakeholders periodically to let them know ‘how much I can give you of the $95, and therefore, you can plan accordingly.’”

It is going to be a very bumpy ride for at least the next year.

Then consider the dimensions of the problem for one city. Here is a summary of what the City of Buffalo and its schools receive from the state for the current fiscal year:

Combined State Aid – City and School District – 2019-2020

Total Revenues                 State Aid              % of Total Budget

City                        $508.7 million                     $161.3 million                     31.7%

Schools*              $917.4 million                     $784.4 million                     85.5%

* Excludes $10 million in Fund balance

Combined, less City Taxes used for schools: Total Revenues:  $1.355 billion.  State aid:  $945.7billion or 69.9% or total Buffalo government and school revenues.

The County of Erie annually receives about 24 percent of its total $1.555 billion in revenues from the local portion of sales tax. The 4.75 percent of the tax collected in Erie County was projected to total $829.3 million in 2020.  The County retains $457 million of that amount.  Cities, towns and school districts get $338 million.  The cities of Buffalo, Lackawanna and Tonawanda receive an added $12.5 million.  The Niagara Frontier Transportation Authority (NFTA) gets $21.9 million.

But those shared amounts were developed for 2020 based on the assumption of modest growth in the sales taxes this year. That assumption is now, of course, terribly out-of-date.

Assume instead that the current shutdown of businesses, as extensive as it is, reduces total 2020 sales tax proceeds for 2020 by 10 percent. That could diminish the county’s revenues for the year by $45.7 million dollars.  The cities, towns and school districts’ revenues could be down a collective $35 million.  The NFTA could lose nearly $2 million.  There is no way of knowing what the lost revenue will amount to, but even a 10 percent fall would be devastating.  It could be much higher.

The state, of course, will also stand to lose a significant amount of sales tax revenue, further hampering its finances. The state retirement accounts have been in reasonably good shape, but the losses in the stock market will diminish the retirement account balances, and will lead to higher costs to the state, local governments and school districts, which will see required contributions increased.

The County Legislature yesterday approved a Revenue Anticipation Note (RAN) in the amount of $125 million. RANs usually occur near the end of a fiscal year and are used to compensate for cash flow issues often related to the timing of the receipt of money from the state.  Some years RANs aren’t needed.  The county had a fund balance of $102 million at the end of 2018, and it likely added $8-10 million in 2019.  For the county to sell RANs in the amount of $125 million (which might not occur until early summer) is a signal that they are anticipating a serious shortfall in state revenues, either on a permanent or short-term basis.  Whenever RANs are even sellable is another question.

The most important problem facing the states and local governments at the moment is to get the COVID-19 pandemic in their areas under control as best they can. But the consequences, when all is said and done, will extend into other government services as elected and appointed leaders struggle to manage their activities with greatly diminished resources.