Regional Governments Face Budget Cuts If Federal Support Falls Short

The Economist May 2nd 2020 pp62-63 Local Business in America “Less than Zero”. Westchester County “Cities and states face a cash crunch. Some help is on the way”

For Westchester county, heavily affected by COVID-19, sales-tax revenue could fall as much as 20% from $500M to $400M. Lodging tax will decline as well. At the same time, costs for medical care have skyrocketed. In combination the county expects a budget shortfall of more than 7.5% or $160M on $2.1B. New York state may help slightly but faces a 14% decline of its own this “due to lower corporate- and personal-income-tax”. Budgets cuts amounting to $7.3B will be required to balance the state budget. The expected state-shortfall, for all states, through 2022 will be significantly greater, at $350B, than either of those experienced 2001-2003 and 2009-2011. Other regions will suffer the same fate for direct and indirect reasons-for example falling revenue for oil and coal (Wyoming America’s Leading Coal Producing State). “The National Association of Counties estimates…[shortfalls of] $144B…through the upcoming fiscal year”. These governments, by constitution, statute and tradition must balance their budgets which means cuts in staff etc.

Consequently, municipal bonds yields have fallen more than 30% from ~3.3% to 2%. The good news is leading into COVID-19, most localities had built better “rainy-day” funds as much as “8% of general fund expenditures” ranging to a low of 1%. “Drawing down…half of these funds…[plugs] $36B” of the shortfall and Federal aid has added $28B with more expected. “In order to calm the bond market, the Federal Reserve has said it will buy up to $500B of state and local debt. “A wave of [state and local] defaults is unlikely”.

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