<div><div class="indented"><div class="indented"> 1275 First Street NE, Suite 1200</div></div> <div class="indented"><div class="indented">Washington, DC 20002</div></div> <div class="indented"><div class="indented">Tel: 202-408-1080</div></div> <div class="indented"><div class="indented">Fax: 202-408-1056</div></div> <div class="indented"><div class="indented">center@cbpp.org</div></div> <div class="indented"><div class="indented">www.cbpp.org</div></div>    June 15, 2020 States Continue to Face Large Shortfalls Due to COVID-19 Effects <div class="indented"><div class="indented">By Elizabeth McNichol and Michael Leachman</div></div> The restoration of a portion of the jobs lost as a result of COVID-19, as reflected in the Labor Department’s recent jobs report for May, was welcome news. Nevertheless, the economy remains in a deep recession, and state and local governments have been hit particularly hard. We now project that the state budget shortfalls expected from COVID-19’s economic fallout will total a cumulative $615 billion over the current state fiscal year (which ends on June 30 in most states), the new state fiscal year that starts on July 1, and the subsequent state fiscal year. This figure is for state shortfalls only and does not include the additional shortfalls that local and tribal governments and the U.S. territories face. The private-sector job market performed somewhat better in May than many economists had expected, and this has led to some improvement in the outlook for the period ahead. That, in turn, has somewhat moderated the size of the shortfalls states face now and in the coming years. But states remain in dire straits; in just three months, state and local governments have furloughed or laid off more than 1.5 million workers1 — twice as many as in all of the Great Recession. While some of those workers, such as school bus drivers and college security staff, are often furloughed during the summer, many of these and other workers will lose their jobs permanently in the coming weeks as states cut spending to balance their budgets, unless the federal government provides substantially more aid.                1. Bureau of Labor Statistics, “Employees on nonfarm payrolls by industry sector and selected industry detail,” June 5, 2020, https://www.bls.gov/news.release/empsit.t17.htm. <div class="indented"><div class="indented">1</div></div> Our new shortfall figure, which is based on the Federal Reserve Board’s summary of economic projections from last week2 and the Congressional Budget Office’s (CBO) May projections,3 is lower than our estimate of three weeks ago but higher than our projection of early May.4 The projected shortfall for the upcoming fiscal year (2021) is much deeper than the shortfalls faced in any year of the Great Recession (see Figure 1). These figures underscore the continued urgency of the President and Congress enacting substantially more fiscal relief and maintaining it for as long as economic conditions warrant. <div class="indented">FIGURE 1</div>                                 Federal Reserve economists project that unemployment — which averaged 14 percent in April and May according to the Bureau of Labor Statistics — will peak this quarter and still be at 6.5 percent at the end of 2021, a year and a half from now. CBO’s projection is grimmer — unemployment will remain at 11.5 percent in the last quarter (October-December) of 2020 and stand  2. Federal Reserve, “Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, under their individual assumptions of projected appropriate monetary policy, June 2020,” June 10, 2020, https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20200610.pdf. 3. Congressional Budget Office, Interim Economic Projections for 2020 and 2021, May 2020. https://www.cbo.gov/system/files/2020-05/56351-CBO-interim-projections.pdf. 4. Our previous estimates were based on an average of Goldman Sachs’ forecast and CBO’s forecast; we are no longer using the Goldman Sachs forecast because it assumes that additional federal aid will be enacted. Changing to the Federal Reserve Board projections does not affect the results substantially.  2 at a still-quite-high 8.6 percent at the end of 2021, it says. Both economic projections take into account the aid that the federal government has already enacted for businesses, individuals, and state and local governments. Our estimate of $615 billion in shortfalls over state fiscal years 2020-22 is based on the historical relationship between unemployment and state revenues5 and on the average of the CBO and Federal Reserve Board projections. The estimate demonstrates that the federal aid policymakers have provided to date, while helpful, will fall far short. Revised Treasury Department guidance indicates that states can use some of the aid provided in the CARES Act to cover payroll costs for public safety and public health workers through December 30, but even adding that to other existing federal aid likely won’t cover much more than $100 billion of the state shortfalls, leaving nearly $515 billion unaddressed. States hold $75 billion in their rainy day funds, a historically high amount, but far too little to meet the unprecedented challenges they now face. And, even if states use all of it to cover their shortfalls, that would still leave them about $440 billion short. The shortfalls that local governments, tribes, and territories face are in addition to this. States must balance their budgets every year, even in recessions. Without additional, substantial federal help, they likely will deeply cut critical program areas such as education and health care, lay off teachers and other workers in even greater numbers, and cancel contracts with many businesses. Those steps would worsen the recession, delay the recovery, and further harm families and communities. State and local cuts in health care also could shortchange coronavirus response efforts. The large shortfalls could lead states and localities to raise taxes and fees as well. The coronavirus relief bill that the House passed on May 15, the Heroes Act, includes substantial state and local fiscal relief,6 both by providing flexible grant aid and by strengthening and extending the temporary increase in the federal share of Medicaid costs in the Families First Coronavirus Response Act — a particularly effective and efficient form of aid that alleviates state budget pressures and protects health coverage. States need robust aid of this nature to avoid making cuts that would further weaken an already weak economy and cause further widespread hardship.              5. Matthew Fiedler and Wilson Powell III, “States will need more fiscal relief. Policymakers should make that happen automatically.” Brookings Institution, April 2, 2020, https://www.brookings.edu/blog/usc-brookings-schaeffer-on-health-policy/2020/04/02/states-will-need-more-fiscal-relief-policymakers-should-make-that-happen-automatically/. 6. CBPP, “How Much Would Each State Receive Through the Coronavirus State Fiscal Relief Fund in the Heroes Act?” updated May 28, 2020, https://www.cbpp.org/research/state-budget-and-tax/how-much-would-each-state-receive-through-the-coronavirus-state-fiscal. 3</div>

CBPP Updates COVID-19 Revenue Shortfall Projections

CBPP Updates COVID-19 Revenue Shortfall Projections

Center on Budget and Policy Priorities

The Center on Budget and Policy Priorities reported on state revenue shortfalls attributable to COVID-19 and projected that the fiscal 2021 shortfall will be greater compared to any year during the Great Recession; in total, the group estimated a $615 billion shortfall from the remaining months of fiscal 2020 through fiscal 2022, updating its <a href="/lr/resolve//2cgqr" target="_blank">earlier projections</a>.

States Continue to Face Large Shortfalls Due to COVID-19 Effects

The Center on Budget and Policy Priorities reported on state revenue shortfalls attributable to COVID-19 and projected that the fiscal 2021 shortfall will be greater compared to any year during the Great Recession; in total, the group estimated a $615 billion shortfall from the remaining months of fiscal 2020 through fiscal 2022.

The Center on Budget and Policy Priorities reported on state revenue shortfalls attributable to COVID-19 and projected that the fiscal 2021 shortfall will be greater compared to any year during the Great Recession; in total, the group estimated a $615 billion shortfall from the remaining months of fiscal 2020 through fiscal 2022, updating its earlier projections.

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Michael Leachman

Elizabeth C. McNichol

DOC 2020-23301

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Michael Leachman is senior director of State Fiscal Research with the State Fiscal Policy division of the Center on Budget and Policy Priorities.
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CBPP Updates COVID-19 Revenue Shortfall Projections