“We’re in recession—I just don’t know how deep”

New projections of state budget shortfalls resulting from almost two months of skyrocketing unemployment and the virtual cessation of economic activity in entire sectors due to the coronavirus pandemic indicate shifts in fiscal readiness. A fresh analysis by Neal Johnson Associates reveals that states hardest hit by COVID-19 may also be facing some of the sharpest revenue gaps, even as 24 states have begun pushing through budget measures to address the front end of the crisis. And early indications are that public K12 and higher education systems may take some of the biggest hits.

As we reported last month, Texas, California, and Georgia appeared to be best positioned to weather a mild economic downturn, according Moody’s Analytics’ “Stress-Testing States 2019.” But a just-released update from these economists suggests that in spite of encouraging COVID-19 case trends, California could be edging closer to the fiscal precipice—as could Texas, especially if the oil market wreaks havoc on that state’s revenues.

Furthermore, our review of the 10 states with the largest populations—representing more than one-half of the country’s total—indicates that several of the least fiscally-prepared are among those with the highest per capita reports of COVID-19 cases, further compounding their health as well as economic prospects.

Big 10 Fiscal Impacts—Mild vs Severe Recession

Texas, California, and Georgia again appear to be best positioned to weather a mild economic downturn, according to Moody’s Analytics’ new “Stress-Testing States: COVID-19” report. But California’s prospects dim under a severe recession—a scenario confirmed by the state’s Legislative Analyst, who testified last week that the state has entered a recession, and that its effects will likely continue for more than a year. As in its prior work, the Moody’s Analytics team estimated the potential budget impacts of a moderate recession based on data from the National Association of State Budget Officers (NASBO).

But in this new analysis, the modelers ran the numbers on a severe recession as well—and with good reason. Analysts ranging from Goldman Sachs to the Congressional Budget Office project nationwide unemployment peaking as high as 16 percent by midsummer and gradually declining over a year or more. Accordingly, the Moody’s Analytics severe recession model calculated the effects of travel and business restrictions lasting into the late summer of 2020, with long-term disruptions including a peak jobless rate of 17 percent. (See table, below.)

Georgia and Texas could keep their heads above water under this severe recession forecast. But the picture could change drastically for Texas if roiling oil markets fail to stabilize. Texas Comptroller Glenn Heger recently said that the state is in a recession, but “I just don’t know how deep it will be,” and may be able to complete the current year without major spending adjustments.

California, North Carolina, and Ohio could experience shortfalls ranging between 3 and 8 percent, while Pennsylvania, Michigan, Florida and Illinois might see double-digit budget gaps ranging between 12 and 20 percent. But hard-hit New York state’s budget could experience an eye-popping 24 percent shortfall, according to this worst-case forecast. Governor Andrew Cuomo has already declared that “we’re broke,” given the state’s immediate shortfalls in the FY 2021 budget just passed April 1—and the budget itself includes provisions for large-scale borrowing should revenues continue to crater.

COVID-19 incidence further complicates recovery prospects

A disturbing piece of this complicated prediction puzzle is the actual course of the coronavirus disease itself—further exacerbated by woefully inadequate testing and reporting. Both its unpredictable nature—with wildly uneven patterns across states and even among cities and counties within states—and the testing mess itself further complicate efforts to assess potential health, economic, fiscal, and behavioral consequences.

With the caveat that we fully understand that the data on COVID-19 are far from perfect, we thought it might be useful to examine cases reported to date (in total and on a per capita population basis, as of April 22) among these 10 largest states, in comparison with those states’ projected budget shortfalls.

Concerningly, the five states with double-digit projected budget shortfalls under a severe recession rank highest (along with Georgia) in per-capita COVID-19 cases. Among states with estimated severe-recession shortfalls between 12 and 24 percent, the number of reported COVID-19 cases per 100,000 population ranged from 130 in Florida to 330 in Michigan—with New York state soaring above all others at 1,322.

The costs to states and localities of the health care and other social supports for this tragic tide of affected Americans remains incalculable at this time. But maintaining basic services and re-establishing a safety net will take an enormous toll in human and fiscal resources—especially among these large states with sizable urban populations. Federal aid will help allay some of these costs—although much more is needed (and is a topic of heated discussions between the governors and federal lawmakers at this writing).

Most of these states, to their credit, already have appropriated supplemental funds or redirected reserves from rainy day funds and other accounts to address this crisis. In recent years, the big-ticket state general- funded categories have been elementary and secondary education (36 percent), Medicaid (20 percent) and public higher education (10 percent) in the aggregate, according to NASBO.

As educators have taken on the task of radically shifting delivery to online platforms, for example, colleges and universities are facing revenue gaps from services such as housing, food, parking and research—while summer and fall enrollments may drop as well, observers note. As a first wave of emergency Federal funds hits campuses, further reductions in all other revenue sources are expected, with potentially devastating impacts on those institutions and students most in need of support.

Neal Johnson Associates will continue to report on the impacts of these historic fiscal shocks to the states and capture best practices in fiscal and policy actions that support all residents—but especially the most vulnerable.

Find weekly updates on state actions at the National Conference of State Legislatures, “State Fiscal Responses to Coronavirus.”

Read “Stress-Testing States: COVID-19,” Dan White, Sarah Crane and Colin Seitz, Moody’s Analytics, April 2020. (Free registration required.)

See also “Stress-Testing States 2019,” Sarah Crane and Colin Seitz, Moody’s Analytics, October 2019.

“Preliminary Assessment of the Economic Impact of COVID-19,” California Legislative Analyst’s Office, April 16, 2020.

“The Fiscal Survey of the States,” National Association of State Budget Officers, Fall 2019.

“The Sudden Stop: A Deeper Trough, A Bigger Rebound,” Jan Hatzius et al, Goldman Sachs Economic Research, March 31, 2020.

 “CBO’s Current Projections of Output, Employment, and Interest Rates,” Congressional Budget Office, April 24, 2020. 

Watch “Coronavirus in Texas: Interview with Texas Comptroller Glenn Hegar,” April 1, 2020, The Texas Tribune.

See the New York Times’ daily updates on national, state, and county total and per capita COVID-19 cases, “Coronavirus in the U.S.”

See my discussion last month of the impact of states’ volatile revenue streams on prospects for economic and fiscal recovery. And here’s my further reporting on best practices in addressing the needs of some of the most vulnerable student populations: single parents and those with demonstrably insufficient food and housing, as well as recent trends in public higher education funding.