States Beg, Borrow and Cut to Cope with Pandemic-Wracked Finances

August 06, 2020

The COVID-19 pandemic has had a devastating impact on state budgets, with tax revenue shortfalls estimated to total about $200 billion for fiscal years 2020 and 2021 compared with initial projections.[1] What actions are states taking to deal with these financial losses?

Illinois’ FY2021 budget relies on borrowing to close a $6.6 billion deficit. However, Governor J.B. Pritzker hopes to avoid most of the borrowing if Congress can be persuaded to provide states with sufficient funding to offset the pandemic-related revenue drop-off. Without such federal relief, the Governor has warned of drastic spending cuts.[2] Federal assistance to states and local governments so far has covered COVID-19 expenses but not revenue shortfalls due to the virus.

Unlike Illinois, some states have already made significant spending reductions in order to meet balanced budget requirements. Others have put their FY2021 budgets on hold or passed temporary budgets because of uncertainties surrounding federal assistance and revenue projections. Many states have made use of rainy day funds—an option not available to Illinois, which does not have a functioning reserve account to stabilize spending and avoid tax increases during economic downturns.

Forty-six states, including Illinois, began the 2021 fiscal year on July 1, 2020.[3] New York’s fiscal year ends on March 31, Texas’ fiscal year ends on August 31 and Michigan and Alabama have fiscal years ending on September 30. The decision to extend income tax filing and payment deadlines by three months to July 15 has heightened the challenge of revenue forecasting for most states because of the difficulty of separating the financial impact of the virus from the revenue loss associated with late payments. 

For FY2021, 33 states are enacting new budgets, while 17 states previously enacted budgets covering FY2020 and FY2021.[4] Some of the 17 revised their previously approved budgets due to the pandemic. Kentucky was expected to enact a two-year budget but instead approved a one-year budget covering only FY2021.

Instead of passing full-year budgets, several states have approved stopgap financial plans for FY2021 or delayed action on FY2021 budgets until the outlook becomes clearer.[5]

• Massachusetts enacted a one-month budget to cover July expenses, followed by a three-month budget that runs through October. In signing the three-month plan, the Governor rejected the legislature’s attempt to fund departments and services at least at FY2020 levels.[6]

• New Jersey enacted a three-month stopgap budget, effectively extending FY2020 through September 30, 2020 and shifting the start of FY2021 to October 1, 2020.

• Pennsylvania enacted a budget that funds most agencies through November and funds schools through June 30, 2021.

• Rhode Island supplemented its FY2020 budget with rainy day fund withdrawals and other fund transfers and is not expected to pass an FY2021 budget until prospects for federal aid are clearer. Until an FY2021 budget is enacted, the state is authorized to spend one-twelfth of its FY2020 budget amount each month.

• South Carolina is spending at FY2020 levels, pending the passage of an FY2021 budget when the legislature reconvenes in September.

• Vermont enacted a budget for the first three months of FY2021, with the legislature expected to convene again later this summer.

States that have enacted FY2021 budgets relied on borrowing, rainy day funds, deferred expenses, budget cuts and, to a far lesser extent, revenue increases.  

Without additional federal aid, New York officials plan more than $10 billion in spending cuts to the $177 billion budget enacted at the start of April.[7] The budget also authorized $11 billion in additional borrowing.[8] If the cuts are imposed, state aid to local governments could shrink by $8.2 billion, with New York City losing more than $3 billion; the state has already withheld $360 million from smaller cities and counties. The governor temporarily froze scheduled pay increases for most unionized state workers.[9]

New Jersey authorized $9.9 billion in additional borrowing to address the pandemic crisis.[10] Until it enacts an FY2021 budget in October, the state has deferred major expenditures, including pension contributions and aid to local governments, public schools and public transit.[11] The governor ordered a hiring freeze, transferred the rainy day fund balance to the general operating fund and de-appropriated $1.3 billion from the FY2020 budget.[12]

California’s $202 billion FY2021 budget dealt with a projected deficit of more than $54 billion by delaying payments to schools and community colleges, temporarily limiting business tax credits, bolstering revenue forecasts, borrowing from other state funds and withdrawing almost half the money in the state’s $16 billion rainy day fund.[13] About $11 billion of budgeted spending reductions, including pay cuts to public workers, would be offset by additional federal aid.

Florida’s governor vetoed $1 billion in spending that legislators had approved prior to the pandemic crisis and ordered state agencies to reduce spending by 6% to save $750 million.[14]

Ohio cut spending by $775 million over the last two months of FY2020, including steep reductions to education and Medicaid.[15] In FY2021, the second year of its two-year budget, the state expects to save about $138 million by docking state employees’ pay by the equivalent of ten work days.[16] Ohio also plans to rely heavily on its $2.7 billion rainy day fund to close a projected $2.1 billion deficit in FY2021.

Indiana’s agencies were directed to cut spending by 15% in FY2021, the second year of the state’s biennial budget, but the mandate does not apply to education.[17] The state is also spending through the surplus built after the Great Recession.

Colorado enacted significant spending cuts, including a $724 million reduction in state spending on education, and trimmed corporate tax breaks to address a $3 billion budget shortfall.[18] The state also used marijuana tax revenue—as well as money from other accounts designated for specific purposes—to pay for general operating expenses. A $225 million payment designed to shore up Colorado’s pension system was suspended.

Georgia approved a 10% budget cut for FY2021, including nearly $1 billion in spending reductions to public education.[19] The governor had initially told state agencies to reduce spending by 14%. Lawmakers rejected proposals to increase cigarette taxes or trim tax breaks. The FY2021 budget used $250 million in reserve funds, in addition to about $1 billion applied to the FY2020 budget.

Despite so many states waiting for or relying on the prospect of additional federal coronavirus relief funding, the outcome remains uncertain. Negotiations on a relief package are continuing in Congress, but Democrats and Republicans appear to be far apart on the issue of more aid to states and localities.[20] The Civic Federation supports the provision of these revenue recovery funds because only the federal government has the resources to mitigate severe economic and fiscal disruption.[21]

For more information on budget deficit-closing measures by states, the National Conference of State Legislatures is tracking state actions here.