Published in Economic Development

Longer recession predicted without federal support for state, local budgets

BY Sunday, May 24, 2020 06:00pm

University of Michigan researchers told state officials at this month’s revenue estimating conference they anticipate a gradual economic recovery in the next few years, resulting in an unemployment rate of 6.8 percent by the end of 2022. 

The relatively optimistic projection, however, comes with a caveat: The researchers assume the federal government will provide hundreds of billions of additional stimulus funds to support state and local governments. 

Tim Bartik, senior economist at the W.E. Upjohn Institute for Employment Research COURTESY PHOTO

Discussions over such support — with backers including Gov. Gretchen Whitmer and the Michigan Municipal League — have grown politically contentious in recent weeks because of Republican concerns about “bailouts” for allegedly mismanaged state budgets.

In Michigan, state and local budgets are required to be balanced each year. Absent the federal help, economists predict steeper revenue shortfalls and a more prolonged recession from the coronavirus.

“It makes the recession worse directly and indirectly” without the aid, said Tim Bartik, senior economist at the W.E. Upjohn Institute for Employment Research in Kalamazoo. 

Without federal support, state and local governments will cut spending, resulting in higher unemployment and less contract work for private companies. All of this reduces consumption and the ripple plays out in the economy through a multiplier effect, he said, while GDP could shrink by 4 percent.

“The reality is, if state and local governments make budget cuts of this magnitude with the multiplier effect, that in itself is likely to make this a recession that will last at least through 2021 in a fairly serious way,” Bartik said. “The biggest downside risk to the recovery is whether the federal government acts.”

Federal aid in limbo

The May 15 Consensus Revenue Estimating Conference (CREC) brought agreement among varying fiscal projections by the State Budget Office and the House and Senate fiscal agencies. They agreed Michigan faces a $2 billion shortfall this fiscal year for the General Fund and School Aid Fund. Revenue shortfalls — driven by less income and sales tax revenue — are expected to continue in the next two fiscal years.

Bartik said the CREC’s figures are more optimistic than projections by the U.S. Congressional Budget Office.

Researchers from U-M’s Research Seminar in Quantitative Economics issued their own forecasts during the revenue estimating conference. Assuming $600 billion in federal stimulus aid for state and local budgets across the U.S. and a severe second wave of COVID-19, U-M economists forecast the state’s unemployment rate will steadily decline to 6.8 percent by the end of 2022.

The budget forecasts have heightened awareness for additional federal aid. The CARES Act included $150 billion for these budgets, but it was limited to large cities and only covered new expenses related to COVID-19.

In Congress, House Democrats approved a $3 trillion stimulus package that included $1 trillion for state, local and tribal governments. It was swiftly rejected as an option by the Republican-led Senate. In a video message, U.S. Rep. Bill Huizenga, R-Zeeland, called the Democrats’ bill package a “liberal, progressive, socialist-Democrat grab bag. … It has zero chance in the Senate.”

A bipartisan bill in the Senate would create a $500 billion fund for state and local governments in three tranches based on a formula that considers population, COVID-19 cases and revenue losses.

Bartik said a formula-based disbursement will be key as the crisis unfolds, which at this point is unpredictable.

State lawmakers have called on the Whitmer administration for a “budget correction plan” to resolve this fiscal year’s shortfall, but it’s unclear how that process will proceed while federal aid is in limbo.

“We have a massive revenue shortfall brought on by this economic shutdown that will affect our families, schools, local governments and vulnerable citizens,” state Rep. Shane Hernandez, R-Port Huron, said in a statement. Hernandez chairs the House Appropriations Committee. “The people need to hear from the governor what her priorities are that reflect this new reality facing our state. Time is of the essence and we look forward to resolving this challenge.”

On May 20, the state underscored the economic effect of COVID-19, reporting the seasonally adjusted unemployment rate reached 22.7 percent in April. Whitmer reiterated the state’s need for federal support.

“Families across the country need help,” Whitmer said in a statement. “We’re counting on the federal government to work together to provide additional flexibility and aid for states like Michigan to continue supporting essential services like health care, education, and police and fire departments. We will get through this together.”

Locals feeling it

While state agencies have issued furloughs and started work-sharing programs to cut costs, local governments also are feeling the pain. Not only is tax revenue down, but they anticipate further setbacks as spring and summer programming is canceled, such as the Tulip Festival in Holland and the Coast Guard Festival in Grand Haven.

The Michigan Municipal League hosted a conference call with city leaders across the state earlier this month, highlighting the need for federal aid.

Kalamazoo anticipates a ripple effect on city services due to hundreds of layoffs at Western Michigan University, said City Manager Jim Ritsema. Layoffs may be inevitable, he added, as the city’s workforce makes up two-thirds of the budget, and capital projects will be deferred.

“There will be impacts on core services to the community that relies on us even more during this time of crisis,” Ritsema said.

The city of Muskegon has furloughed, laid off or eliminated 31 percent of its budgeted positions, said Mayor Stephen Gawron. That includes a 20-percent reduction in Fire Department staffing and holding vacant 15 Police Department positions. The police records department has been mostly furloughed, as has most of the City Clerk’s office, he said.

“Cities are not asking for a bailout,” Gawron said. “Muskegon is looking for government partners to help support us due to this crisis that has shut down the economy. Cities are severely limited in their ability to raise revenue, at the same time we’re required to maintain obligations to our citizens to provide for the protection of life.”

Gilda Jacobs, president and CEO of the Michigan League for Public Policy, said this month that the Great Recession provided lessons in government budget cutbacks and resulting infrastructure divestment.

“Policymakers in Lansing must learn from their predecessors’ mistakes,” Jacobs said. “Despite the gloomy revenue outlook, it is bad for the economy and our residents to address the revenue losses through deep cuts, especially to the areas our residents and businesses depend on most like quality schools, safe roads and water systems, and dependable health, economic and work supports. We simply can’t cut our way to prosperity or health.”

Meanwhile, the urgency for the stimulus is growing, Bartik said. While the state’s fiscal year ends in September, many local and school district fiscal years turn over at the end of June.

“The federal government should act on this now,” he said. “If you wait longer, you’re going to have all these states make decisions, then aid may come in and it’s going to be kind of a mess.”

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