For governors and mayors across the nation, every day of social distancing has added to a different kind of distance – the growing gap between tax collections and budget realities. With large sectors of the economy closed against the spread of COVID-19, state and local revenues are plummeting at a pace likely to dwarf the Great Recession. 

As plans to re-open take shape in state capitals and city halls, negotiations continue on Capitol Hill for another stimulus focused on support for state and local governments. The CARES Act targets specific intergovernmental costs related to COVID-19 but doesn’t address broader budget challenges.

But the idea of general aid to replace lost revenues is more controversial, sometimes characterized as a “bailout” for states.

Critics ask whether new stimulus would cover budget mismanagement unrelated to the pandemic. Would states and cities avoid tough fiscal choices, fingers crossed for federal intervention? Why should taxpayers from prudent parts of the country subsidize profligate ones?

It’s not our place to referee this debate, to weigh in on issues like pension reform and liability protections that have been pulled into the discussion.

But we can offer an Indiana perspective, an idea of the stakes for Hoosiers.  

Indiana has earned ‘AAA’ marks by the major rating agencies.  The state built a $2.3 billion surplus through the end of 2019 after a decade of balanced budgets and disciplined spending (about 85 cents for every dollar of national expenditures). Public pensions are well-funded; as a percent of state personal income, pension and debt liabilities are well below the 50-state average.

By no definition would Indiana fit the bill as a “blue state bailout.” We’re as well-prepared as most for a rainy day…but we’re facing a typhoon, along with the rest of the country.

After two weeks of COVID-related restrictions, Indiana revenues finished March $65 million below what lawmakers anticipated for the budget. In just over a month, roughly 18% of the state’s workforce has filed for unemployment.

A conservative projection: Indiana remains mostly closed through June. The economy continues to struggle over the next two quarters, with high unemployment, low consumer confidence and business retrenchment. Then a steady climb towards 2019 levels of economic activity by mid-2021 (the end of the state’s two-year budget cycle).

Under that scenario, Indiana could finish $2.5 billion below biennial revenue forecasts (more than 7% of the total 2020-21 budget plan). That’s in the ballpark of the $2.66 billion loss predicted by Moody’s as the baseline of its recently-released “Stress-Testing the States: COVID-19.” (Indiana actually loses more revenue than average, as we’re more reliant on sales taxes.)

The fiscal shock is widely shared by states in the Moody’s analysis, even under its optimistic outlook. Many economists foresee a deeper recession, many public health experts anticipate longer restrictions (and a potential resurgence of the virus). Then there are costs not covered by the CARES Act, a growing Medicaid budget, preparing schools for safer reopening – the list goes on.

The consequences for Indiana stretch beyond the aftermath of the pandemic. It will be difficult to avoid cuts to K-12  (it’s more than half the state budget), a decision with generational impact as educational attainment drives economic development and income growth.  Infrastructure plans may be put on hold by lost and diverted gas tax revenues, and priorities like rural broadband deployment could stall too.

Steep revenue losses could trigger Indiana’s balanced budget amendment and continued cutbacks, pushing the General Assembly to deduct forecasted shortfalls from the 2022-2023 budget.

For counties, cities and towns, the most painful budgets won’t come until 2022 and beyond, because of how their revenues are calculated, collected and distributed.  In many ways, local government hasn’t fully recovered from the Great Recession, and the effects of the pandemic could last just as long.

Indiana is well-managed, generally governed with conservative fiscal policies. But if we’re forced to rebuild our finances from a deep hole after reopening our economy, it’s likely to slow the recovery and compromise the investments that will keep us competitive as a state.

Federal aid to replace state and local revenues is an unusual proposal for an unprecedented crisis. It deserves a thorough debate; closer to home, we should take a clear-eyed view of the costs and benefits for Hoosiers. But the rhetoric of “bailouts” and red states/blue states doesn’t address the central issue:  Every state – including Indiana – faces years of stark choices ahead if Congress declines to act.

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