Economists Grapple With Pandemic’s Effects As Ohio Valley Officials Brace For A Fiscal Blow

May 26, 2020

Kentucky’s state budget officials told lawmakers Friday that general fund receipts may decline by $495 million next fiscal year. It’s just the latest example of the unprecedented financial hardships ahead for the Ohio Valley’s state and local governments due to the coronavirus pandemic.

More than 38 million Americans have applied for unemployment insurance in the past nine weeks, about 2.5 million of them in the Ohio Valley states of Kentucky, Ohio and West Virginia.

Even economists find figures like that hard to reckon with.

John Deskins directs the Bureau of Business and Economic Research at West Virginia University. He says the fallout from the coronavirus pandemic challenges standard approaches to economic modelling and forecasting, which rely on recent patterns in data. But data since mid-March are completely unprecedented.

“The notion that the national economy would go from 3-point-something percent unemployment to 20-something over the course of 6 weeks? We’ve never heard of that before!” he said.

Then there are the unknowns regarding what happens with the virus itself: Will there be a large second wave of infections? When will a vaccine arrive? But even with those uncertainties, economists like Jason Bailey say the outlook is grim. Bailey is the executive director of the left-leaning Kentucky Center for Economic Policy and says even the rosier scenarios in his control forecast show economic conditions will likely be worse than those during the 2008 financial crisis.

“The control forecast is still a terrible forecast when it comes to the economy, when it comes to the unemployment, when it comes to revenue for government,” he said. “It’s still worse, by far, than anything we’ve seen in our lifetimes.”

So while details of the economic forecast for Kentucky, Ohio and West Virginia remain murky, the existing data reveal the outlines of mammoth losses that economists and local leaders expect the coronavirus to have on state and municipal budgets. Experts say the unprecedented budget shortfalls could lead to layoffs for public-sector workers like school guidance counselors and city maintenance workers; cuts to funding for local festivals; and the shelving of arts and cultural programming.

Just how big those cuts will be may largely depend on the outcome of the current Congressional debate about further federal aid.

Cities and Towns

Without further stimulus from the federal government, Kentucky cities expect to lose about $85 million between them by the end of the next fiscal year, and as much as $180 million the following fiscal year, according to a survey of mayors conducted by advocacy group the Kentucky League of Cities.

Mayors reported the shortfalls could result in cuts to parks budgets (85 percent of respondents), public works (80 percent) and police services (54 percent). Of Kentucky’s 416 mayors, 102 responded to the KLC’s survey.

In recessions, the experts say, education, social services and the arts are the first budget items to go.

“Some people disagree about whether cities should be in the business of parks and recreation,” said KLC executive director J.D. Chaney. “But if this crisis has shown us anything, it’s that people can work from anywhere. So if you want people to live in your town, you have to make it a nice place to live.”

A March bill from the federal government, the CARES Act, included $150 billion to reimburse cities for expenses related to the coronavirus. But that funding is limited to cities with more than 500,000 people, leaving small and mid-sized cities worried. Besides, Chaney said, he started hearing from mayors across Kentucky that the issue wasn’t an expenditure problem: It was a revenue problem. Residents weren’t paying their utility bills; property, retail and income taxes were expected to plummet.

“Before this all came about, we were sort of doing a balancing act to provide services with the limited budget we already had,” said Todd DePriest, mayor of the eastern Kentucky city of Jenkins, population less than 2,000. “Just looking at utilities, we’re somewhere between 10 and 20 percent in terms of collections compared to where we were before. That don’t sound like a lot, but when you’re already borderline operating anyway, it really cuts into what you can do.”

DePriest has already started making changes: Police cars will receive maintenance less frequently, and purchases like new tires for utility vehicles will be put off for as long as possible.

Seeking Federal Aid

The state of Kentucky also expects significant revenue loss related to the pandemic. In a recent report, the Governor’s Office for Economic Analysis projected a revenue shortfall ranging from $318.7 to $495.7 million, and fourth quarter totals may be as much as 23.7 percent lower than in the same quarter the previous year.

The shortfall is largely a consequence of skyrocketing unemployment in Kentucky and around the country, with roughly 2.5 million people in the Ohio Valley filing for benefits since mid-March.

The unemployed, explained Jason Bailey, “Are not buying, so they’re not paying sales taxes, and they’re not employed, so they’re not having income taxes withheld.”

Corporate taxes are also expected to fall short of original estimates, as commercial and industrial activity will likely remain low in the coming months. “If movie theaters start going bankrupt, all of a sudden you’re going to see a lot of urban real estate that’s not paying taxes,” said Rea Hederman of Ohio’s right-leaning Buckeye Institute.

“As these budget cuts start to come down,” said Policy Matters Ohio executive director Hannah Halbert. “Looking at those cuts through an equity lens, and even just a health-disparities lens, that will tell its own story: What gets cut first, which districts are harmed, and how that deepens or lessens people’s shots at a fair future.”

Since states and localities have to balance their budgets, the depth of those cuts will largely depend on how much stimulus comes from the federal government. Organizations including the National Governors Association, the National League of Cities and the National Association of Counties have called on Congress to provide additional aid.

“Many state and local governments are facing a June 30 deadline to adopt budgets,” the groups wrote in their appeal to Congress. “Without federal assistance, states, territories and local governments will be forced to make drastic cuts to the programs Americans depend on to provide economic security, educational opportunities and public safety.”

A $3 trillion bill dubbed the HEROES Act passed the Democratic-led House, but faces opposition in the Republican-led Senate. The 1,800-page bill includes items from the Democratic wish list that will surely face scrutiny, like student loan forgiveness and payments of up to $6,000 per family. Kentucky Republican and Senate Majority Leader Mitch McConnell has expressed skepticism about further spending until there’s more data on the effects of previous bills.