Twelve states in the US, including some of the country’s largest economies, are at risk of cutting or scaling back programs in essential areas like education and public safety when the federal government’s historic stimulus package expires in 2026.
(Bloomberg) — Twelve states in the US, including some of the country’s largest economies, are at risk of cutting or scaling back programs in essential areas like education and public safety when the federal government’s historic stimulus package expires in 2026.
California, New York, and Pennsylvania, alongside nine others, used federal stimulus money to cover recurring costs that totaled 2.5% or more of their general fund expenditures in fiscal 2022. They could face budgetary gaps because of that spending, forcing government leaders to rethink certain programs and jobs, according to an analysis of disclosure filings as of July 2022 released Tuesday by The Volcker Alliance, a nonprofit research group.
The five biggest states in such a position play an outsize role in the country’s economy: they represent a quarter of the US population and nearly a third of state general fund spending.
“A lot of states have major issues. Illinois is dealing with refugees and wanting to provide health care for them,” said Beverly Bunch, a professor at the University of Illinois Springfield and author of the report. “That’s coming at the same time that some of these federally funded programs are being exhausted, and that makes it even more challenging.”
In more recent filings, which weren’t included in the report, California increased the federal funds allocated for operations while New York and Illinois decreased their amounts, Bunch said. Of the other states that the report identified as moderate or elevated risk of a fiscal cliff, the amounts for operations remained about the same.
States emerged from the pandemic in strong financial positions in part thanks to cash infusions from Congress helping to smooth the recovery. The Coronavirus State and Local Fiscal Recovery Funds program, among the largest, provided $350 billion directly to state, tribal and local governments and was part of the $1.9 trillion American Rescue Plan Act.
In aggregate, states have allocated about 74% of their $195.3 billion share, according to filings as of July 2022. The funds must be earmarked by 2024, and spent by the end of 2026.
The Volcker Alliance’s analysis found roughly a quarter of the money allocated so far has gone to capital projects, such as funding for state roads, buildings, wastewater and broadband initiatives. A fifth was allocated to government operations, which are recurring expenses like salaries and the cost to run programs. About 16% will be used to repay federal loans to their unemployment trust funds or replenish capital, an exemption to a federal rule that prohibited states from using stimulus money to repay debt.
California, for instance, has allocated all of its $27 billion. Half is going toward revenue replacement to fund expenditures like health and human services programs, higher education and courts, according to the report, which assigned the state an “elevated” risk of a fiscal cliff.
New York, Pennsylvania, Wyoming, Utah, Alaska and Nevada also face “elevated” risk because their aid allocations to general government operations represented at least 2.5% of their general fund expenditures, according to the report.
New York State has spent or disbursed $7.6 billion of the $13.5 billion in federal aid, which includes state and local funds, as of Aug. 31, according to the office of the New York State Comptroller.
Five other states face “moderate” risk because they allocated funds to operations that may decrease as Covid-19 wanes, like public health programs.
There is still some cause for optimism. The report pointed out that 38 states face low risk of a cliff. It also didn’t take into account projections for revenue growth going forward. The job market’s strength, as well as rainy-day funds at record highs, bodes well for certain states.
Even so, states that have been cutting taxes dramatically could face pressure as federal aid runs out, said William Glasgall, senior director for public finance at The Volcker Alliance.
“If we do see a continued weakening in the states’ own generated revenue and you take away this $350 billion gift to states and localities, are they going to be able to make that all up?” he said.
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