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Unless the federal government steps in, every single American may soon find their local governments forced to cut essential services such as education, housing, and health programs.  

The future of America’s states and cities is looking increasingly grim. Unless the Trump administration steps in, every single American may soon find their local governments forced to cut essential services such as education, housing, and health programs.  

These cuts, in fact, are already underway. States and cities across the country have begun enacting spending freezes and cuts in response to budget shortfalls caused by the novel coronavirus. In Ohio, Gov. Mike Dewine announced nearly $800 million in cuts earlier this month, including $210 million from Medicaid spending. In Georgia, budget leaders have demanded that all state agencies find ways to cut their budgets by 14% by May 20. “No exceptions,” they warned in a memo. 

Students could be among the most harmed by these cuts. Ohio has already slashed $300 million from K-12 public school funding; Michigan school districts could suffer a staggering 25% budget cut for K-12 schools; and school officials in Pittsburgh, Penn. said their district alone could lose $82 million because of the COVID-19 pandemic.

The bloodletting is likely to continue unless the federal government steps in and provides aid to states and cities. Bipartisan leaders of the National Governors Association have asked for $500 billion in aid to state governments, while mayors and counties have called for another $250 billion in emergency assistance to local governments. House Democrats approved legislation last week that includes more than $900 million in aid to state, local, and tribal governments, but President Trump and other Republican leaders have thus far opposed such aid.

That may finally be changing, though. White House officials signaled privately last Thursday that they might be willing to provide tens of billions of dollars in relief to states if Democrats agree to Republican priorities, such as tax breaks and liability protections for businesses. 

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“The White House is moving to set up where a deal could be,” a Republican close to Trump told the Washington Post. “The first thing is getting Republicans in Congress to come around on some money for states and that’s happening. It’s progress, for sure, but it’s only the first part of bringing it all together in a deal.”

That’s the state of play. But you might be wondering why all this is happening and how we got here. Let’s dive in.

Why Do States and Cities Need Money?

As the coronavirus outbreak exploded in March, more than 40 states issued stay-at-home orders and all 50 states issued restrictions on businesses in order to try and limit the spread of the virus. With consumers stuck at home, and millions more Americans out of work and struggling to afford food and rent, income and sales tax revenues plummeted. 

At the same time, essential services such as public transportation and airports have continued operating even as the number of people using those services has plummeted. Public health costs have also skyrocketed as states increased spending on medical equipment, masks and other medical supplies, coronavirus tests, hospitals, and nursing homes.

Many workers who lost their employer-sponsored health insurance, along with their jobs, have been forced to apply for Medicaid, the public health program for low-income adults, children, pregnant women, and the disabled. Roughly 70 million Americans already receive coverage through Medicaid, and anywhere from 11 million to 23 million more people could sign up for the program over the next several months, according to an estimate from Health Management Associates.

The federal government covers roughly 60% of Medicaid costs, with states responsible for the rest, but as millions more people enroll in the program, states will be on the hook for billions more in costs. Unless they get more federal assistance, these rising costs could force states to slash benefits for patients and payments to medical providers. States have the flexibility to modify Medicaid benefits, payments to healthcare providers, and eligibility requirements with oversight by the federal government.

Some states already had financial issues and budget shortfalls, in part owing to enormous pension fund obligations, but the fallout of the coronavirus represents a perfect storm that threatens the very survival of the public sector. 

Can’t States Just Run a Deficit?

Actually, no. While the federal government can and does spend more than it takes in, 49 of 50 states—Vermont being the exception—have balanced-budget laws on the books, meaning they can only spend as much as they bring in. Consequently, states must find a way to pay for their rising costs, and in the absence of federal aid, this gives them two options: cut or borrow. 

Virtually every state has implemented or discussed cuts, and California has already borrowed $348 million from the U.S. Treasury to cover costs associated with rising unemployment claims. States and large cities can also use a new Federal Reserve lending program introduced in response to the coronavirus crisis which will allow them to borrow from the Federal Reserve, but cuts are still all but certain. 

OK, So Why Isn’t the Federal Government Acting?

Democrats have for weeks fought for relief funding for state and local governments, but Trump and some fellow Republicans, like Florida Sen. Rick Scott, have claimed that it’s only “blue states” that are suffering from financial issues. 

While Florida has $3 billion in reserves, state lawmakers are already considering budget cuts. In fact, the Sunshine State could be one of the hardest hit states in the nation, due to its reliance on retail sales and tourism. The state already brought in $773 million less in sales and use taxes in March than anticipated and April’s numbers, when Floridians were stuck at home under the Gov. Ron DeSantis’ stay-at-home order, are likely to be even worse. 

Some Republicans, like Utah Sen. Mitt Romney, have rejected Trump and Scott’s argument. Romney was spotted in the Capitol last week carrying an oversized poster reading: “Blue states aren’t the only ones who are screwed.” Romney’s poster, which portrayed an analysis using data from Moody’s Analytics, shows that a number of Republican states—including Louisiana, Kansas, and Kentucky—are expected to face some of the largest budget shortfalls in the nation.

Aware of the danger to his state and others, Sen. Bill Cassidy, Republican of Louisiana, introduced a bipartisan bill last month alongside Sen. Bob Menendez (D-NJ) that would provide $500 billion in aid to states and localities. 

“If we do not provide stability for states, we risk wasting all the money spent to save small businesses. These small business[es] need basic government services,” Cassidy wrote in a Washington Post op-ed. “Who will eat in a restaurant if garbage and rats are out front because a city has laid off sanitation workers?”

Maryland Governor Larry Hogan, a Republican and the chair of the National Governors Association, and New York Gov. Andrew Cuomo, a Democrat and the group’s vice-chair, also argued that aid for states should not be a partisan issue.

“With widespread bipartisan agreement on the need for this assistance, we cannot afford a partisan process that turns this urgent relief into another political football,” they said in a statement last Wednesday. “This is not a red state or blue state crisis. This is a red white and blue pandemic. The coronavirus is apolitical. It does not attack Democrats or Republicans. It attacks Americans.”

President Trump, who is eager to reopen the economy despite warnings from public health experts, has expressed fear that federal aid might lead states and cities to move more slowly in lifting restrictions. Trump recently attacked Democratic states, accusing them of being too slow in moving to reopen their economies. “There just seems to be no effort on certain blue states to get back into gear,” he said.

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Even Trump’s own former economic advisor, Gary Cohn, believes the federal government should provide relief to cities, states, and hospitals—which are also in grave danger as the coronavirus forced the cancelation of elective procedures, a key revenue stream. 

“I’m not trying to help cities and states get back to a solvent financial position, [but] I would like to get hospitals and states back to a financial position they were in 60 days ago,” Cohn, a former Goldman Sachs executive, said on CNBC’s “Squawk Box” on Monday.

What Happens If States and Cities Don’t Get Help From the Federal Government?

Cuts, cuts, and more cuts

The federal government’s refusal to provide assistance to state and local governments could lead to a severe reduction in state and local services such as education, housing, and health programs.

Earlier this month, the Democratic governors of five western states—California, Colorado, Oregon, Nevada, and Washington State—highlighted exactly how much is at stake in a letter to congressional leaders requesting $1 trillion in “direct and flexible relief” for all 50 states.

“Without federal support, states and cities will be forced to make impossible decisions—like whether to fund critical public healthcare that will help us recover, or prevent layoffs of teachers, police officers, firefighters and other first responders,” the governors wrote. “And without additional assistance, the very programs that will help people get back to work—like job training and help for small business owners—will be forced up on the chopping block.”