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States Prepare For The ‘Red Wedding’

Florida Governor Ron DeSantis speaks at the 2018 Student Action Summit
Florida Gov. Ron DeSantis. Photo by Gage Skidmore.

With government revenues collapsing under the weight of pandemic-induced lockdowns, public sector workers everywhere are nervous – but in my own state of Florida, they have reason to be downright squeamish.

The budget for the state’s fiscal year beginning July 1 is in the hands of Gov. Ron DeSantis, who has line-item veto power over the spending plan the Legislature approved in March. While DeSantis has limited flexibility to move money from one place to another, he has ample power to cut almost anything he deems expendable.

So what kind of cuts is DeSantis contemplating? “It’s kind of the veto equivalent of the Red Wedding from ‘Game of Thrones,’” he told reporters last week. Fans of the former HBO series will shudder at the thought; the fictional incident in question became infamous for its shocking bloodiness. Everyone else can simply take DeSantis’ comment to mean that a lot of state spending is going to die.

If DeSantis unsheathed a more colorful analogy than most governors would use, it may be because it comes naturally; his wife, Casey DeSantis, is a former Jacksonville television host. Yet even if other governors wouldn’t make the same pop culture reference, it aptly sums up the situation in a lot of places.

Every state’s budget has been slammed by the sharp curtailment of economic activity and resulting loss of income and sales tax revenues, coupled with higher spending on unemployment, other social benefits and public health. A few are also victims of the sharp fall in oil prices, with West Texas crude’s benchmark price having plunged from around $61 a barrel at the start of the year, to a brief foray into negative territory in April, before partly recovering to nearly $40 last week. The results are stark. The Center on Budget and Policy Priorities projected a collective $650 billion budget gap for state governments through the next two fiscal years.

The speed with which the carnage unfolded, as well as its timing, caught many flat-footed. Most legislatures wrapped up their annual sessions in the spring, just as the situation was deteriorating but the scope of the damage was still unknown. Those of Texas, North Dakota, Montana and Nevada are on biennial calendars, and did not have any sessions scheduled in 2020 at all.

This has mainly left it up to governors to rally their states’ fiscal forces. Victory in the coming battle is out of reach; the goal is to survive to fight another day.

There is no bankruptcy option, no government equivalent of Chapter 11 reorganization, to act as a shield. The states have only four tools they can use to patch the gashes in their budgets. They can cut spending, raise taxes, borrow in financial markets, or send a raven to Washington, D.C., with an urgent plea for help.

All of those tools are at the ready. But a particular state’s willingness to use each one is driven largely by its political culture and its chief executive. Unsurprisingly, fiscally conservative “red” states like Florida and Texas – will we ever think of red states the same way after DeSantis’ “Game of Thrones” comment? – are inclined to cut state spending. These states are always inclined to cut spending. Some of the more liberal “blue” states like California lean toward raising taxes, because that is how they typically tilt. Both camps hope Washington will dispatch a dragon carrying barrels of cash to smother the fiscal fire.

California, facing a staggering budget gap of $54 billion, enacted a budget last week that eschewed virtually all cuts (for now) in hopes of that dragon appearing in the summer sky. Decisions on any spending cuts are put off until October. In the meantime, the state tinkered with its tax code to raise more money. It has sharply limited the ability of businesses to use their losses to reduce taxes or claim refunds before 2023. For businesses that were making money and paying taxes before the pandemic but now face their own devastation, the state’s rule change is apt to sound like a schoolyard chant of “no takebacks!”

New York was already about $6 billion in the hole before the pandemic, thanks mainly to its out-of-control Medicaid spending. It lost another $7 billion or so by virtue of becoming the state hit most intensely by the pandemic, with the worst effects centered on the financial engine of New York City. Gov. Andrew Cuomo, who earlier demanded that the entire federal stockpile of in-demand ventilators be sent to his state, has with similar modesty insisted that New York requires $61 billion in federal aid. That is enough, per some projections, to fill expected budget gaps for the next four years. The state has both spending cuts and potential tax increases teed up as a plan B against the possibility (or near certainty) that no magic spell will conjure such a sum.

Greater realism dominates in places where dreams are not made in factories and express elevators do not carry taxpaying potentates to offices just below the clouds. Liberal-leaning Oregon is bracing for budget cuts not unlike those that are on the table in down-to-earth Indiana.

Of course, a comparatively rapid return to something like normal economic life would soften the pandemic’s financial blow to the states, just as it would for everyone else. Much of the damage has already been done, however. States tapped their reserves and dug into the sofa cushions to meet unemployment claims that were orders of magnitude greater than any previously known.

Washington is going to have to send a dragon in the end. Exactly what the dragon will carry is still very much in doubt. Last month – before national attention shifted to the serious matter of police violence against racial minorities and the less-serious matter of John Bolton’s book – House Democrats passed a $3 trillion aid package whose most meritorious component was about $1 trillion in economic relief for the states. Other elements, such as a six-month extension of the $600 additional federal unemployment stipend, were dead on arrival when the legislation reached the Senate.

Many Republican lawmakers are skeptical of a bailout that would not just cover state losses from the pandemic, but also serve as a do-over for varied state fiscal sins, notably unfunded pension promises and bloated government payrolls. Their point is valid. But they have little choice but to do something – a significant something – anyway. States lack the fiscal printing press and unlimited credit line that Washington has already tapped in its earlier relief measures. The hit they took from the pandemic was real, big and not their fault.

For all the chance they have of coming true in a world without Westeros, Cuomo’s vision of $61 billion in free money to New York and California’s dreams of enough largess to avoid any substantial cuts to its vast budget might as well include a three-eyed raven. Whatever help states do get from Washington is probably going to be a mix of appropriated money with strings attached and loans like the ones that are already keeping some state unemployment funds in business.

The virus that caused all this destruction is as unthinking and relentless as an army of the reanimated dead. It can be defeated, but victory will cost a lot of gold and a lot of lives. A dragon would certainly come in handy.

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