Economic Recovery From the Coronavirus Pandemic

Sebastian Mallaby, senior fellow for international economics at CFR, and  Brian Sigritz, director of state fiscal studies for the National Association of State Budget Officers (NASBO), discuss the economic status of state and local governments as a result of the coronavirus pandemic and how it affects the standing of the United States in the global economy.

FASKIANOS:  It's great to have you join us for today's Council on Foreign Relations State and Local Officials Webinar. I'm Irina Faskianos, vice president for the National Program and Outreach here at CFR. We're delighted to have participants from forty-four states and territories with us today. We thank you for taking the time from your busy schedules to join us for the discussion, which is on the record. As you know, CFR is an independent and nonpartisan organization, think tank, and publisher focusing on U.S. foreign policy. Through our State and Local Officials Initiative, we serve as a resource on international issues affecting the priorities and agendas of local governments by providing analysis on a wide range of policy topics. CFR is also publisher of Foreign Affairs magazine.

We are delighted to have Sebastian Mallaby and Brian Sigritz with us today. We previously shared their bios with you so I'll just give you a few highlights on their distinguished careers. Sebastian Mallaby is the Paul A. Volcker senior fellow for international economics at CFR. He is a contributing columnist for the Washington Post where he previously served as a staff columnist and editorial board member. He's author of several award-winning books, including The Man Who Knew: The Life and Times of Alan Greenspan. His research covers a wide variety of domestic and international issues, including central banks, financial markets, and the intersection of economics and international relations.

Brian Sigritz is the director of state fiscal studies for the National Association of State Budget Officers (NASBO) in Washington, DC. He tracks the fiscal health of states as well as tax revenue trends, transportation, energy and disaster response issues. Previously, he held roles in state and local government in Ohio, including legislative aide in the Ohio senate and house and legislative liaison to the mayor of Dayton. So welcome to both. I'm going to turn the discussion over to Sebastian to have a conversation with Brian and then we'll go to all of you for your questions and comments and to share best practices. So Sebastian, over to you.

MALLABY: Thank you, Irina, and thank you to everybody who's joined us on this call. Brian, I want to start just by asking you to give us a bit of the lay of the land. There was a lot of gloomy talk over the summer that state and local finances were really going to be the crunch point in terms of getting a recovery going. Chairman Powell testified in Congress saying that he thought that this could really be an overhang to the recovery, just like it was after 2007 to 2009. But my sense is that there's been slightly better news recently in terms of state tax revenues. So perhaps you could just sort of bring us up to date on how you see this?

SIGRITZ:  Sure. I think we can even take a step back further than that. Before this downturn, states were in a relatively strong position. We've seen strong revenue and spending growth the past few years, you know, even fiscal 2020, which most states just completed the end of June, fiscal 2020. Before the downturn, most states were still seeing revenues come in above projections. Rainy day funds were at an all-time high record level. So states were in pretty, you know, good fiscal condition, fiscal shape. It took a long time from the Great Recession for states to fully recover to the positions where they were before. And actually, state revenues, if you adjust for inflation didn't get back to pre-recession levels until fiscal year 2018. So it shows you how long it can sometimes takes days to recover, especially after a significant downturn which the Great Recession obviously was. So then when the pandemic hit when states started to see the impact around March or so, states started doing the shut downs. Different states were impacted differently and to different degrees, although all states were being impacted. Some of the variation was based upon their tax structures if they're more reliant on sales taxes or personal income taxes. Oftentimes we see a decline in sales taxes show up before we see the declines in personal income tax. It’s just the way that income taxes are reported and not reported as often as sales taxes are. Looking at states economies, the hospitality and tourism states are impacted significantly your Floridas, your Hawaiis, Nevada, states like that. Yes, the oil producing states are dealing both with decline in oil prices along with that downturn in the economy overall. So states like Alaska, Oklahoma, New Mexico, some states like that, the manufacturing states were hit pretty significantly. Manufacturing, we've seen a slowdown. Manufacturing is obviously not one of those industries that’s easy to do from home. So but we now see a little bit of an uptick in the manufacturing side.

So we're seeing all states being impacted. But, you know, I think there's definitely a lag. And we're still dealing with some of the lags and seeing the impact and revenue collections for states. We have seen some slowdowns, but perhaps not as significant as what people were assuming in March or April. I think there's several different reasons for that.  One is because of the stimulus measures that were passed by Congress and signed by the president that have helped to prop up the economy. You know, things like business loans, additional unemployment assistance, some of those measures have helped prop up consumer spending. And some businesses haven't seen the impact that they would have without those stimulus measures. So the decline in states’ revenues are so closely aligned with the national economy. And you know, we haven't seen the full impact yet. But moving forward, we are expecting to see more declines in revenues, and we're expecting fiscal 2021 to be worse than fiscal 2020 was for states.

MALLABY: Brian, to sum it up. I mean, if we looked at the emergency fund level, across the states, and compared that to the expected deficits, how many more proportionally the states are going to really run out of emergency funds, and have to cut?

SIGRITZ: Yeah. States’ rainy day fund levels, although they're at record highs, won't be enough to fully cover the revenue shortfalls, which means states will have to turn to other actions, including budget cuts, personnel actions, which they already have.

MALLABY:  Will this pinch next year, or when do you project that it will hit?

SIGRITZ:  Yeah, we're already seeing what we saw last year in fiscal 2020. We're still seeing it in fiscal 2021. We're expecting more states to have to make mid-year budget cuts as we progress through this year. You know, during the last downturn, we saw thirty-five to forty states make mid-year budget cuts, you know, so it's likely that we could potentially see a number that high again.  This is going to depend on, you know, what happens at the national economy. If there is a second wave, the outbreak gets worse. And also what happens at the federal level, if there's additional aid to states, it will lessen the need for spending cuts, although we still expect the states have to make spending reductions even with additional federal aid.

MALLABY: You must be following that political question about the likelihood of additional aid to states. Is that your sense that if that's going to come, it will be after the election?

SIGRITZ: If you would ask me that a week or so ago, I probably would have said yes. Now, it seems like there's some chance once again, that Congress might act here in the next week or so. Speaker Pelosi and the House Democrats just released a new proposal, just yesterday, where it's less than what their original proposal was, but still well above what the Senate has been discussing. It seems like the president’s administration is looking at level a little bit above what the Senate is looking at. But still, you know, less than what the House is looking at. So there's still only, you know, quite a bit of ground that make up, but, you know, there might be, you know, some political pressures and moderates, you know. And in both parties there has been some discussion once again, especially the past few days about the possibility of, you know, another stimulus package, which would hopefully include additional aid to states and localities.

MALLABY: And if you were to divide the country, a bit crudely into red states and blue states, in terms of who controls the governor's mansion and also the state legislature. Would you say this is an economic hit that has been bipartisan? Has it hit blue states more than red states?

SIGRITZ: Um, no, I mean, it's definitely hit states in different ways and different magnitudes. But you know, Florida as I mentioned, really saw it with their sales tax, you know, dependence. I saw it with the decline and hospitality tourism. Texas has been impacted as well, and of course New York. You know, blue state, but, you know, with almost full closure of New York City in New York was significantly impacted. But some of the states in the middle part of the country probably see a little bit less of declines in some instances. But, you know, even though most instances seen decline.

MALLABY: What would be an example of a state that was relatively not so much hit?

SIGRITZ: Yeah, I'd say some of the, you know, agricultural states, your states like Nebraska or Utah, some states in that kind of that area of the country that typically don't see much revenue volatility in the first place. Some states, just because of the way their economy is structured, don't get the high increases in revenue in the good times, but they don't see it's larger than the declines in the bad times. A state like California, say, relies so heavily on high-income earners and capital gains during the good times. They see significant increases in revenues, but during recession, they can see sharper revenue declines. So there's a lot of states kind of in the middle part of the country, which don't see that level of volatility.

MALLABY: I read somewhere, and you'll correct me if I'm wrong, but I read that the total layoffs at the state and local level already exceeds 1 million workers, 6% of the workforce. It's more than it was in the five years after the great financial crash. So that feels like a lot. And there is this irony isn't there? Precisely the time when the Fed has cut interest rates to pretty much nothing, and it's super cheap to borrow money to do infrastructure investments, the states and the cities are having trouble seizing that opportunity to borrow the money to stimulate. And you know, if one was to look at it, from outside the U.S., I mean, I'm speaking here as a both British and American working for CFR, but right now speaking to you from London. It is an irony that the U.S. has this advantage of the world's reserve currency, and the ability to borrow and the ability to cut interest rates as much as it has. And yet, it's not making the most of that source of potential power by using this moment to do infrastructure, which would be both a stimulus for the economy when we need it and also something you could afford, because of low interest rates.

SIGRITZ: Yes, I mean, we've seen a few states that were doing ongoing spending for infrastructure projects, and now discussing shifting over and borrowing for them. Instead, we sometimes see that during a downturn where states will borrow more from infrastructure than they typically would, but we haven't seen a large uptick in new debt issuances so far for infrastructure, real expansion of that. And even during the Great Recession when  in the years following it, when the interest rates were low, there is still a hesitancy at the state level to take on additional debt. Even you know, in a lot of ways probably would have been favorable, with rates being so low. So, we'll see what happens moving forward, we've seen a lot of refinancing, states taking advantage of the low rates in that regard, but as far as their proposals for large new infrastructure spending, we haven't seen that yet. And part of the reason is, it does take a while for infrastructure spending to ramp up. There's other ways to stimulate the economy that have a more immediate impact than infrastructure spending, even though long term it can be very beneficial.

MALLABY: So Brian, and I could ask you more questions, but I'm conscious that a lot of people have called in to listen, and I'm sure they've got questions. And so I'm going to hand it back to Irina, who can moderate that Q&A.

FASKIANOS: Great. Thank you. So let's go now to all of you if you want to raise your hand by clicking on the participants tab at the bottom of your screen, or if you're on an tablet, click on the “More: button and raise your hand there. You can also write your question in the Q&A box. Jill Oberlander, a selectman from Fairfield, Connecticut, wrote a question asking if you could talk about the additional costs borne by hospital systems and whether the Medicare/Medicaid budgets will be supplemented by the federal government to cover these additional costs and loss of revenue from fewer elective procedures.

SIGRITZ: Yes, so as far as Medicaid at the state level, we have seen an increase so far on the F map, which is the federal Medicaid funds going down. The states were basically increasing the amount that the federal government pays for Medicaid. Medicaid costs are split between the states and the federal government. So as of now, the federal government is picking up and increasing the share of what they normally would pay.  That is set to expire whenever the public health emergency at the national level is declared over. So there's some uncertainty right now for states when that might be. It makes it kind of difficult to plan on how much longer they're going to gain the additional Medicaid. As far as the CARES Act funds, which was the large stimulus bill providing 150 billion to states and localities. Some of those funds have been used to help deal with the public health emergency providing additional funds to hospitals and other things. But,  moving forward here remains a concern. States and, you know, the country is also responding to the pandemic, but  as states balance their budgets moving forward, you really have to go where the money is, in four states, the money is in the areas of education and health care, infrastructure and corrections. So, you know, it is likely that if additional federal aid isn't provided, we will see cuts in those areas, including in Medicaid.

FASKIANOS: Okay, I'm going to go to Jackie Manz. And please say who you are in what seat you're, you represent or where you live.

Q: Thank you. My name is Jackie Manz. I live in the city of Lake Oswego. I'm council president, City of Lake Oswego. As everyone is well aware, in Oregon, as up and down the West Coast, we are experiencing A fire season beyond any belief that we would have had even ten years ago. How do we look at that, from a budgetary standpoint, from help from the federal government with all of your respective crystal balls? And what should we be looking at locally, statewide, region wide in order to address what will probably be an ongoing problem? Thank you.

SIGRITZ: Sure, as with any disaster, the response is a combination of federal, state and local. The federal government's role is largely dependent on if it’s declared a national disaster, a disaster declaration. You know, that's the most typical way that additional federal aid is provided. Sometimes it can be separate appropriation bills. And, states and localities will pick up the remaining share, depending on how much of the role the federal government's going to be playing. Yeah, I think a lot is dependent on how much there's a disaster declaration and how much the federal government is going to be providing. FEMA has already been involved in responding to the pandemic overall. So, there's a question of how much funding FEMA has available for responding to some different natural disasters, and there needs to be another appropriation from Congress to provide more funds for FEMA. There's another hurricane, the wildfires are already very significant. So they're responding to the costs, there's a possibility that there might need to be additional FEMA funding provided here moving forward. So, I think it remains to be seen, how it's going to play out with who picks up what percentage of the cost and how, from a budgetary side, the different levels of government respond to the fires that have taken place.

FASKIANOS: Great. I'm going to take a written question from Jess Edwards, state representative from the New Hampshire House. Are you aware of any states that have recently raised their income or business taxes have achieved their expected revenue or attracted new people or businesses to move to their states?

SIGRITZ: Yes, so far. Since the downturn, we haven't really seen too much in tax increases especially broad tax increases. We've started to see some discussion of it now. And you know, we'll probably see more of it next year. Typically increasing taxes isn’t a first response for states during a downturn, they initially look more towards cutting spending, personnel actions, using rainy day funds, in some instances, and then might turn to tax increases later on to ensure that their budget remains in balance. So, yeah, we now have started to see some discussion of things like increasing millionaires taxes in some states. But so far most of it, the action we have seen has been things like efforts to try to expand sales tax base somewhere or increase, start taxing vaping products, that sort of thing. We really haven't seen broad based tax increases.

FASKIANOS: I think this one might be for you, Sebastian, it's anonymous. But what about the massive amount of money printing and central banks putting those dollars into the market? It seems like the market is not a good reflection of Main Street with business laws, how do we gauge or predict the economic future and revenue flows?

MALLABY: Well, that's a great question. I mean, I wrote a piece in Foreign Affairs this year, called “The Age of Magic Money.” And it was kind of about this post-COVID crisis response to the Federal Reserve, to create enormous amounts of money, and then basically lend it to the government. So the government gets to spend it. That's the federal government. Of course, the thing which would normally have disciplined the central bank, and prevented the Fed from doing that, would have been the fear of inflation. And the weird thing is that inflation across the world, not just in the U.S., has been extraordinarily low. And so without that fear of inflation, it's been possible to create enormous amounts of money, that money shows up, first of all, in asset prices, with the bond market and the stock market, have been very resilient, as you know, through this crisis. And it doesn't necessarily filter through into, you know, job creation in the real economy quite so visibly, although it's a net positive. So what I would say is that, yes, the Fed’s policies do create a big gap between Main Street and Wall Street, between the financial economy and the real economy. The real economy is still somewhat better off because there is a stimulus that filters through. And the whole game is dangerous. Only if we get inflation. Until there is inflation, the Fed can sort of do this and get away with it, as it did after 2008 people expected lots of inflation when the Fed went to quantitative easing for the first time, it did not materialize. Unless it does materialize, I think the Fed is doing the right thing.

FASKIANOS: Great, and I'm going to take the next question from Gary Scarpello, Commissioner of Upper Dublin Township in Pennsylvania. Do you see an economic crash or slow down coming as reported in some of the media? If so, what do you see? How do you see that will impact local government? So probably both could answer that one.

SIGRITZ: Yeah. You know, I can't speak as much about municipalities at NASBO where we cover state specifically, but I think a lot will depend on what happens if there's more of an outbreak or what plays out with the national economy as a whole. I mean, speaking specifically about states, we do expect another several years of tough decisions for states and looking at painful cuts. We typically see a lag after a recession ends, where states are still making cuts for a number of years after the end of a national downturn. And we expect that to take place again this time around. The cuts become more difficult as you move forward too, if you've already made spending reductions and then you're cutting from a lower base, that becomes more difficult. So, moving forward here, we're expecting states that are continuing to have to look at actions like spending cuts, the possibility of raising taxes, using the rainy day funds, and I think a similar picture will play out at the local level. Locals rely on different revenue streams than states and in a lot of instances they rely more heavily on property taxes. So there are some variations but definitely during the Great Recession, localities are hit as hard if not harder than states. So I think you'll see a lot of a lot of tough years for localities to move forward here as well.

FASKIANOS: Let's go to Fonda Brewer as she's raised her hand, if you please unmute yourself. Tell us who you are. That would be great.

Q: Hi, hello, can you hear me? My name is Fonda Brewer, and I’m in Lansing, Michigan, and I am a Delta Township trustee. But my question is, do you see any federal funding or resources to support the current Diversity, Equity and Inclusion needs around the states, especially when it relates to maybe re envisioning policing, or with inequities in health care and homelessness and judicial area? Any special funding? Do you see coming to the states to help with some of these issues? Thank you.

SIGRITZ: I'm not aware of funding at the federal level targeted specifically for that. At the state level it definitely varies by states, but I have seen different states take up various police reform commissions and other efforts, kind of along the lines of what you’d discussed. Some legislators are still debating those sort of issues. So we have seen action at the state level, regarding that, you know, how much funding is provided. And, it's going to be a different question, versus others changes they're examining, police practices and that sort of thing, but not at the federal level. I'm not aware, there may be efforts that I'm not aware of. Additional federal aid is provided to states in if there's more flexibility as far as what states can spend it on, you might be able to see states put more money into that. In the CARES Act states were required to only use the funding, states and localities both are required the only use of funding, specifically to respond to the pandemic and the public health emergency. So there wasn't a lot of flexibility as far as what they can use it for, for other purposes. But, there's a chance that additional aid may be more flexible than what we saw in the CARES Act.

FASKIANOS: Okay, let's go to a written question from Karen Welch. What is the likelihood of a significant infrastructure-funding bill in the future? And from Keith Kang: Are you expecting a  K-shaped recovery?

SIGRITZ: I'll take the infrastructure one, and there's Sebastian can respond to the second if he wants to. Honestly, I think the chances aren't the best right now. I mean, for a number of years it seemed like there might be an appetite for another infrastructure bill with both Republicans and Democrats talking about the importance of infrastructure. The president himself talked about the need for additional spending for infrastructure, but yet, we haven't seen any action in that regard. Right now they're looking at renewing the bill that supports the highway trust funds spending, I think. Last I heard they're looking more for a short term extension. So I don't think the outlook before the elections is good for any broad infrastructure package. Possibility after the election and after things hopefully settle down some. But now, before the election, I don't see any kind of major infrastructure package.

MALLABY: On the shape of the recovery, and I just say that, you know, the beginning there was hope of a V-shaped recovery, where you go down really fast, but you come up really fast as well. I think that was predicated on a sense that, you know, COVID would be much less long lasting than it's turned out to be. And then there was the Nike swoosh theory: so you go down fast, but then you come up gradually, gradually, gradually, and then maybe around the time when production gets back to 90% of what it was, you sort of get stuck there for a bit. Because even if the government isn't forcibly telling people to stay at home, there were certain activities like going on cruises or certain vacations or going to movie theaters that people just aren't going to do because they're worried. Until there is a vaccine, you only have a 90% recovery. So that was sort of the Nike swoosh thing. I think the letter that I'm hearing more about than K is W. Right? So you go down, you go up a bit, but not all the way. And then a second wave hits and you're down again. Then maybe there's a vaccine, and hopefully we're up on the last leg of that W.

FASKIANOS: Thank you. Alright, so I've got two questions. Let's see, from Counselor Randy Lauer in the Portland, Oregon metropolitan region talking about that, you know, they're dealing with economic devastation from the pandemic, stemming from the shutdown in the economy. Many long-standing businesses have shuttered for good because of this tragedy. So can you talk about the reasoning behind why in some states are more stringent and others are more visibly loose with the regulations? Why these are drawn around whether the state is blue or red? The city of Troutdale, where I'm elected is 16 miles east of Portland, and yet I have family in Utah where they are just amazed how shut down our economy actually is. And then sort of a follow up on that is, do you either of you foresee a similar shutdown for the upcoming flu season? And that's from Counselor Randy Lauer.

SIGRITZ: Um, yeah, I’ll try to take that question as best I can. You know, I think there's a lot of different factors that went into play with deciding about the shutdown in terms of level of strictness. Obviously there are clinical decisions that are being made, based upon how bad the pandemic was, in those particular areas. You know, what we have seen for sure is, there's been different ways in different states have been impacted different times like, New York and Washington State were obviously impacted very early on, and we started to see more outbreaks in the South. And then, as that happens, new restrictions taking place. Right now, it seems to be that the Midwest has become a little bit more of a hot spot in some areas of the country where we hadn't seen as much are now starting to see an uptick. So there've been variations among states as far as when they've seen more significant outbreaks, and I think those largely impact what states have been doing as far as issuing the different guidelines and restrictions on whether businesses should be open or closed, and I’ve forgotten the second question.

FASKIANOS: I've got down, similar shut down during the flu season?

SIGRITZ: I mean, I can't say too much on that. I think overall, there's been some discussion and it’s going to be difficult to tell in some instances if it's the flu or if it's coronavirus, based on the symptoms and concerns. And as we move into the winter months and people are indoors, there may be more of an outbreak. So, if there is more of an outbreak I do you think it could lead to some stricter rules once again, and possibly in areas that had previously loosened restrictions.

MALLABY: Clearly, we have the flu season every year, and we don't lock down every year. So I think if there is more lockdown to come, it's really COVID. COVID may be exacerbated by interactions with the flu. If you've got both at the same time, that's going to be particularly bad. Flu obviously can depress your immune system, so you're less in a good state to resist COVID. So there is an interaction between the driver of a potential second wave of lockdowns is a second wave of Coronavirus.

FASKIANOS: I'm going to go to Dennis Patterson next, he raised his hand and he also wrote a question. So you can ask it yourself. Please unmute yourself.

Q: Hello, this is State Representative David Michel with my good friend Denis Patterson, who is a board of reps member in Stanford. My question is, it's a comment mixed with a question, is we know we're going to need to create jobs. And we've got into bids with the offshore wind. However, if we if we let the developers pick the techniques, we could produce as low as I think it's 28 times less the amount of jobs here while they would be creating more jobs in Europe. And although I have a French accent, my home is here and I really dream of, I really hope that a lot of people in the business community understand that we still have a choice, we have a small window of opportunity. But pressure needs to be made to push for the developers to adopt the technique that would not only be really protective of the marine ecosystem, but also create 30 times the amount of jobs. I think it's important that the business community knows that labor is obviously looking for jobs. So it's, we have an opportunity there that would actually fit in the description of what a Green New Deal is. So I just wondered if you've heard through the business community about this potential with the offshore wind, I know that they're talking about the jobs they're creating by using mono-piles. But by doing concrete gravity base, we could up the number of jobs, I think, more precisely by 20 times the amount of jobs, and that's coming from industry and environmental lawyers and other people from Europe. They've given me those figures. Thank you.

SIGRITZ: The particular proposal, what you described specifically, I'm not familiar with. You know, I would say that, before the outbreak, we were seeing increased interest at the state level, as far as issues concerning climate change and clean energy. And in a lot of instances, it was both blue and red states. We also do some readings of the State of the State speeches. And a lot of the State of State speeches were done this year before the outbreak of coronavirus in the U.S. So, we've heard governors emphasizing the need to expand clean energy and address climate change and various different proposals. So, yeah, I don't think this is an issue that's going away at the state level. And in some instances, it may even get placed on the back burner. In some other instances, as we're looking to recover the economy, it might be that some of these different efforts like one you're describing may be something that states look at more than they have in the past.

MALLABY: I think the question does point to the complexity of a Green New Deal, you know, is the new deal about being the New Deal? Or is it about being green? And sometimes those two things are not the same, you might achieve a lot of environmental progress with one type of project, but then achieve more employment by a different type of project. And I think part of the challenge for people who design these projects, is precisely to clarify that choice. I think Green New Deal is a politically appealing term, because it sort of avoids the conflict between the two. But when you actually get down to doing programs, you have to make choices. And you have to choose how much you're trying to be green, and how much you're trying to create jobs.

Q: Right. I mean, in our case, the ratepayers would pay maybe an additional 1%. So when you talk about seven cents a kilowatt, it's really just at the beginning, and then you create this huge infrastructure, and we could be in the Northeast, leading the leaders in offshore wind, and now would be with the pressures of creating jobs would be, I think, a great opportunity. And solar, for example, we have a special session tomorrow. And we keep asking leadership, can we put in something about a solar energy bill, and we know that if we just put a small amendment with no fiscal note to the state, we could be creating, helping creating 500 jobs. I mean, you know, we have to create jobs and where we have these, we have created this area where we have opportunities right now, without politicizing, just creating the jobs and doing what's right for the state. And then as well as at the same time for the environment. Thank you very much, by the way, thank you for organizing this. It's great.

FASKIANOS: Thank you, just to continue on that track, Charles Knutson asked, what countries or states have already done an effective job at economic stimulus to rebuild from COVID-19 while simultaneously tackling climate change? That's a big one.

MALLABY: Maybe I could just make a general framing point here, which is that, you know, doing something about green infrastructure and tackling climate change, that is a long process. And we're talking, you know, at least five years more like ten years, and to really see, you know, big changes in the energy mix. As a result of investments in research, these things take a long time to design and then to roll out and then you have to not only build them, but sort of get them distributed into the way people live and the choices that they make. And it's not an instantaneous thing. Whereas coronavirus, I hope, is something where, you know, there'll be some sort of vaccine in the first quarter of 2021. The first wave of those vaccines will not be at all 100% effective, and there'll be plenty of people who don't want to take the vaccine. So I'm not minimizing the difficulty to the rollout, but you know, I see coronavirus as a big, big problem for, let’s say, the next twelve months, whereas I see the climate challenge as something that I think about over ten years. And so I think that this is a mismatch between seeing green investments as the best solution to COVID.

FASKIANOS: Okay, so we have several questions about restructuring local or state debts. A city council person in Marin, California said they've had some success, restructuring pension debt with pension obligation bonds. Somebody else has said: do you have any tips on balancing our budgets in small cities? Like mine, who are struggling with this? And I think I'll stop. I'll give just those two together.

SIGRITZ: As far as the pension side, pension obligation bonds, Kansas, I believe, did that a year or so ago. You know, overall, we've seen a tremendous amount of pension reforms in states since the Great Recession. And, forty-five or so states have done various different reforms, including increasing employee retirement ages, changing COLAs, increasing employer contributions, increasing employee contributions. In some instances, the changes that the states have made may only apply to new hires, either based upon decisions that the legislature and the governors made or because of different legal restrictions that made it difficult to go back and change the rules for current employees. So, overall states continue to face pension underfunding issues. It's kind of three different levels. I'd say for states, there's four or five states where it's a very significant issue. There's a majority of states that are facing some pension underfunding. But it's not as significant as it was for those four or five states. And then there's also a handful of states that are in pretty good shape as far as pensions. But you know, as far as coronavirus, I think the thinking was initially that you will probably see more stock market declines, which would negatively impact pension funding. Although, the stock markets that went down earlier this year had recovered, I believe, all of its losses, but now it's down a little bit. Someone can correct me if I'm wrong on that. A lot of states still ended this past fiscal year okay, as far as meeting the expected rate of returns for pensions moving forward here. If the stock market takes another nosedive, that would impact pension funding moving forward, so as long as pension underfunding is an issue states continue to look at, they're going to have to continue to address it.

FASKIANOS: Okay, so, two questions, what lessons can we learn from the 2008 financial crisis to help manage potential budget cuts, while also working to ensure a relatively speedy recovery? And what more can/should the Federal Reserve do to help local and state governments beyond the MLF (Municipal Liquidity Facility)? Is there a way you can see them doing so without congressional approval? I think you maybe Brian, you could take the first one. And Sebastian, you could do the second one about the Federal Reserve?

SIGRITZ: Sure, yeah. So, on our website, www.nasbo.org, we have a report: lessons learned from the economic downturn, I believe it was. And that interviewed state budget directors after the Great Recession. I believe it came out in 2013. And we have some various information on there about how states handled spending cuts during the downturn. When to use rainy day funds. You know, a lot of instances we saw states not use a rainy day funds up initially. Turn to spending cuts and use rainy day funds after they’d already taken other actions to kind of make sure the budget remains in balance. So, a lot of different helpful tips in ways that states handled it during the Great Recession, and thinks about ways that they might have handled it differently. And I think a lot of those lessons learned from the Great Recession will be relevant here moving forward. Yeah, as far as the MLF just real quick, Sebastian might go into more detail, but we haven't seen too many states express interest yet at the state level, it's only been a handful. But, you know, some states have had the ability. It seems to be states that have some of the lower credit ratings, those have been the ones that have shown more appetite for it. Versus some of the states have higher credit ratings where they haven't found the terms to be that favorable, or seen the need to turn to  the MLF.

MALLABY: Yeah, well, the MLF or the municipal liquidity facility is offering, you know, $500 billion worth of purchases of local debt, basically. And by buying that debt, the Fed obviously will increase the borrowing capacity of local governments and state governments. And to me, the parallel here is that, after 2008, the Fed was aggressive in creating money through quantitative easing. But the federal government was not so eager to use that Fed window, to increase the national debt and increase the budget deficit. So there was a period of fiscal stimulus with the 2009 stimulus package at the beginning of the Obama administration. But then that was not sustained. So as you look at the recovery, which was a gradual and painful one, from the financial crisis, the burden was borne by central bank action, as opposed to by a mixture of central bank action and federal government willingness to run a budget deficit. And, you know, Brian knows the details of the state level finances better than I do. But my sense is that when the states do not take up this invitation from the Fed, to, you know, use the MLF, therefore, to be able to spend more locally, by using the Fed’s invitation, we're kind of running a repeat of the mistake in 2010-2011. In these kinds of times, when you've got a huge external shock, on demand, and you need to create jobs, you need to keep businesses from going under because they'll be good businesses once COVID has gone, but they have to survive through the next year. Now is the time I think, to say, you know, we can afford to do stimulus, we can afford to have the Fed buy state and local bonds and use that window of opportunity for state and local governments to refinance their debt. And spend more. And it’s too bad that there is a reluctance to grab that opportunity.

SIGRITZ: And real quick, at the state level, we have found too with some states, concerns about how borrowing from the MLF might tie in with some of the laws already on the books as far as barring restrictions, long term debt, you know, being required to be gone, for not ongoing spending. And, you know, how that’s to be repaid. So there's some hesitancy, I think, at the state level, for some states, how the MLF kind of coincides with laws already on the books at the state level as far as borrowing restrictions.

FASKIANOS: So Sebastian, I'm going to give you a chance to respond to somebody who wrote a response to your response on climate change, saying that putting the issue of climate change on the back burner is not the way forward and time will confirm this. So I wanted to give you an opportunity to respond, and clarify your point.

MALLABY: Yes, yes. Thank you. Well, so clarify is right, because I don't disagree with that. I'm all for prioritizing a green infrastructure push. I'm just saying that's not necessarily the right tool to think about when you're looking at an economic downturn, which is probably going to last another twelve months maximum. So, you know, by all means, go for green stimulus. We need it for climate change reasons. And some of the stimulus, if you're doing it for green technology, or green infrastructure, probably will be spent in time to help in stimulating the economy over the next six to twelve months when we're worrying about COVID. But we should just bear in mind that much of the job creation from this green stimulus, and much of the extra spending will take place beyond the envelope of one year. That's all I'm saying. So we may need additional other shorter-term stimulus actions to counteract the downturn that we've got immediately.

FASKIANOS: Great, thank you. So we had a question from State Senator Larry Crowder in Colorado, about the additional federal funding, not in sight, what would be the impact on the nation when this funding exceeds the GNP? Would at this point, would at this point, create inflation and make the situation worse? And then there's another question on that point. Would you speak to the consequences of the historic drop in the GDP? So I'll pair those two.

MALLABY: I would say that, you know, at a time when unemployment has been pushed up as a result of COVID, therefore, households’ confidence and spending is weakened. At a time also, when businesses have been hit by COVID, therefore, business spending and business investment are weaker. And you do need the public sector to spend more to offset that fall in private demand. And the way you get inflation is too much money chasing too few goods, and there isn't going to be too much money doing the chasing if the private part of the economy is kind of, you know, hiding his head under the nearest bush. So, this is something which is a fair debate, different economists have different views, my feeling is that there is no immediate risk of inflation. And that furthermore, if inflation did start to rise above the 2% target, the Fed has already said it would tolerate that for a bit. But I'm sure that if it was to carry on, the Fed would reverse course, it would rein in the stimulus, and it would be able to control the inflation. The worry is that the reining-in would cause the Fed to raise interest rates. That's how the Fed will do it. And with higher interest rates, the very large national debt becomes more expensive to service. And so I think, you know, we have to balance risks here. To my mind, the greater risk is a deeper depression, because we don't stimulate rather than worrying about a big outbreak of inflation, which is a hypothetical.

FASKIANOS: Brian, anything to add before we go on?

SIGRITZ: No. I don’t think so.

FASKIANOS: Okay, I've got two from Senator John Michael Montgomery. Are states and subdivisions again enhancing future deposits to rainy day funds as the lesson learned, or is it more prevalent to focus on the sort of tax increases? And from Mary Perkins Williams in North Carolina, when many department stores are visited, one finds the shelves are skimpy. Will goods and services return from overseas? Or, will the United States bring consumer products back to the United States?

SIGRITZ: As far as the rainy day fund issue, you know, right now isn't the time where we'd be expecting to see states increasing the size of their rainy day funds. Right now, we're expecting states to be turning to the rainy day funds. We saw that during the Great Recession where states used the rainy day funds as you would expect. You expect the building-up during the good times and drawing-down during the bad times. And I will say that, yeah, I do think it was a lesson learned during the Great Recession, where if you look at states’ overall state rainy day fund levels, this year before the pandemic, were well above what they were going into the Great Recession. So states have made a concentrated effort, especially in the past year or so with additional revenue, to put more into rainy day funds. And we've also seen a number of still two or three states that didn't have rainy day funds up to a couple of years ago. Now, all states at least have some form of rainy day funds. So it is something that states have been prioritizing more. But you know, in the next year or two, I wouldn’t expect to see states depositing too much more into the rainy day fund. Maybe there will be some exceptions, but once the states come out of this, they will once again work to rebuild the rainy day fund levels to what they were before.

MALLABY: And I think we should just underscore here that, you know, Brian in his very subtle way, has delivered a big pat on the back to everybody on the call, right? You're saying that rainy day funds were in fact built up as they should have been before COVID. That's a big achievement. So kudos.

FASKIANOS: Wonderful. All right. So let's see. What kind of impact will be on the service community who normally make revenue to survive through winter with capacity kind of 50% or so will they survive through winter? Or is winter when the impact really hits? And that's from Jason Chappell in Transylvania County in North Carolina. He's a county commissioner.

SIGRITZ: Um, yeah, no special assignment. But definitely, I think, you've seen more of an impact on certain segments of the workforce than others, and the services industry has been one area that has been significantly impacted. I would expect to see that moving forward here. As we go through the winter months, unfortunately, I don't think that is something that’s going to change. You know, I think that's part of the reason we'll have to see what happens on the federal level as far as if another stimulus package is passed, that would include enhanced unemployment benefits, and some of the other measures that might help people in some of those areas of the workforce.

FASKIANOS: So I'm going to take the final question. And there are so many questions in the chat box, and in the Q&A box, and raised hands, and I'm sorry that we couldn't get to you all. We're going to just have to continue exploring this subject in future webinars. The final one comes from Steve Tulowitzki, town councilman of Munster, Indiana, and he writes, economist Paul Romer said that a crisis is a terrible thing to waste. What perhaps counterintuitive, or once in a lifetime opportunities might we be on the lookout for to improve our communities during this crisis? So Brian, why don't we start with you and Sebastian, I would like your thoughts as well.

SIGRITZ: Sure, I think after the Great Recession, what we saw was a number of different reform commissions and streamlining commissions looking at new ways of doing things out of necessity. So I think you'll continue to see and, you know, kind of reevaluating how state governments operate, ways that they might be able to reduce spending. Of course, this question of how permanent is the shift, people teleworking more, how that will impact states moving forward, there’s been some discussion if states will need less physical buildings. There is the counter that people will need more office space, you won't be able to do the cubicles or the hoteling. And some things, I think there's some debate that states will be able to reduce their physical footprint. But yeah, I would expect to see some new ways of going about running state government and new programs and new initiatives and coming out of this.

MALLABY: My answer, Irina, is not really about economics, or politics. And it's actually that I think that the learning that comes out of COVID is more psychological, maybe even spiritual. And, you know, I think we're all being put in a position where we think about mortality more. We value people who work in service, whether it's in medical services or in social services, because we're more aware of human suffering. We may be spending more time with our families than we would have done. We don't travel. We’re locked down at home some of the time and therefore, compelled to interact together more. This is sometimes challenging if your child is seven and would normally be at school, as Irina was saying before we got on this call. But there's also an upside, right, in in how we all relate to each other. So I would offer that as the learning opportunity. Even though Paul Romer is an economist, I think he would recognize that type of answer too.

FASKIANOS: Wonderful. Well thank you both very much for taking the time to being with us and for all of you for your great, great questions and comments. And again, I'm sorry that there are so many still raised hands and unanswered questions, but we will try to address them in weeks to come. So again, you can follow Brian at the National Association of State Budget Officers on Twitter @nasbo and Sebastian @scmallaby. And we will send out the link to this webinar and transcript after the fact as well as some other resources so that you can all review it and share with your colleagues. And please do send us an email to [email protected] if there are other subjects you want us to explore in the coming weeks, anything we can do to support the important work that you are doing. So thank you all for what you're doing on the frontlines in your communities and stay well and be safe.

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