Rescuing States and Cities Amid the Pandemic

Panelists discuss the current state and local budgetary crises brought on by the coronavirus pandemic, policy options available to state and local officials, and implications of these crises for the U.S. economy.

ORSZAG: Okay, thank you so much and welcome everyone. We are delighted to be able to spend an hour with you. We're going to be discussing the state of state and local governments and their finances and debt. As we speak, federal policymakers in Washington are reportedly debating an additional round of federal relief to state and local governments. This is an important part of federal government activity to try to fight recessions, because state and local governments, otherwise, would tend to cut spending and raise taxes in the middle of an economic downturn, which is exactly the opposite of what you want during such a downturn. I note that the relief that's being considered is like past episodes of such relief—a fixed-dollar amount—and is not tied to the state of the economy, which some people have suggested, including me in a Bloomberg column this morning, would be a better way of doing this kind of relief, because we've learned in the past that we often face the need to come back again and again and again, and we could instead design a system in which the relief is in place as long as the economy is weak.

But we're getting a little ahead of the discussion, and so what we're going to be doing is we have a fantastic panel to sort through these issues with us. Shelby Kerns is the executive director of the National Association of State Budget Officers. Eden Perry is the managing director and head of U.S. public finance at S&P Global. And Dick Ravitch is a former lieutenant governor of the state of New York and also the former CEO and chair of the MTA. They all have significant insights and experience with these issues. We're going to start with a conversation amongst ourselves, and then about halfway through we'll open it up for questions. So please don't be shy about participating once we do open things up. And Shelby, I'd like to start with you, just to give us some sense of what was the state of states, if you will, coming into the pandemic-linked recession? How have they been faring? And what is the prognosis going forward?

KERNS: Thanks, Peter. I'm really excited to be here today. It's nice to be able to start off a little bit with the state of states pre-pandemic, because that's the positive message that we don't get to talk about very much these days. So, you know, looking backward, it's sometimes really hard to believe that it was only a year ago that governors were preparing budget proposals based upon a fiscal outlook that was extremely positive. At the beginning of calendar year 2020, when most governors were submitting budget proposals for fiscal year 2021, most states had experienced multiple consecutive years of faster-than-expected revenue growth, which led to sizable budget surpluses in many cases. In fiscal year 2019, revenue in forty-six states exceeded their projections. And pre-pandemic, thirty-two states reported to us that they expected revenue to beat their projections in fiscal year '20, which closed on June 30 for most states. They expected to have that strong revenue growth again. And that strong revenue growth had also contributed to states growing their rainy-day funds at a median balance of 1.6 percent of general fund spending after the Great Recession. And that grew to an all-time high of 7.3 percent of general fund expenditures in fiscal year 2019. Reserves—they reached at a record of more than $75 billion—were projected to continue to grow and beat that all-time high in fiscal year '20. Of course, we saw something different—we saw some states have to utilize their savings to close the budget gaps and the level of savings did decline. We've seen states be really judicious in use of the savings, because it's easier to use them and better management to use them over the course of a downturn rather than all upfront and then you just have to make those deeper cuts later on.

Another reason why states were entering this pandemic in a good fiscal position is that they had grown their spending slowly to ensure that they were in within their means. They really learned during the Great Recession that that was a wiser way to approach spending growth. So after the steep declines that we saw during the Great Recession, state general fund spending had just barely returned, in the aggregate, to inflation adjusted pre-recession fiscal year 2008 levels in fiscal year 2019. So in fiscal year 2019, half the states still spent less from their general funds than they did in fiscal year 2008 after adjusting for inflation. And, of course, then what we saw for fiscal year 2020 was quite different than that outlook that I just talked about despite three very strong quarters of growth where the majority of states were seeing revenue collections exceed their projections. State general fund revenue declined about 1 percent in fiscal year 2020, and that's the first decline since the Great Recession. And I want to stress that that 1 percent is actual revenue decline. States' budget on a projection, and in aggregate states, were expecting and budgeted based upon 3 percent growth. So that gap is actually 4 percent that we saw fall. And some of that gap was filled by other federal aid, such as increased federal matching rates for Medicaid. But 4 percent is a sizable gap to make up in one quarter at the end of the fiscal year.

I think another thing to point out just really quickly, too, is that that revenue loss was despite all that strong, temporary stimulus measures that were provided by the federal government. So we saw enhanced unemployment benefits, Paycheck Protection Program, etcetera, and all of those stimulus measures kept income and sales tax collections from falling even further. The current year, states are in fiscal year '21, and we're expecting additional revenue declines from those already depressed fiscal year 2020 revenues, given that for most states only that last quarter was impacted by the pandemic, and further, as we all know, those temporary stimulus measures are set to expire. And additionally, of course, state tax returns for fiscal year '20 reflected that strong economic activity of 2019, while returns in 2021 will reflect the weaker 2020 economy and declines in state tax collections. They typically lag the start of a national economic downturn for those reasons. There's a lag in tax collections sort of catching up to the economic conditions. But the decline in sales tax revenue, coupled with the expiration of the federal stimulus, and, you know, without additional stimulus, we expect a wave of foreclosures and job losses, leading many states to project a further decline in fiscal year 2021 in the budgets that governors will be proposing after the start of the year.

I'd probably be remiss if I didn't mention that, in addition to that expected revenue loss, states are seeing increased spending demands that further add to that budget gap. You know, we're used to seeing some counter cyclical programs, such as unemployment insurance and Medicaid increased during a downturn, but the pandemic is really creating new burdens on schools, businesses, government operations, you know, we've got testing, tracing, temporary medical facilities, and more so that the aid provided by Congress to help with those expenditures is also expiring at the end of December just as the states are experiencing a surge in cases. So it certainly has budget officers concerned as they look ahead.

ORSZAG: And, Shelby, typically, I mean, this might be a little bit of Captain Obvious, but since health care and education are the biggest parts of state budgets, is that where you expect, in the absence of significant additional federal assistance, is that where you expect the spending adjustments to happen disproportionately?

KERNS: Certainly, and part of that is, you know, I think poor states spend their money, you know, it shows their priorities, that those are state priorities, but when you have to make a big cut you have to go where the money is. So you can't really cut around the edges, you really have to hit those pots even though those are your priorities of, you know, mainly education and, obviously, cutting medical spending is quite a concern when you're in the middle of a public health crisis.

ORSZAG: Okay. Dick, state and local governments have already seen a decline of 1.3 million jobs since over the past year. What's your perspective on how much worse this could get, and what are the drivers behind this, you know, what's happening at the state and local level?

RAVITCH: Well, I think that I have to begin by reciting what the sources of revenue are. The property tax revenue is the single largest revenue that most cities receive in addition to what they get from states and what they get from sales taxes and income taxes. There is no way of knowing yet what the impact on property taxes actually is except it's going to be a staggering amount of money, because to whatever extent a landlord is not receiving rent, which constitutes in the major municipalities the majority of landlords at this point in time, that means that the assessed value of their property is significantly reduced or you need a one-year P&L [profit and loss] to file with an assessment reduction proceeding. So we have no idea what the actual loss in property taxes will be and won't know until 2022—that's probably the most significant. Sometimes New Yorkers are more familiar with it. New York, roughly a third of its revenue comes from the property tax. It will be hit dramatically in an additive function, obviously, in 2020 term. We have more current data on sales tax information, for obvious reasons, but we have less on income tax because, once again, people's income taxes are not filed until a year after the taxable year has been computed. But I think there's a whole other part of this that isn't documented in budgets. And that is what decisions of governors and mayors made to defer incurring debt for infrastructure purposes that they might otherwise feel were necessary, because they didn't want to add any debt service to their budgets given the fragility of the budgets for all the other reasons. Then there is the question of how to allocate other monies that have been discretionary and to what extent are states and cities not budgeting in a proper fashion, not budgeting in accordance with generally accepted accounting principles. Therefore, you don't know the hole in the budget in the pension funding of states and cities. You have no way of knowing that with precision at this point in time except to say that it is highly unlikely that pension fund accounting has improved significantly when all the pressures have been so great to defer them.

So I have to say that, at the risk of repeating myself, one, we all know what the numbers will be. They have got to be worse, and some of them don't reflect immediate short-term loss. It doesn't mean you're going to cut the salary of your firemen and the police, but if you don't incur a debt to build a new school that you would otherwise want to build, then that has a much longer-term implication on the ability of government to fulfill one of its major functions. And it's a very imprecise thing to measure. So I respectfully believe that federal aid should come in the form of replacing the lost revenue that cities and states received in year 2020 or 2019, even better. But some measure of what was a reasonable basis for computing a level of revenue that was deemed to be a reasonable, a properly arrived at revenue level, and putting together a budget and making sure that during the period in which the damage has devastated the economies of so many cities and states that that revenue is replaced, that the money not be used to create new programs or to enhance compensation of existing employees, but should be used to fill the hole created by the revenue shortfall as it ensures over a period of time.

ORSZAG: Okay. So, Eden, that sounds kind of dire. Why haven't you downgraded, kind of, every state and can you give us a sense of how you are viewing the predicament of state and local government and their ratings and their ability to raise debt at what are still pretty attractive rates, etcetera?

PERRY: I mean, there's a lot I'd love to talk about with Dick, there's so much in what he just said that I feel like we could spend an hour and a half on that. We did going into, I think, Shelby has a really good point, when we were going into 2020, most states and cities were in really good position financially in terms of their reserves, but we did notice with this onset of COVID that it was really a sudden stop and we saw a huge market volatility back in March and April. On April 1, when we came into the year, all of our sectors were unstable. Everything that we rate in public finance was unstable, except for higher education that had been negative outlooked for three years, and that we had ports and mass transit on negative for the year. On April 1, we moved in all of our sectors to negative. We just saw more—the sector outlook is a macro view of what we think if there's going to be more upgrades or downgrades for the year, and we felt that state and local governments would definitely be more.

Although we feel like this has a longer tail than, say, corporate debt, which would have had more immediate impacts, because the states and the local governments had more reserves and more ability to manage through the crisis. I do agree with Dick that it's primarily a revenue issue, and a lot of the stimulus that we've seen has been on the spending side and not on the revenue side. But what we saw is that the—losing my train of thought a little—is that it's been very uneven, and we think it's going to continue to be uneven. So to date, we've changed sixteen hundred ratings. It's about sixteen hundred credits. It's about 8 percent of our portfolio. And they primarily, 80 percent, have been outlook changes, and this is because the way it moves through government is a lot slower than, say, other sectors that we rate.

Also, to the sort of not really contradicting Dick, but what we've observed is state revenue collections from March through, I think, was through September, there was a 10 percent decline for some states and then a 3 percent growth year over year for some states—this is according to Brookings Institute. So we've seen wide variation across the country of how this has actually impacted state revenues. I think we've been surprised by some things like—I just read that California had a $26 billion surplus. I think this is due to the nature of the high progressive income tax and the top 1 percent being able to work at home, still being able to pay in their income taxes. So we're seeing definitely variation, and we think that's going to continue. I read your Bloomberg article this morning, I thought that was really good. It's something we've noted that states and local governments have reduced their employment by 1.3 million, that's 6.4 percent of their workforce. How much room do they have going forward if they don't get the revenues that are expected is something that we're watching. We think that the fiscal policy is really key for the future direction of credit in the municipal market, and we think things that are going to impact this for the duration of the virus—spikes and infection rates. Our economists currently are showing that GDP decline was 3.9 percent in 2020, and it won't get back to pre-crisis level until third quarter of 2021. However, if there's no stimulus and the continued resurgence of COVID cases, they're showing GDP would drop 4.4 percent in 2020 and decline to only 0.8 percent in 2021. So the stimulus is really important, we think, for future credit direction. They do show that if we get stimulus, their prediction was $1.5 billion, then the U.S. economy contracts by just 3.8 percent in 2020 and rebounds by 4.5 percent in 2021. So that'll heavily impact our state and local government issuers.

ORSZAG: So, Eden, can you comment for a second? The picture we get here is, you know, states were acting very responsibly, they built up a rainy-day fund and then the pandemic hit and boom—trouble. There's also though been, and Dick mentioned this in, you know, in part of his remarks, this kind of concern out there about the long term, not the operating budgets, but the long-term obligations that state and local governments face, especially on pension and to some degree, health-care benefits. So actually, how good was the state of state finances even going into this pandemic if you've got this looming long-term problem? And how do you see that being resolved, especially if we're, you know, it's going to take a while to recover from this downturn, and especially if interest rates remain, you know, very, very low for a long period of time.

PERRY: I think the story there is, and probably Shelby can talk about this too, it's really varied state by state. It's not like all states are in a bad situation in terms of their pension funding. We definitely have—the majority of our states are AA or higher. I think it's about 90 percent are AA minus and higher. And we have five states that are below that ranging from A down to BBB minus. And those are the states with the high-fixed costs. We have five states with high-fixed costs up for about 40 percent of their budgets...

ORSZAG: Eden, I think we're having connection problems. Why don't we go to Shelby. On that same point, which is, just maybe elaborate a little bit on was it actually so good going into the pandemic? And what is the medium to long-term prognosis for state budgets?

KERNS: Well, you know, one of the words that I feel like describes where we are now can cover that, too, and that's unevenness. You know, not all states were in the same position in terms of their long-term fixed costs. And I think Eden was making that point very well that we tend to talk about a state to maybe had problems with their long-term obligations, but that wasn't the case for all states, you know, and we're seeing that a lot right now even in our outlook going forward that there's huge discrepancies. We have states that, you know, due to the mix of their economy—tourism states, energy states, some other states with high unemployment—you know, they're maybe getting hit really hard. I'm actually in my home state of Idaho today where we're seeing growth. We're seeing very, very strong revenue growth. And a lot of that's driven by population growth, but it's, you know, that's also figuring into these aggregate numbers. All states are not being hit the same and all states didn't come in the same. So, it kind of can obscure the picture sometimes when we talk about aggregates or, you know, we tend to say states have problems with these obligations and it's not an across-the-board, you know, statement, really.

RAVITCH: If I might interject something, the discrepancies that Shelby just pointed out are another reason why you cannot look at a solution here in terms of replenishing state shortfalls versus providing them amounts of money that they say need. So therefore, you have to be very careful how you measure what the impact of the pandemic actually has been, if indeed, you want the remedy to correspond to the reason for the shortfall. Let me be more specific for a minute, Peter, if I may, and that is that if a state decides that it wants to spend less because it anticipates its revenues coming down, then what's the bogey on the expenditure side that you measure against? If they're saying, okay, we're going to reduce our fire departments by 20 percent because we don't have sufficient revenue to support them, that's fiscally prudent management. That's good budget management. That's budgeting in accordance with a gap. But that doesn't tell you what's happening to the performance of governing in the city or what the implications are to all the things that are affected by the size of a fire department. I can carry that on to every other aspect of municipal government starting with infrastructure and ending up with probably the least desirable budgetary lines it affects, which is police, and say that it's not an objective measurement just looking at total dollar amounts of revenue and total dollar amounts of expenditures. So therefore, we have to know in many cases, for example, revenue to provide the local share of Medicaid comes from a specific tax source. In New York State, a high percentage of the local contribution is made by the local governments as distinct from the state government. In many jurisdictions, the states can definitely, the state and local share in its entirety. What is the benchmark that we have to measure by, and I respectfully suggest to my brilliant friends who understand the markets very well, that these are questions that have to be answered if we're going to get a serious discussion going on whether in the next few weeks or after the new administration takes place as to what are the basis for deciding the level of support we want to provide.

ORSZAG: Can I ask, Dick, we'll stay with you and then for Shelby and Eden also, I mean, one of the other aspects of the pandemic is this question about whether we're going to de-urbanize to some degree after it's over? So I guess, Dick, just to put it very directly with regard to New York City where there's been a debate about, you know, is the golden era of New York City over and will people desert it for New Jersey and wherever—other places? What is your view about the future of the city and then maybe for Shelby and Eden a little bit on how important are cities to state and local finances because one of the arguments is that if property taxes are as important as they are, that property values are, you know, for any given amount of money spent on real estate that the land constraints in cities drives up property values much more than if people are living elsewhere where, you know, the marginal cost of new construction is much lower. But Dick is probably the strongest with regard to New York City, so thumbs up or thumbs down on the future in New York?

RAVITCH: Thumbs up. Peter, let me say this. There are not too many advantages being as old as I am, but I've lived through a period when real estate values in New York were minimal, when people moved to the suburbs in droves, paid prices for homes in the suburbs of New York City. They were a fraction of what they're going for today. Once the sports arenas, concert halls, operas, sixty nonprofit theater operations, restaurants and bars open, this city is going to recover, because as I said, it's the greatest socializing institution that we have in our society. I'm not smart enough to tell you how long that's going to take, and that's why I think that the way to approach the problem here is to look at what their revenue shortfall is measured against them in a long-term plan for capital investment, which is key, and to make sure that their pension systems are adequately funded. They're not doing what New York State once did, which is to borrow money from the pension fund to make the payments to the pension fund—and every major bank in New York looked the other way to make that possible. So I am not concerned about the long term. I'm concerned about the short term. But you have a marvelous way in this society of adjusting to bad news. We've gotten through major bankruptcies in Detroit, in Puerto Rico, in New York City or near bankruptcies, and with unbelievable recoveries at times when people were saying the apocalypse was around the corner. So I'm a great optimist, but I think we need short-term help to cover the gaps, the revenue shortfalls that we're incurring now and will be incurring, far more grievously in '21, '22, and '23.

ORSZAG: Okay, and Laura, we're going to get to questions from the members in just a second, but if I can just turn to Shelby and Eden. I guess, two questions quickly. One is if you have any different views from Dick on the future role of cities and if you're optimistic that urbanization will continue? But then, also if you could comment, underlying a lot of this commentary, I think, is a concern about transparency. About how good the data are on state and local finances and even the forecast of revenue shortfalls, you know, how lag they can be, what have you. So, maybe a quick comment on whether you see people moving to the suburbs or out to Idaho or other places being a long-term trend, and then also, why in an era of, you know, pervasive information and digitization do we still struggle with a transparency on state and local finances? If you agree that we do. So maybe start with Shelby and then Eden and then we're going to open it up to questions with members in a second.

KERNS: I would say that I agree with the premise that everything goes in cycles and that long term, you know, things work out, all of those things, and that there's a short-term problem. But as far as the, you know, the tension between, you know, small cities or big cities and small states, it's a harder question for me, because, you know, when you talk about, like you mentioned people moving from New York to New Jersey, you have sort of winners and losers. It's good for some states, bad for some states. And not all states collect property tax, so it doesn't impact states the same, but there's certainly an interconnectedness. And I think what, you know, that's the hard part is maybe you'll see some states in the short term see some more depressed property values and others see increased property values, and over time it seems like we go through the cycle of everyone wants to live in a city, everyone wants to live in the suburb, then they want to live in the city, then want to live in the suburbs. So it does seem like a cycle that keeps going. I think that I would disagree that we have a lack of transparency with financial data. I think, really, you hit it that there's so much data. There's actually a lot of data, there's so much coming at us all the time. The problem is more that there is a lag. And, in fact, normally we don't know we're in a recession until our data catches up and tells us we're in a recession. This time, we knew we were going to be in a recession soon, right, because we were taking measures that were going to put us into a recession. So we're all feeling like the data is bad and we can't get data that we need. But it's more that there's just simply is a lag. There's a lag in the time when people spend money, businesses collect it, they submit it to the state and that data can become public. So there's just more of a lag, I think, than we would like to see when we're trying to make real-time policy decisions. And, I think, that's probably more the issue is just certainly that that lag makes it difficult.

ORSZAG: Shelby, you said one thing I just want to follow up on, which is, I just want to clarify whether it is a common view or not in your organization, that it was, in a sense, the lockdown measures that caused the budgetary harm as opposed to the pandemic, which the lockdown measures then responded to? Do you have a view?

KERNS: That's a great question. Honestly, to me, it feels very interconnected. It's very hard to separate one from the other. But, I think, you've seen even where there aren't lockdowns or maybe things were not curtailed as long, people’s finances were still impacted and you still have the fact of were those impacts worse. So maybe, you know, just anecdotally for me personally, I have no idea how to cook. I can barely make toast. So I'm still spending as much money on food deliveries and pre-packaged things, but it looks different. And my favorite restaurant's out of business. It's not, hopefully, solely because I'm not there every day, but it's not—so you're still seeing even if people are shifting their expenditures, maybe they're buying more—now we saw a lot of people go to Home Depot and do home improvement projects. They were spending money there and not at another business where people went out of, you know, went out of business, lost their jobs—

ORSZAG: —but the economic evidence is showing that most of the damage comes from the pandemic and that lockdowns have a disproportionate effect on the evolution of the virus and some effect on the economy, but much more diminished because of this diversion, less spending on restaurants and more take-home, less spending on retail, you know, shopping in the store and more mail-order, etcetera—

KERNS: —and certainly less on, you know, less on airline tickets and tickets to Disneyland and, you know, travel and tourism and visiting New York City. You know, everybody goes to New York City and we're not doing that right now, so it's disproportionate.

ORSZAG: More on video games. Yes, exactly.

KERNS: Yes.

ORSZAG: Eden, any thoughts on any of this before we open it up to other questions?

PERRY: I think I'm more in line with Shelby. I think, you know, maybe long term for New York City, we obviously think there's so much robustness with the hospitals, with the arts and culture, but I think in the short/medium-term we are concerned just about human behavior. And what do people do even once they get the vaccine? Do they take it? It looks more positive that people are going to take it. It was at 51 percent; I think now it's in the 60s. But once they take the vaccine, do they just go back, is there a resurgence of sort of, you know, okay, everyone goes right back to normal, or do people think this is really a possibility this could happen again? You know, there could be another pandemic. Maybe I really want to change my behavior. We're seeing, I think, Goldman announced today that they may be moving their asset management business to Florida. We've heard of other corporations doing the same thing, you know, diminishing their footprint so people can work from home. So it's a sort of new way of working, although then we've also read recently that, I think, Facebook and Amazon leased some Midtown space in Manhattan. So in terms of city like New York City, I think, you know, we're still waiting see exactly what it means and what people's behavior, and I think that's hard to predict how people really respond to this. I think it's going to be in our psyches. The way we used to talk about our grandparents, you know, my grandma lived through the Great Depression and that's why she was so frugal. How is this going to impact us when we say we lived through COVID-19? How does that impact our behavior going forward? I think that's hard to predict.

KERNS: It's going to take a long time to know, but it's definitely going to happen.

ORSZAG: All right, thank you. Laura, if we could turn to questions, please?

STAFF: [Gives queuing instructions.] We'll take the first question from Ed Cox.

Q: Yes, and for the purpose of this meeting, I am the founding co-chair of the Committee for Economic Development, a task force on business and the reopening of New York City. The issues raised by Dick here with respect to the states and the resolution of those is very important for getting approval from the Senate Finance Committee with respect to the next stimulus and how that's done and how you separate past liabilities of states from the revenues that are needed in order to compensate for COVID. The same questions apply to state and local government and are much more complicated. And the question is, how do you make the same judgments that Dick is raising are necessary at the state level for cities and for local governments to which aid goes directly, and to make sure that assistance does go to those city and local governments and isn't sucked up to the state government by governors who need it for their purposes?

ORSZAG: Shelby, do you want to take a crack at that?

KERNS: You know, well, I think there needs to be probably more robust aid so that maybe we're not competing as much. Right? So rather than state and locals competing for those dollars and having a bucket of funds that were sent to states and then states need to decide how much to give to locals, that there's a recognition of the widespread problem and that there's money for both. And that's probably not—it's not a very detailed answer, but I think that's the problem is when you have a certain amount of money that's given to a state and that maybe doesn't meet all their needs, but they're also needing to look at the local needs, you know, it's really a scarcity problem.

ORSZAG: Can we talk for a second about the, and this came up a couple times, but about the form of federal relief to state and local governments? So in the 2009 stimulus, it was done through an enhanced matching rate for Medicaid, and then there was a separate program through an education facility. In the original round of the stimulus in 2020, a different formula was used. I don't know how the negotiators are planning to distribute money today assuming that there is some kind of package that's agreed to. But in your mind, what's the best way of doing this? Is there direct funding to local governments that should be part of federal relief, and how should the money actually be most efficiently delivered? Maybe we could start with Dick.

RAVITCH: At the risk of repeating myself, I think the amount of money that should be appropriated by the federal government should equal the revenue shortfall created by the pandemic.

ORSZAG: But you would do that directly to local governments too or would it be funneled through the state governments?

RAVITCH: I would have the state government responsible for the administration and integrity of that, but I would not give them discretion to modify the causation, the reasons, for the entitlement. And let me say something else, and this is very important in my view at least. And that is that city and state governments have been modifying thanks to the careful work of people like Shelby and her staff and their equivalence at that other firm, whose name I forget, and that there is a much higher degree of consciousness about budget practices now. So many states are treating on staying local expenditures in ways that were unmeasurable, uncharacterized in budgets. People didn't know how I was spending money on, and this has been changing over the last decade because there's been a whole new level of interest spurred on by people like Shelby and Eden and their colleagues who have made—and I like to say the work that we've done at the Volcker Alliance as well—at the penance to the tune of everyday affairs to make budget practices more transparent. So we're not fooling people anymore. We're not underfunding pension systems. We're not issuing general obligation debt when we can issue a piece of paper that is backed by a real revenue stream. If you look at the change in the municipal bonds structure in the United States over the last ten years, it's been staggering. I remember, Peter, when Tim Geithner was flabbergasted to hear that the largest holders of municipal bonds were not buying any general obligation debt.

ORSZAG: Okay, we have, Dick, sorry, we have a lot of people—Laura's pinging me in the queue to ask questions. The one thing we're going to do is end on time and not deficit spend on the time domain. Okay, so we're going to, kind of, go a little bit more rapid fire now. And if the people asking questions could make sure that they get to their question quickly, we'll try to run through as many as we can, because it's great to see so many people queued up to ask our fantastic panelists some questions. So Laura, next question.

STAFF: We'll take the next question from Emerita Torres.

Q: Hi, thank you. I'm Emerita Torres, I'm with the Community Service Society, vice president for policy research and advocacy. I have a New York-specific question, but perhaps others can comment on how this will affect other states, but there's been a lot of conversation in the state legislature around revenue raisers particularly looking at personal income tax, also financial transaction taxes, you know, stock buyback tax and sale/transfer tax, as well as real estate taxes, looking at pied-à-terre taxes on second homes, etcetera. I'd be interested to know from the panel their views on some of the implications of these taxes, especially as they really relate to [inaudible]. For example, the wealthy move out of New York if they're taxed on their second homes, will Wall Street be affected by sale/transfer tax, etcetera? Thank you.

ORSZAG: Okay, great. So what form of tax—if state and local governments have to raise taxes, how should they do it and what's the best way of getting that done? Since the question was specific to New York, Dick, we'll start with you, but Shelby and Eden if you have perspectives on this, please weigh in, also.

RAVITCH: If our objective is to have people to move back into the cities, strengthen the tax base of urban areas in this country, and the last thing we ought to do is in that taxes that make that even more difficult. Pied-à-terre taxes, one of the dumbest tax proposals I've ever read in my entire life. At this point in time in New York City, it would be death. It's like saying we no longer want anybody to move into New York City from abroad. I have to say that taxes are always an issue. But I haven't heard one peep yet from the Biden administration-to-be as whether they're going to get rid of salt. And the reason Goldman Sachs, I'm sure, is moving their research facility to Florida, is that they're going to take a whole slew of their income and make it no longer subject to New York state income taxes and pay a much lower tax rate in Florida. So, I think, that one of the things we've learned from this tragic mess we're going through is that we have to reexamine the relationship between setting local taxation and business locational decisions and the growth of the economy.

ORSZAG: Eden, as you look at debt ratings for state and local governments, does the form of taxation way into those ratings or is it just the level and what perspectives do you have on the best way of raising taxes from that perspective?

PERRY: So, we really just care about structural balance. So if people are getting there through expenditure reductions or tax increases, we try not to comment on the policy aspect of that. However, we do think the more diverse the tax base, the better. So if you have more, not only income tax law...

ORSZAG: Well, Eden's connection always seems perfect until, unfortunately, she's the one speaking which is, we'll work on the technical side of that, too. Shelby, any quick comments on the form of taxation?

KERNS: You know, I would, not a form of taxation, but I would just say that it's very difficult for states to fill these immediate budget holes with tax increases. It takes a while to enact a tax increase to, you know, collect those funds, and so it's not always the best tool for these immediate problems.

ORSZAG: All right. Laura, let's go to the next question.

STAFF: We'll take the next the next question from Gary Scarpello.

Q: How are you doing everyone and good stuff today. I'm Gary Scarpello, I'm the Upper Dublin Township commissioner here in Pennsylvania. Our pensions did take a hit, as you can imagine, and also our earned income tax revenues got a hit. But on the other side, our real estate taxes were fine, because we collected, as a township, we get our real estate taxes in March. The school district get their taxes in September/October, so they're taking a hit. But we as a township did pretty good. And a lot of our employees that we laid off were okay to be laid off, because they were getting that $600 and their unemployment. So that really helped us to offload, and we ended up with a surplus this year. But, of course, now things are turning around, and so my question is how long do you think it will take once the vaccines hit, which looks like it's going to be the end of March into early summer, maybe by mid-summer, how long do you think it'll take before all of these, the economic calamity that we've had over the past year seems to mellow out a bit, and we get back on a strong footing?

ORSZAG: Shelby, do you want to take that question? So, you know, what—

KERNS: I was afraid you were going to ask me to take that question. You know, I don't know, and that's one of the things that states have really struggled with in doing those these revenue projections is this is something we haven't seen before. So we don't know how quickly people will be vaccinated. We don't know how long it will take for people's behavior to return to normal or, you know, I think Eden really, really hit an important point is we don't know what the new normal will be. We don't know how people will, long term, have changes. So, I wish I had an answer to that. I feel like that would make me very famous if I had the answer to that question, but, I think, we're all trying to figure that out.

ORSZAG: Okay.

RAVITCH: And what's wrong with the simple idea of having the aid measured by the revenue loss?

ORSZAG: Right, well, yes—

RAVITCH: —and solve the problem, Shelby.

ORSZAG: —instead, you know, assuming that that doesn't go on forever, how quickly will revenue recover? And obviously, if you're filling in the hole, it doesn't really matter because you're held harmless, which is Dick's point. Laura, can we go to the next question just in this round robin rapid-fire approach that we've adopted.

STAFF: Sure, we'll take the next question from Sewell Chan.

Q: Hi. Thanks, everyone. Could we talk a little bit more about Congress and the role of partisan politics in determining whether there will be a state and local rescue package? I'm wondering, in particular, whether the kind of geographical sorting of our society whereby, you know, the kind of states that deliver the most votes for Democrats tend to be higher GDP states, you know, have a lot of kind of Democratic voters packed into them. Obviously, Senate and Electoral College are weighted somewhat more toward rural states that may be less urban, you know, more and more of the country's metros are marching in the Democratic column. Fewer and fewer metros are actually evenly split or leading Republican, and does that—what will that mean for the long term?

ORSZAG: So, if you guys could comment on that. That's a great question, including, you know, some of the states that are the hardest hit. Texas has a big projected revenue shortfall. Georgia is obviously very much in the news. How are the, kind of, for lack of better phrasing, polarization electoral politics affecting not only the probability that we'll get aid, but the form of that aid if we were to get some for state and local governments? Eden, I'm a little nervous to ask you a question, because I know then that the Wi-Fi will go out, but let's just try.

PERRY: I moved to my hotspot, so I hope it's going to work better. I have three kids now on the Wi-Fi as well, as they're in school from home so it's dicey at times. For the partisan? I don't know if that's a question for me, as much as maybe for Shelby or for Dick, actually, the political aspect of it. We worry about political risk, but not, I don't think, in the way the question's being asked.

ORSZAG: Yes. And Shelby, are you seeing universal support for federal relief from Republican and Democratic governors? Or is there a partisan mix among the governors, and how do you see that affecting that congressional action?

KERNS: You know, the NGA, as I suppose you know, we're both nonpartisan and both have supported aid. So both organizations have been supporting aid, and I think what we're seeing is, it's not a red state/blue state problem. You know, it's impacting Republican states and Democrat states, so it's really a mix of what type of aid is palatable. And I think those are the philosophic differences that we've seen all along is more what form should it take and how much? And I think, you know, it goes to Dick's question of it shouldn't be measured by exact revenue loss. It shouldn’t include expenditures and all these other things, and I think you've just seen from that end of things to a, we want strict revenue loss. I think it's more how things would be structured is what you're seeing—

ORSZAG: Is there any systematic difference in the revenue shortfall among, I mean, because early on, I think, there was this perception that there was a much bigger gap in blue states than red states? Is that still true? And any perspectives on that?

KERNS: That's a great question. You know, we're just collecting updated data right now. So it'll be interesting—it goes to our conversation about the lag in data collection. But I think you're seeing, you know, percentage-wise, if it's really not—it's not on a partisan divide. That would be my guess, you know, and a lot of that, again, you think about some of date being hit.

RAVITCH: I will share with you all a study that was commissioned by the Volcker Alliance showing that there are as many red states and cities in trouble as blue states. Let me add one other thing, Peter. You did something back in 2009-10. You picked up a hunk of the debt service cost that states were assuming in their infrastructure programs. That would be a very useful thing to add into this mix right now, because it would ensure that states and local governments stop spending money going to housing for poor, schools, parks, etcetera.

ORSZAG: Okay. Laura, if we could get—you know what, let's do this since I'm looking at the clock. Can we have two people ask questions, and then we're going to have our three panelists answer both of them for the grand finale. So if you could just ask—

STAFF: Sure. First, we'll have Jeff DeWitt, if you could ask your question, and then I'll unmute the next questioner.

ORSZAG: Thank you.

Q: Thank you. This is Jeff DeWitt. I'm the chief financial officer for the District of Columbia. And I agree with Richard's comment about revenue. But how do you deal with, going back to the politics of, you know, the cities that are hit differentially that have heavy tourism and hospitality and are reliant on sales tax are heavier hit than those that may be property tax, and those may be red or blue, as Dick said, they seem to be fairly equal. But what about the excuses you keep hearing on the congressional side is, "I'm not bailing out the state who has pension problems. I'm not going to fix your pension problems with revenue." Are there areas besides pensions that you believe, maybe would be excluded from a formula you would come up with that would make it more likely to get something through that would help us get through the gap we have in revenue pensions? Clearly one, I would argue exclude using the money for pension. We're not fixing the pension problem; we're fixing a revenue shortfall. Are there other areas you think might need to be considered to get something politically viable that can get out to these cities and states and counties to help them get through this pandemic?

ORSZAG: Okay. Thank you, Jeff. And, Laura, if we could take another question.

STAFF: Let's take the next question from Zachary Bookman.

ORSZAG: Zachary, you need to be unmuted.

Q: It's unmuted. Hi all. I'm Zack Bookman, co-founder and CEO of OpenGov, a software enterprise software company serving our nation's cities and counties. Quick round the table—0 to 100 percent chance of passing another stimulus bill?

ORSZAG: Okay, great. Last two questions. And let's start, please answer both of them, and on Jeff's question, distinguish what should be taken into account in terms of how much money a state government receives versus any rules about trying to offset the fact that money is fungible and, you know, tying it to particular uses, which often ends in tears, because it's very hard to trace which money, you know, what money goes where without taking into account the fact that states have other resources available that they can redirect to various purposes. So we'll go around, and then give a percent probability of getting an additional round of state and local fiscal relief. Dick, why don't we start with you?

RAVITCH: Well, I think there will be some. I just can't measure how much. Part of it, of course, depends on what happens in the Florida or special election. But I believe that the Biden administration—

ORSZAG: Georgia, right?

RAVITCH: —will be seriously committed to providing a significant amount of aid to states and cities to make up for a large part of the revenue shortfall that they have uncovered. As to the other part of the question, I believe that you cannot in a federal program, compensate for differences in political and social views that our federalist system puts in place, which is why I thought that what you did with the Build America Bonds programs was a brilliant step to make to alleviate state and fiscal stress. And doing things where there's a uniformity of impact and effect on state and local governments, whether it's in infrastructure or health care—essential expenditures. I mean, simple fact that the cost of health care institutions in New York is a staggering increase over what was budgeted alone. That is solely, and exclusively, a function of the pandemic. That is what needs help. I question help that is irrelevant to the amount of help that would be available in the state, which didn't carry an enormous hospital load and didn't have tens of thousands of volunteer health care workers keeping people alive.

ORSZAG: So, thank you, Dick. And Shelby, there's some tension between getting this done quickly and getting it done precisely in terms of taking into account all of the variations that we've been discussing—what should be included and what should not be included? How would you do that, and what's the probability that something will happen?

KERNS: Hi, Jeff. Jeff's one of my members. So glad to have him have him on the call today. And I think that that's a, I think, pensions is really the sticking point of what people want to see excluded. That seems to be the sort of that long-term problem that people feel like shouldn't be solved through aid related to the pandemic. And honestly, I'm too superstitious to put a probability on it on one to a hundred, but I feel more optimistic today that I haven't a long time.

ORSZAG: Okay. Eden, you get the last word. You're still muted, though.

PERRY: So, I think we're thinking more optimistic about a stimulus. I don't know if it's going to be before the end of the year or more likely in Q1, but we definitely feel more optimistic about it happening. I agree with Dick on terms of the revenue. In 2010, the aggregate peak revenue shortfall was $230 billion. So the $160 billion that's proposed right now is probably not enough for states. So, I think it's likely, hopefully there'll be another stimulus after that if this one goes through to help the states.

ORSZAG: All right. Well, on that note—Shelby, Dick, Eden—thank you so much, and to all the members and other participants, thank you for joining us. We will be watching what federal policymakers, along with state and local policymakers, do very carefully. Thanks again.

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