A few weeks ago, we wrote about the devastating financial impact facing states across the nation due to COVID-19 related expenses and revenue shortfalls over the past few months.  At the time, individual states were beginning to lay out the scenarios that would keep them afloat if the federal government didn’t provide assistance in the short-term.

Private-sector economics firm Moody’s Analytics has now completed one of the first comprehensive nationwide analyses of the revenue shortfall’s impact on local and state governments.  They estimate that cities and states will need to lay off 4 million people to balance their budgets.  And while the estimated cost to avert this crisis isn’t as high as the Democratic House’s nearly $1 trillion state and local government bailout, it will still cost more than any local government bailout program in modern history.  Moody’s estimates that over $500 billion would need to be provided to local and state governments over the next several years to fully avoid the mass layoffs that would otherwise take effect. 

Moody’s, famous for its bond ratings, isn’t known for getting into political fights.  The reason they are wading into this one is the very real impact these layoffs would have on an already unstable private sector.  If the federal government provides no money to local and state governments, Moody’s estimates it would result in a 3% reduction in the US’s real GDP.

Schools in particular are likely to be more costly to operate, as social distancing will require smaller class sizes, more bus routes and more sanitation than ever before.  In the absence of a bailout, the only way to accomplish this for many states may be to offer fewer school hours for children in the coming year.  Fewer school hours for kids means more time at home, which reduces when and how much they can work.

Moody’s analysis is only one of many that will be released in the run-up to the late July deadline for the next (and likely final) stimulus bill before the election.  Individuals, businesses and governments are all competing for funds in this package.  In the end, tradeoffs will need to be made to keep the price tag out of the multi-trillion range.

While local and state governments didn’t fare well in the last bill, they may fare better this time simply because they have a better understanding of the consequences of failure.  They’re likely to make their case directly to their citizens in the coming weeks.  With an election coming up in November, legislators will be listening closely to how their constituents want to balance the needs of people, businesses and governments.

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