Where will cities, states find COVID relief?
The federal government is the only source of economic aid, so why is the Federal Reserve charging penalties for critical funding?
Chicago Mayor Lori Lightfoot and Gov. J.B. Pritzker continue to look to the federal government as the only source of COVID-19 relief for tax revenue lost in the pandemic. (One Illinois/Ted Cox)
By Ameya Pawar and Ted Cox
For months, governors and mayors across the country have been insisting they’re going to have to get additional COVID-19 relief from the federal government to make up for tax revenues lost in the pandemic and its ensuing economic fallout.
On Monday, we found out just how bad it is — at least for a city like Chicago. Mayor Lori Lightfoot released figures showing that the city has an $800 million budget shortfall this year, due to lost revenue, expected to increase to $1.2 billion next year. The vast majority of next year’s estimated shortfall, $783 million, is directly related to the pandemic — revenue lost from restaurants and bars dealing with reduced capacity, if they’re open at all; closed concert halls, clubs, and theaters; canceled conventions at McCormick Place; empty hotels; a halt to tourism.
Gov. Pritzker has been warning for months that Illinois faces a similar calamity, writ large: a $2.7 billion estimated shortfall this year, followed by a $4.6 billion shortfall next year, all due to lost revenue in the pandemic.
State and local governments have few appealing options under those conditions. They can take on more debt through the conventional municipal bond market, at a high cost under the current fiscal situation, which is doing nothing to improve their credit ratings. They can make drastic cuts, but that sends more idled workers to unemployment just at a time you need them to maintain earnings to keep the economy going — to keep it from spiraling from a recession into a depression — while not coincidentally cutting critical social services just when they’re most needed in a public health crisis.
Understand, that includes police, fire, and public education.
Pritzker has thus far resisted that approach, but Lightfoot acknowledged it as a possibility Monday, distasteful as it might be, saying, “Property-tax increase and layoffs and furloughs — those are at the end of my list of tools and options. But they have to be on the table given the size of the budget deficit that we’re facing for the next year, which is historic.”
There is another possible solution, however: aid from the federal government, the only entity capable of providing relief to state and local governments across the nation reeling from lost revenue in the pandemic. Pritzker said as far back as April: “As a nation made up of the 50 states, we are facing by early estimates state budget deficits of at least $500 billion,” adding, “We ask for Congress to do for the states what it alone can do to get us through this crisis together.”
Laurence Msall, president of the Civic Federation, a business-oriented government watchdog, agreed on Monday in response to Lightfoot’s estimates, saying it’s impossible to imagine “how the city would close such an enormous deficit without significant layoffs and possibly the elimination of entire programs” without additional federal COVID relief.
Or, as Lightfoot cogently put it: “This calamitous financial crisis is bipartisan in its impact, and we need a bipartisan solution. We cannot let the policy makers in Washington, D.C., fiddle while our country burns.”
Yet’s that’s exactly what the Trump administration and congressional Republicans are doing.
Democrats in the House passed the $3 trillion HEROES Act relief package in May, including that needed aid to states and local governments, but it’s been ignored in the Republican-controlled Senate under Majority Leader Mitch McConnell of Kentucky.
In the earlier CARES Act relief package, Congress did approve a $500 billion fund for government loans through the Federal Reserve, the Municipal Liquidity Facility, but only while insisting that it continue to charge penalties and interest. At the same time, the Fed was providing low- or no-interest loans to corporations and buying up corporate debt in a desperate attempt to halt a crash in the stock market.
The results of those policies? As the Wall Street Journal reported Tuesday: “All three major U.S. stock indexes have climbed for five consecutive months after a brutal February and March that ended the longest bull market on record. The benchmark S&P 500 has surged 35 percent over that period, its largest five-month percentage gain since 1938.” The Journal knew were to lay the credit, reporting: “The S&P 500 set records last week after the Federal Reserve signaled that it was likely to keep U.S. borrowing costs low for an extended period.”
Meanwhile, what was going on with the $500 billion available to state and local governments through the Municipal Liquidity Facility? Of all the states and cities across the nation, only Illinois was desperate enough to draw on it given the draconian terms, borrowing $1.2 billion in June — in part to make up for delayed income-tax revenue with the filing deadline pushed back from April to July in the pandemic — but at an interest rate of 3.82 percent, no bargain.
Stock prices lifted by a free-money policy, while states and cities continue to stew and consider drastic cuts awaiting federal relief. What's wrong with this picture?
As Amanda Kass, associate director of the Government Finance Research Center at the University of Illinois at Chicago, commented on Twitter: “It's almost as if the MLF was more about stabilizing the bond market than filling budget holes.”
Exactly. The $500 billion Municipal Liquidity Facility might seem benevolent, but it’s really intended to keep state and local governments beholden to the banks and big-bucks investors who profit off the conventional municipal bond market. It’s always about stabilizing the investor class.
Or, as the Rev. Martin Luther King Jr. put it back in the ‘60s in a quote that’s been repeated like a mantra in recent years, America has socialism for the rich and rugged capitalism for the poor.
It makes no sense for the Fed to offer short-term loans to cities and states at costly penalties and high interest in the midst of a pandemic. Yet these are all policy choices. The new Fed facilities are inspired by the Reconstruction Finance Corporation, which worked with President Franklin Roosevelt to tilt markets in favor of people and communities in the Great Depression. Today's facilities, by contrast, favor the investor class.
If direct aid is too much for Congress and a profit motive is necessary, then the Fed should lend directly to states and cities with long-term repayment schedules and low rates: say, 1 percent interest over 50 years, with the possibility that those loans could even be forgiven if the national economy bounces back over time.
Otherwise, we face the very real possibility that the economic collapse caused by the pandemic — which continues to rage across the nation and deter any recovery — could slide from recession into another Great Depression.
Look for states and cities to continue to plead for additional COVID-19 relief from Washington. The question is, will anyone in the nation’s capital listen before it’s too late?