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State and Local Budget Concerns

Furloughs, layoffs, and budget cuts are some of the difficult decisions facing state and local governments as they continue to confront the economic realities of operating during a global health pandemic. Although much of the focus during the initial months of the health pandemic was on aid to small businesses, direct aid to taxpayers, unemployment insurance and the Payroll Protection Program, state and local governments are also facing immense challenges.

The federal government approved substantial relief early in the pandemic; however, only a portion of the aid was earmarked for state and local governments. The Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed by the U.S. Senate March 25, 2020 and by the U.S. House of Representatives on March 27, 2020. In part, the CARES Act included: (1) a one-time payment of $1,200 to authorized taxpayers with an additional $500 for certain dependents in the form of check or direct deposit, (2) a Paycheck Protection Program aimed at supporting small businesses and keeping workers employed, and (3) a $150 billion Coronavirus Relief Fund (CRF) for state, local, and tribal governments impacted by COVID-19.

The Paycheck Protection Program (PPP) provided $349 billion in loans to small businesses (businesses under 500 employees) and was administered by the Small Business Administration (SBA). The program offered small businesses a much-needed lifeline through the extension of forgivable low-interest loans. The program was designed to help small businesses keep workers on their payroll and was so popular that the first round of funding ran out after only 13 days. Congress approved a second round of PPP money on April 27, 2020. According to the SBA’s website, the program closed August 8, 2020.

Although likely benefitting from PPP money, the economy has continued to struggle as businesses cautiously begin to reopen. The real gross domestic product (GDP) fell by nearly 33 percent in the second quarter according to the Bureau of Economic Analysis. This contraction was the worst on record since a 10 percent contraction in 1958. At the time this article was written, the United States had recently experienced its nineteenth straight week of over 1 million unemployment filings.

The impact of COVID-19 shutdowns on businesses is irrefutable. However, its impact is not confined to private business. The impact to state and local governments has also been substantial and will likely be felt well into the future. Cities, towns and counties have expended significant amounts of money and resources in responding to the pandemic. Examples of such unplanned purchases include masks and gloves, plastic shields, COVID-19-related signs, and cleaning supplies.

Unlike the federal government, state and local governments are unable to maintain budget deficits. As a result, many have taken severe cost-cutting measures to offset falling revenue which include furloughing employees, layoffs, suspending certain services and programs, and deferring planned projects. Because there is currently no date certain for the end of the pandemic, the end of many of these cuts is indefinite and local officials continue to respond in real time to everchanging guidelines and timelines provided by federal and state authorities.

The Center on Budget and Policy Priorities projected total state budget shortfalls for 2020-2022 of approximately $555 billion, not including local governments such as towns, cities and counties. The Minnesota Office of Management and Budget announced a projected State budget deficit for the 2020-2021 biennium of $2.4 billion after reporting a $1.5 billion surplus early in the year. The deficit will undoubtedly restrict the State’s ability to provide aid to local government.

What options do local governments have in the interim? One option may include CRF money. Governor Walz has agreed to distribute a portion of the approximately $2.2 billion in CRF money received by the State of Minnesota to eligible cities, towns and counties who submit certification forms to, and are approved by, the Minnesota Department of Revenue. Although the distribution program will likely not resolve all local budget woes, it may serve as a meaningful resource. Information regarding the availability of the funds can be found on the Minnesota Department of Revenue’s website, including a certification form, contact information and instructions. The Department of Revenue is accepting certification forms through September 15, 2020.

Congress appears to be at an impasse. The House passed the $3 trillion Health and Economic Recovery Omnibus Emergency Solutions (HEROES Act) as early as May, which designated an overwhelming $1 trillion of aid to state and local governments; however, in stark contrast, the Health, Economic Assistance, Liability protection and Schools Act (HEALS ACT) proposed by the Senate in late July does not provide any further aid to state and local governments. Conservative lawmakers have voiced concerns that aid to state and local governments may function as a bailout for governments that have been fiscally mismanaged prior to the pandemic. As a result, state and local governments, at least in the interim, will need to find alternative solutions for balancing their budgets. While borrowing may be an option, Minnesota law restricts the ability of local governments to borrow to fund working capital expenses.

As new information and resources continue to come online, local government associations such as the League of Minnesota Cities, the Minnesota Association of Townships and the Association of Minnesota Counties offer local governments a method of tracking pertinent information. For example, the League of Minnesota Cities has created a web page dedicated to COVID-19 related news and resources which includes: links to an ongoing webinar series entitled “#WeGotThis,” CARES Act Funding Information for Cities, and Financial Considerations during the COVID-19 Pandemic among many others.

DISCLAIMER: This article should not be deemed legal advice. You should always consult with an attorney about your specific circumstances and legal rights and obligations.

Brian Peltier is an attorney with the Fryberger Law Firm, practicing primarily in municipal financing, and banking and lending support services. He can be reached at Fryberger’s Duluth office at (218) 725-6854.