New reports address COVID-19’s fiscal effects, policy possibilities

The economic, health and social impacts of COVID-19 are unprecedented, and state and local governments are not immune.

From revenue shortfalls to meeting increased demand for public services, the challenges facing government entities require atypical policies to deal with these issues in the COVID-19 era and beyond, according to new reports from the Government Finance Research Center at the University of Illinois Chicago.

The project, supported by the Joyce Foundation, features policy insights and ideas from scholars who strategically examine federal and state aid to cities, state banking, and infrastructure programs that could help. 

“Previous recessions provoked a federal government response in the form of business bailouts and support of state and local governments at a level much below the response to the COVID-19 crisis. The magnitude of the pandemic’s impact creates the need to explore options beyond the typical, incremental adjustments that public policies tend to promote,” said Amanda Kass, associate director of the center and co-author of the project’s fiscal aid research.

Their research and recommendations are presented in white papers and briefs corresponding to the following:

Fiscal Aid

• Opportunities to enhance state aid programs: States may consider developing an automatic stabilizer component of their local aid programs, but sharp cuts to other state programs would have to be considered.
• Federal government help: Creation of a federal automatic intergovernmental stabilizer program that would expand unrestricted aid to state and local governments during recessions and would gradually contract as the economy recovers.
• Fill the gaps: While local governments are an engine of the American economy, there are numerous gaps and vulnerabilities in state and federal programs that aim to strengthen the finances of local government.

State Banking

• Underserved communities: Providing credit in underserved areas is one of the primary functions for which a state bank might have a unique and constructive role to play in underserved communities.
• Supporting credit to those in need: A state bank may be better embedded into neighborhoods, have superior knowledge about its customers and hence may suffer fewer loan defaults. The lower default rates at state banks combined with greater access to state deposits contribute to lower costs of making loans.
• Challenges to state banks: A state-owned bank can generate surplus funds that can be employed to address various social issues outside the scope of private markets. A consortium of six independently created state banks for upper Midwest states is recommended to undertake lending activity.

Infrastructure

• Economic stabilization function: There is historical evidence of the benefits of public infrastructure investments in difficult fiscal periods and an advantage for states that fund these major projects can be more responsive to local needs and their stimulus programs can be tailored to local economic situations.
• Government investment: Consideration should be given to suspending balanced budget requirements if needed to provide necessary funds for states to stabilize economic conditions through investing in public infrastructure.
• Financing projects: Despite some of its downsides, state governments can avoid undue pressure on their current revenues by financing projects using borrowed funds. One advantage of debt financing is that interest rates charged on borrowing for infrastructure are often lower than those on borrowing for other purposes because the interest received from municipal bonds is tax exempt to bondholders.

Contributing authors involved with the project are Robert Chirinko, UIC professor of finance; Philip Rocco, assistant professor of political science at Marquette University; Isabella Romano, research assistant at the Government Finance Research Center; and Yonghong Wu, UIC professor of public administration.

The full reports and other COVID-19 related projects by the Government Finance Research Center at UIC are available online.