COVID-19

State Budget Effects of Recent Federal Actions to Address COVID-19

As the Legislative Analyst noted in a recent Fiscal Perspective, California could face a budget problem as a result of the coronavirus emergency. As the public health crisis has unfolded, this possibility seems increasingly likely. In a recent post, we described the state’s reserves available to address such a budget problem. However, the state has another source of support in this area: new funding from the federal government. This post discusses the sources of a potential budget problem related to the coronavirus disease 2019 (COVID-19) emergency and how recent federal legislation could help address some of the sources of a problem.

Sources of Potential Budget Problem

A budget problem occurs when the state’s anticipated General Fund revenues are less than the General Fund costs to maintain the cost of state services. When the Governor releases his May Revision, the state likely will be facing a budget problem. That problem would come from three sources, all related to COVID-19:

• Higher Direct Costs to Respond to Public Health Emergency. The state already has incurred significant costs to respond to the public health emergency. For example, the state has allocated funding to lease medical centers to expand the state’s hospital and laboratory capacity and purchase and refurbish medical supplies, including ventilators. Higher costs for state health programs to provide testing and treatment to COVID-19 patients also are likely.

• Higher Indirect Costs as a Result of Changes in the Economy. The state also will incur higher indirect costs from changes in the state’s economic circumstances that are resulting from the public health emergency. For example, as unemployment in California rises and incomes fall, more people will qualify for means-tested programs like food assistance. In past recessions, these types of costs have risen by low billions of dollars.

• Lower Revenues as a Result of Changes in the Economy. Finally, the largest budgetary impact of the COVID-19 emergency is likely to arise as a result of lower revenues. Our office has estimated that—in a typical economic downturn—revenues are lower by tens of billions of dollars across a multiyear period. The length and severity of the public health emergency will drive the severity of the economic disruption and the ensuring revenue implications.

Federal Funding

Recent Federal Legislation Affecting the State Budget. Recent federal legislation has directed funding to states, local governments, and other entities to respond to the COVID-19emergency. This legislation includes: the Coronavirus Preparedness and Response Act; the Families First Coronavirus Response Act (FFCRA); and the Coronavirus Aid, Relief, and Economic Security (CARES) Act. (In addition, the federal emergency declarations also provide additional funding to states and local governments to reimburse them for certain costs. We explain the effect of those declarations here.) In this section, we describe the major sources of funding from the recent legislation that could help reduce budgetary strain from the three sources described earlier. (This list is not comprehensive. In the coming days, we will be posting additional information about all of the sources of funding California could receive.)

Coronavirus Relief Fund (CRF)

Provides Aid to States Based on Population. The CARES Act establishes the CRF, which provides $150 billion to state, local, tribal, and territorial governments. The fund sets aside $139 billion for states based on their estimated populations as of July 1, 2019. (Tribal and territorial governments are eligible for the remaining $11 billion.) The U.S. Department of the Treasury (Treasury), which is responsible for administering the CRF, has indicated that California is eligible for $15.3 billion from the CRF to be shared between the state and local governments.

Local Governments in California Eligible for Estimated $5.8 Billion. The funding to each state will be shared between state and local governments. Local governments with populations of at least 500,000 are eligible. Treasury has published a list of eligible local governments here. Total funding for local governments is capped at 45 percent of the state’s overall amount. Figure 1 shows our estimate of the amount of CRF funds that 16 counties and five cities in California are eligible to receive. (Our estimates might differ slightly from Treasury’s ultimate allocation to individual local governments due to differences in population estimates for cities.)

Treasury guidance indicates that in cases where an eligible city overlaps with an eligible county, the county’s payment amount will be correspondingly adjusted. For example, if both the City of Los Angeles and Los Angeles County request funds, the city will receive funding based on its population and the county will receive funding based on its population excluding the city’s population. (Our previous estimates assumed local governments’ populations could overlap. Consequently, our earlier estimates reflected higher allocations to local governments and a lower amount for the state.)

Local Governments Must Submit Certifications by April 17. Treasury has indicated that, in order to receive CRF funds, local governments must provide payment information and required supporting documentation by 11:59 EDT on April 17, 2020. The submission forms are available to be completed here.

Potential State Budgetary Benefit of $9.5 Billion. Setting aside the funding to local governments, we estimate the state is eligible for $9.5 billion from the CRF. Legislation specifies that the funds can be used for “necessary expenditures incurred due to the public health emergency with respect to the Coronavirus Disease 2019” that are incurred between March 1 and December 30, 2020. Ultimately, Treasury has the authority to determine whether or not a particular use of the funding is allowable. The state has discretion to use the funding directly or distribute the funding to other entities.

Funding Will Provide Relief for Higher Costs, but Not Revenue Losses. As described earlier, there are three major ways that the COVID-19 emergency can impact the state’s budget bottom line. Officials representing Treasury have stated that the CRF can be used for direct—and potentially indirect—state costs associated with the pandemic, but not revenue losses. Depending on the ultimate scale of state direct and indirect costs incurred (and Treasury’s interpretation of the legislation), the state could be able to use the full $9.5 billion to address budget issues related to COVID-19 costs.

Medicaid

Temporary Increase in Federal Funding for Medicaid. Medicaid is an entitlement program whose costs generally are shared between the federal government and states based on a set formula. Under the FFCRA, Congress approved a temporary 6.2 percentage point increase in the federal government’s share of cost for state Medicaid programs (including Medi-Cal, In-Home Supportive Services, and some developmental services programs). For several types of Medicaid beneficiaries and services, the federal government pays 50 percent of costs. Under this change, beginning January 1, 2020 and ending the first quarter in which the COVID-19 public health emergency is not in effect, the federal share of cost for those beneficiaries and services will increase from 50 percent to 56.2 percent. (We discuss this change—and other related ones—in more detail in a recent post: COVID-19: Federal Health-Related Response.)

Potential Benefit to the State Budget. Of all the federal funding changes described in this post, this change provides the broadest budgetary benefit. That is because the change will (1) partially offset state costs for increased service utilization in Medi-Cal in response to the outbreak, (2) partially offset state costs for higher caseload as a result of the changing economic circumstances, and (3) reduce state costs for the underlying caseload (that is, spending that was projected to occur before accounting for the impact of the public health crisis). The amount of the benefit will depend on changes in caseload and prices in the programs described earlier. Under current caseload and utilization estimates, and assuming the enhancement was in place through December 31, 2020, we estimate the state would receive between $1.5 billion to $2.5 billion in General Fund savings in both 2019‑20 and 2020‑21. However, caseload and utilization are likely to be higher than currently anticipated. Although new state costs from higher caseload and utilization could exceed the amount of increased federal funding, higher state Medicaid costs would still at least partially be offset by the additional federal assistance.

Unemployment

Various Changes to Unemployment Administration and Funding. Unemployment insurance (UI) is a joint federal-state program in which eligible workers can receive cash benefits when they become unemployed. Benefits are paid with a payroll tax levied by the state. The FFCRA and CARES Act made a number of changes to the UI program, including enhancing benefits, lengthening the time workers can receive those benefits, and expanding eligibly. (We discuss these changes in a recent post: Unemployment Insurance for Workers Impacted by COVID-19.) The legislation also made three key changes that have implications for the state budget bottom line. First, the federal government provided about $120 million in additional UI administration money to California. Second, the legislation provides federal funding to cover the full cost of the expanded benefits and eligibility provided by FFCRA. Finally, should benefit payments under the state’s base program exceed payroll tax collections, the legislation allows the state to take an interest-free loan (through the end of 2020) to continue making benefit payments.

Potential Benefit to the State Budget. These changes to UI administration allow the state to address higher indirect costs of the COVID-19 emergency resulting from higher unemployment claims and lower payroll taxes. Given the magnitude of initial unemployment claims received so far, the state UI Trust Fund likely will become insolvent in the coming months, meaning the state likely will use the interest-free loans to reduce state General Fund costs. Depending on the magnitude of claims and changes in payroll that occur in the coming months, the interest-free loan could have budgetary benefit in the hundreds of millions of dollars.

Education

Education Relief Funding Intended to Help Institutions and Students. Recent federal legislation provides $31 billion for a newly created Education Stabilization Fund. This fund is for states and educational institutions at all levels (elementary through university) to cover costs related to COVID-19. Educational institutions have some flexibility in how they use these funds. For example, they can use their funds for instruction, professional development, technology, and student support services, among other purposes. Higher education institutions must use at least half of their funding to provide emergency financial aid grants to students affected by the disruption of campus services due to COVID-19. (We plan to describe the education relief funding is more detail in forthcoming posts.)

Budgetary Benefit Mainly Will Accrue to State’s Educational Institutions. Of the $31 billion provided nationally, we estimate California will receive $3.7 billion ($1.7 billion for higher education, $1.6 billion for elementary and secondary education, and $355 million for educational institutions at any level). Ultimately, the U.S. Secretary of Education is responsible for administering the calculation and determining the allocations. For some of this funding, states are to meet a maintenance of effort requirement, although the federal government can waive the requirement for states that experience a precipitous decline in their financial resources. The availability of this new federal stabilization funding will help mitigate the adverse impact of state funding reductions to educational institutions.

Conclusion

Federal Action Will Mitigate Some of the State’s Potential Budget Problem… The various recent actions by the federal government described in this post will mitigate some of the adverse budgetary effects that the COVID-19 pandemic is likely to cause. In particular, federal aid will support higher state expenditures that have resulted directly—and to some extent indirectly—from the public health emergency and ensuing economic effects. (Some of these federal actions also have benefit to the state’s cash position. We plan to cover that issue in greater detail in a forthcoming post.)

…But Does Not Significantly Address the Major Source of Budgetary Strain. However, only a small portion of the federal funding allocated to date—additional Medi-Cal funding—will assist the state with the most significant source of budgetary strain that likely will result from the COVID-19 emergency: lower revenues. While the state has accumulated a historically significant amount of reserves to help address a potential budget problem, additional federal action to support the economic and revenue consequences of this emergency could be warranted.