Northeast-Midwest Institute Posts Concept Paper on FRB Replacement of Non-Recoverable State and Local Revenue Shortfalls Resulting From COVID-19 Mitigation Initiatives

A concept paper by the Northeast-Midwest Institute’s Senior Fellow for Public Finance Policy Thomas H. Cochran proposes that state and local governments and their utility agencies should be held harmless for permanent tax and fee revenue gaps caused by the COVID-19 mitigation strategies put in place by Governors and Mayors/County Executives pursuant to federal guidance.

The concept paper outlines both macro-economic and sectoral rationales for the swift initiation of a new Federal Reserve Bank (FRB) facility which would purchase state “revenue gap anticipation notes” (“RGANS”) sized to cover the unrecoverable shortfalls already appearing in in many states’ and localities’ tax and fee revenue streams as a result of the partial economic shutdowns almost all states and localities are now experiencing at the same time as they are performing front-line service in the battle to detect, treat, and control the spread of the virus itself. 

Analogizing from the CARES Act provisions mandating forgiveness of loans to small businesses which agree to continue paying employees and other key expenses, Mr. Cochran’s draft concept paper proposes that the debt incurred in the sale of RGANs to the FRB be forgiven and become grants if the issuing states agree to continue spending at pre-pandemic levels per their budgets currently in effect and meet certain other conditions. For both states and localities, the forgiven amounts of debt would be net of amounts received for other than COVID-19 purposes under the CARES Act, (e.g. Title VI, which sets up a “Coronavirus Relief Fund”).

Local governments and service utility agencies suffering permanent shortfalls and agreeing to continue their spending at pre-pandemic levels would access the forgivable debt proceeds through their state governments

Northeast-Midwest Institute President Michael Goff commented that “While interest groups representing state and local Treasurers, auditors and other finance offers have rightly called on the Fed to help maintain liquidity and provide repayable bridge debt financing for delayed tax receipts. Mr. Cochran’s concept note goes further by proposing that the Fed forgive borrowings to maximize the counter-recessionary impact of the new facility and continue the vital public services being delivered by the states and localities in as uninterrupted fashion as possible.”

The concept paper concludes by emphasizing the importance of speed and efficiency asserting that “To have maximum counter-recessionary value and to minimize the damage state and local revenue shortfalls do to the essential public sectors for which states and localities are responsible, the federal-level intervention must be as swift as possible and come with as little overhead friction (e.g. new bureaucracy, complex rules and regulations, etc.) as possible.” Other alternatives such as a general revenue sharing program similar to that  implemented during the Nixon Administration or “block grant” programs of the kind implemented during several subsequent administrations would take far longer to conceive, legislate, set up administratively, and execute.

Link to Related Report by the Center for Budget and Policy Priorities.
Link to News Coverage of State and Local Revenue Shortfalls