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The crushing budget blow awaiting state and local government workers

State and local government jobs are being gutted, even as the labor market shows signs of a slight recovery.

Why it matters: The coronavirus pandemic blew a hole in state and local government budgets. A slew of states cut spending and jobs — with more planned layoffs announced this week as states try to balance budgets.

  • Even more could be coming as states face more pressure from spiking caseloads and people hunkering back down.

Driving the news: In Maryland, layoffs, furloughs and pay cuts could come as soon as next month, Gov. Larry Hogan said on Wednesday.

  • In New York City, 22,000 government jobs are at risk, Mayor Bill de Blasio said last week.
  • Missouri's state budget director also warned this week of looming job cuts for public sector workers in the state.

Where it stands: Already, nearly two decades worth of public sector jobs have been erased in three months as of May — easily bypassing declines seen during the financial crisis, per Pew Research.

What's going on: Expenses are soaring. Revenues are plunging.

  • Municipalities are seeing less money flow in from sales tax as residents shelter-in-place. In some states, tax deadlines were pushed back at the onset of the coronavirus crisis, and income tax collection is taking a hit as people lose work.
  • In the face of the coronavirus, supporting communities who are getting sick, plus those who need unemployment benefits is expensive.
  • Moody's said last week state and local governments may need as much as $500 billion over two years in federal aid to stay afloat. (That's actually less than the $875 billion set aside for municipalities in the coronavirus relief bill passed by the House in May.)

Between the lines: The Federal Reserve offered cash-strapped state and local governments a rescue float to help manage cash flow pressures. But only one — out of over 250 eligible states, cities and counties — has taken it so far: Illinois.

The slow uptake of the Fed facility is by design. The credit markets seized up at the onset of the coronavirus panic. But the "municipal bond market is much improved from March and certainly operating more efficiently" since the Fed announced it would take action, says Rachel Perlman, who heads up municipal sales at Boenning & Scattergood, an asset management firm.

  • It's cheaper for municipalities to borrow elsewhere. The interest rates set by the Fed's facility are "higher than in more traditional public or private markets for borrowings," analysts at rating agency Fitch wrote last month.

What they're saying: "As with all of our facilities, they're not intended to be primary, they're intended to be backstops," Tom Barkin, head of the Richmond Fed, said in an interview with Axios earlier this week.

  • But so far municipalities aren't issuing any more debt than usual.
  • "The visible supply of [municipal bonds] coming to the market in the next 30 days has been steadily declining since the middle of April and is currently close to its 2019 average," Cooper Howard, who analyzes the municipal bond market at Charles Schwab, tells Axios.
  • More debt, though, would add to their future liabilities, Howard says.
  • Per the WSJ, citing data from Municipal Market Analytics: “Ten municipal borrowers defaulted for the first time in May and another 10 in June, the highest for those months since 2012, when borrowers were still absorbing hits from the 2008 financial crisis.”

The bottom line: The resurgence of coronavirus cases and reimposed lockdowns could push local governments over the edge.

  • "More layoffs are coming, as pandemic-related revenue crashes leave many cities and states billions of dollars in the red," Mark Muro, a policy director at the Brookings Institution, wrote this week.

Go deeper: Cities hit hardest by coronavirus saw huge drops in local commerce

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