The Big Question: Can States and Cities Recover from Covid?

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The Big Question: Can States and
Cities Recover from Covid?

A Q&A with municipal finance experts Richard Ravitch and
Antonio Weiss on why local government shortfalls put the U.S. economy at
risk. 

By Brian Chappatta

September 13, 2020, 9:00 PM GMT+1

This is one of a series of interviews by Bloomberg Opinion
columnists on how to solve today’s most pressing policy challenges. This
interview has been edited and condensed.

Brian Chappatta: U.S. states and cities are projected to
face massive revenue shortfalls in
the coming years due to the coronavirus pandemic. And yet, Congress can’t seem
to agree to another round of fiscal aid that supports municipal budgets. What’s
the holdup in Washington? Just how critical is federal support?

Richard Ravitch, director at The Volcker Alliance and former
lieutenant governor of New York: The estimates
for revenue loss for states and cities range from $600 billion to $900 billion.
The House passed a bill that appropriated $900 billion to cover revenue losses
incurred subsequent to 2019. But the only revenue loss that we can measure
today is the sales tax lost so
far in 2020. Property taxes are the
largest source of revenue for almost every municipality in the U.S. But
people don’t file their property tax returns until the year following the end
of the tax year. Similarly, with income-tax
revenues, we won’t have those numbers until next year when people file their 2020
tax returns.

The size of the revenue loss is such that borrowing is a
temporary stopgap. You can’t encumber cities and states with a massive amount
of new debt, which will have to be repaid at a point in time where cities are
recovering and should be devoting resources to help all the people who have
suffered so egregiously for health reasons and unemployment reasons. Therefore
we’re totally dependent on what Washington does.

Antonio Weiss, senior fellow at the Harvard Kennedy School’s
Mossavar-Rahmani Center for Business and Government and director at The Volcker
Alliance:  The “skinny” relief bill, which was introduced by McConnell and was
passed by 51 of his members in the Senate, not only contained no state and
local fiscal relief, but it also sunset the Municipal Liquidity Facility at
the Federal Reserve on Dec. 31 and provided for no repurposing of prior
appropriated funds to allow for relief.

It’s a mean-spirited exercise in inflicting pain on states
and municipalities and it flies in the face of all of the economic evidence
about what is required in a sharp recessionary environment. It’s forcing states
and municipalities to consider a set of draconian
reductions to expenditures, workarounds to replace funding with financing
and in some cases increases in taxes at the very moment when the opposite
should be happening.

States and municipalities have a number of differences from
the federal government. Forty-nine of them have either a constitutional
or statutory requirement to balance
their budgets. States don’t have their own currencies, they don’t have
their own central banks, and they cannot print money to get out of a crisis. So
when faced with an exogenous shock of this magnitude, they become entirely
reliant on the federal government.

We don’t know yet what the magnitude of the revenue loss
will be for certain. I tend to believe the estimates that are closer to $500
billion in state shortfalls over the next two fiscal years, and that cascading
down to municipalities through a variety of means could bring the total close to $1 trillion. We are
putting a substantial part of any recovery from the Covid-induced recession at
risk by creating necessary fiscal relief at the federal level and necessitating contraction at the state and
local level.

BC: You are both clearly passionate about the functioning of
state and local governments. How did you get interested in the intricacies of
municipal finance?

RR: I’ve been interested in this since I was lieutenant
governor and I was appalled by the fact that [state legislators] made a $600
million contribution to the pension system by borrowing the money. I thought it
was so outrageous that I tried to stop it. And everybody, the unions, the
politicians, they all opposed me. I was very conscious of the fact that the
borrowing to cover operating expenses and pension contributions, in order to
meet contractual obligations to the retired employees of the government, was
outrageous. So that’s what got me interested.

I want to tell you a story. In 1975, when the governor of New York State, Hugh Carey, asked
President Ford for help for New York City, Ford said no. That produced the
famous headline, “Ford to City: Drop Dead.” Well, two days later, the governor
and I convened all the top businessmen to the governor’s office in New York. It
was a Sunday afternoon. The governor said if we don’t get some help from the
federal government, we’re going to have to file a bankruptcy petition for the
city of New York.

The business leadership of New York — the chairman of
Citibank, the chairman of JPMorgan, of airlines, of AT&T, of insurance
companies — they all went to Washington. Several of them played golf with Mel
Laird, who was the secretary of defense and who was Gerald Ford’s best friend.
Several went down and saw Bill Simon, the secretary of Treasury. Felix Rohatyn
contacted all of the major European banks, which let Bill Simon know that a bankruptcy of New York City would
have a very adverse effect on the entire world banking system. And about 20
of these business leaders spread out and talked to members of Congress.

Well, a month later,
I was sitting in the Treasury Department working out the details of a $3
billion line of credit from the Treasury, ultimately as a result of the business pressure.

Now, the business community in New York, most of
whom gave a lot of political contributions to McConnell and Trump, there’s
no evidence they’re doing anything to use those political relationships.
Instead, they write a letter to the mayor saying he has to solve all the
problems. Well, the mayor doesn’t have the money to do it and has rapidly
diminishing resources to address a complex set of problems.

BC: So that’s one takeaway from New York City’s brush with bankruptcy
— that business leaders need to use their clout to fight for their cities.
Antonio, you were intimately involved with the more-recent Puerto Rico bankruptcy, during your time at the Treasury
Department. Is there anything we can extrapolate from that crisis and apply to
potential cash crunches among U.S. states and cities?

AW: Puerto Rico is neither a state nor a municipality: It is
a territory of the U.S. The relationship with the federal government remains
unresolved 120 years after the Spanish-American War. And so the imposition of
an oversight board in Puerto Rico, no matter how carefully designed it was at
the time, was going to be an offense just due to the colonial relationship
between Puerto Rico and the U.S. and the neglect of Puerto Rico as a
priority despite the fact that its millions of residents are American
citizens.

I don’t know that one can analogize anything that
happened in Puerto Rico to the state and local crisis that’s pending across the
country, because so much of Puerto Rico’s problem is structural and
stems from a neglect on the part of the federal government, which itself is in
part a result of this unresolved colonial relationship. That’s not to say that
there isn’t blame to go all around. But the reason that the problems reached
these unprecedented levels in terms of debt as a percentage of general fund
expenditures, or the zero funding of pensions, among other items, is due to the
fact that the U.S. has never really come to grips with the proper relationship
that should exist with Puerto Rico, nor afforded Puerto Rico a path to
determine its own status. It’s important not to take what is a very specific
set of circumstances and generalize across the country on that basis.

RR: Antonio did a brilliant thing in designing PROMESA [Puerto Rico Oversight,
Management and Economic Stability Act]. It gave this board the ability to file a bankruptcy petition,
if it couldn’t arrive at a contractual understanding with the government, with
the debt holders and with the trustees for the debt holders for how much debt
to haircut. The power to file was the
leverage that the board had to get bondholders to agree to very
substantial reductions in the amount of debt, without which Puerto Rico would
never have been able to survive.

The point is: control
mechanisms are very useful. I’ll tell you another marvelous anecdote. There
was a control board created in New York. The governor asked me to spend a lot
of time with the mayor. Every time the control board forced the city to cut an
expenditure, like to reduce the number of garbage pickups to save money in the
sanitation budget, Mayor Ed Koch
would go on television and criticize the control board. When he got off
camera, he would turn to me and say, “Thank God for the control board.” If
we’re going to pump federal money, state money or borrowed money into a local
government, the public is entitled to know that there’s some reasonable
oversight over their expenditures, and that politicians are not spending money
to enhance their re-election.

BC: Dick, given that you were a former chairman of the
Metropolitan Transportation Administration, I have to ask: how does the MTA get through this? Bankruptcy isn’t an option. Its
credit rating was just cut again by Moody’s. It’s about to issue even more debt.
What’s the way out?

RR: Federal money. The bill the House passed provides the
money that the MTA needs for operating purposes, because ridership is way down
and the revenues therefore are dramatically reduced. That’s their most
immediate problem. The longer-term problem is they have to restore their
financial credibility in order to be able to continue to borrow to meet their
capital needs. But in the short-term, to ensure there continues to be mass
transit available, they’re going to have to get federal aid.

BC: What’s the bottom line — what are the most important things that state and local
leaders need to do right now, from a fiscal budgeting standpoint, to get to
the other side of this pandemic?

AW: I suspect one will see even greater borrowing by various states and municipalities. They
will become creative in how they can issue debt notwithstanding the
constitutional and statutory limitations on borrowing that they face. The
municipal markets themselves are extraordinary healthy right now. The debt
markets are open, but the reality has already set in, with the layoffs and
furloughs, which are at unprecedented levels in recent history.

As the reality of the cuts that must be made to the main
budgetary items in states becomes evident — everything from healthcare and
education to grants and assistance to municipalities — the loss of essential
services is going to hit the most vulnerable populations at the very moment
when more, not less, aid is needed in order to offset the direct healthcare and
economic consequences of the pandemic. There is a real need for engagement by civil society, by business leaders and
labor, to make clear to Congress that deficit financing is not going to
come anywhere near to substituting for the funding that the federal government
has to provide in the next Covid relief package.

We’re talking about an extraordinary, once-in-a-century
exogenous shock to the country. And the solution to an exogenous shock is for
the federal government to step in and protect the citizenship from the
consequences of that shock, in supporting the healthcare system and the economy
broadly. As part of that, the federal government has got to channel support to
states and municipalities. This is not a question of mismanagement, as some in
the political leadership would assert. It’s a question of a radical reduction
in revenues due to an exogenous shock. It’s the very essence of why we require
a federal government — to protect the people against what is in essence a
national security threat.

This column does not necessarily reflect the opinion of the
editorial board or Bloomberg LP and its owners.

To contact the author of this story:

Brian Chappatta at bchappatta1@bloomberg.net

To contact the editor responsible for this story:

Romesh Ratnesar at rratnesar@bloomberg.net