Impact of COVID-19 on State's Economy & Finances: Summary
Earlier today, the Chairs of the state House and Senate Committees on Ways and Means, along with the Secretary of Administration & Finance, led a discussion of the economic impact of COVID-19 on the Massachusetts economy, with a particular focus on the state’s fiscal health and revenue picture.
Below, the 495/MetroWest Partnership has provided a high-level summary of the proceedings, specifically as they relate to the following topics:
- Unemployment and GDP
- Factors Unique to Massachusetts
- Impact on State and Municipal Finances
- Recovery Projections
- State Treasurer Deb Goldberg
- Eileen McAnneny, President, Massachusetts Taxpayers Foundation
- Dr. David G. Tuerck, President, and William Burke, Director of Research, the Beacon Hill Institute
- Marie-Frances Rivera, President, Massachusetts Budget and Policy Center
- Professor Michael D. Goodman, Ph.D., University of Massachusetts Dartmouth & Executive Director, the Public Policy Center (PPC)
- Alan Clayton-Matthews, Ph.D., Director of Quantitative Methods, School of Public Policy and Urban Affairs, Northeastern University
- Evan Horowitz, Executive Director, Center for State Policy Analysis at Tisch College, Tufts University
- Beth Ann Bovino, Chief U.S. Economist, Standard & Poor's Ratings Services
- Dan White, Director of Government Consulting and Public Sector Research, Moody's Analytics
All presenters took pains to highlight the uncertainty of their predictive methods during the COVID-19 pandemic, due to the volatility of the public health crisis.
Unemployment and GDP
- The national economy is expected to experience its sharpest contraction ever in Q2 2020 (UMass Dartmouth PPC).
- Unemployment in Massachusetts is expected to approach 18% during Q4 of FY20 (Mass. Taxpayers Foundation).
- Nearly half of jobs lost had been held by lower-income workers (Mass. Taxpayers Foundation).
- The state's estimated $246 billion payroll will drop by approximately $29 billion (Mass. Taxpayers Foundation).
- U.S. GDP is expected to drop 7.4%, with Massachusetts GDP projected to drop 7.2%, in calendar year 2020 over calendar year 2019 (Beacon Hill Institute).
- Should the pandemic sustain itself through the calendar year, there is a chance of depression-level job losses (Beacon Hill Institute).
- 10% of the U.S. labor force filed for unemployment in the preceding weeks; the only sector that experienced growth was health care (Beacon Hill Institute).
- The IMF this morning released its global economic outlook, forecasting a 3% contraction in the global economy; for context, this contraction exceeds the 2008 Great Recession (UMass Dartmouth PPC).
Factors Unique to Massachusetts
- Recovery in Massachusetts may lag the nation as a whole, according to the Mass. Taxpayers Foundation. Factors negatively impacting the outlook for certain states, in particular coastal states, include the number of current virus cases, higher levels of international travel, higher population density, larger portions of the population over age 65, more frequent airline travel and trade, greater dependency on the tourism sector, and reliance on the finance industry.
- Health care and educational institutions are under unique pressures during the current pandemic, noted Prof. Goodman: health care institutions have delayed elective procedures, which were likely built into the financial models of health care providers, and educational institutions may be exposed due to lost revenues from housing and on-campus fees. These two sectors have spurred Massachusetts' Innovation Economy in the past.
Impact on State and Municipal Finances
- The state is certain to experience a significant reduction in revenues below benchmarks for FY21; Mass. Taxpayers Foundation projects a 14.1% reduction in state revenues for FY21, or $4.4 billion.
- Non-withholding income taxes and corporate payments are expected to fall by $780 million and $760 million respectively, with sales tax revenue dropping $1.5 billion largely as a result of losses in meals and motor vehicle sales revenues, per Mass. Taxpayers Foundation.
- Dr. Clayton-Matthews of Northeastern's School of Public Policy and Urban Affairs utilized a more optimistic model, which still projects a 12% decline in state revenues for FY21.
- FY 2020: At the outset of the pandemic, Mass. Taxpayers Foundation projected a tax shortfall in the range of between $500 million and $1 billion for the current FY20, as well as at least another $100 million in revenue shortfall from non-tax sources.
- Treasurer Goldberg noted that state lottery revenues were down substantially, with sales 32.7% lower over the prior week as compared to the same week in 2019. Over 1,800 of the state's 7,500 lottery agents are closed for business at present, with more limiting or eliminating lottery sales due to staff shortages.
- The Beacon Hill Institute noted that in prior recessions, declines in state revenues were comparable: state revenues declined 15% over the prior fiscal year in FY02, and 13% in FY09. Loss of tax revenues to the state will likely exceed the loss following the 2008 recession.
- Mass. Budget and Policy Center notes that it took 5 years for revenue collections to reach pre-recession levels in each of the prior two recessions.
- More residents will be eligible for Medicaid services, significantly driving up the cost of social services to state government (Beacon Hill Institute).
- Prof. Goodman of UMass Dartmouth PPC notes that the state's Unemployment Insurance Trust Fund is at significant risk.
- Treasurer Goldberg highlighted the relative strength of the Commonwealth's Rainy Day Fund, which at $3.48 billion is the largest in state history; this will advantage the state in borrowing.
- The Treasurer's Office is in the final stages of locking in an approximately $1 billion working capital borrowing facility with a syndicate of financial institutions being led by Bank of America. This facility should provide the state with flexibility to drawdown funds as needed during this period of deferred tax revenues.
- Total issuance of municipal bonds dropped off dramatically at the onset of the pandemic, declining from $10-15 billion per week in February to virtually zero the week of March 16th.
- The Federal Reserve has used its existing authority to backstop the municipal market, expanding a lending operation to accept municipal debt as collateral. This action provided much needed stabilization. The SIFMA Weekly Index reset at 0.74% last week compared to 5.20% in mid-March.
- The Federal Reserve has established a Municipal Liquidity Facility (MLF) that will offer up to $500 billion in lending to states and certain cities and counties.
- Treasurer Goldberg noted the state's $70 billion pension fund is not facing any liquidity stress, thanks to a highly-diversified portfolio well-positioned to navigate a volatile market.
- Virtually all presenters noted the potential for recovery to be delayed or derailed by a continuing threat to the public health, or a recurrence of the virus after social distancing and travel restrictions are lifted.
- Mass. Taxpayers Foundation noted that once current restrictions are lifted, there may be some pent-up demand which could spur initial growth, however once that period subsides, consumers' financial positions will determine future spending. Under a scenario where the situation abates by June, the state could recover 410,000 jobs within a year, but employment will not reach pre-recession levels until 2022.
- Mass. Taxpayers Foundation: "It is important to note that there can be no full economic recovery until consumers feel safe in public settings."
- Per the Beacon Hill Institute, available literature on how economies recover from pandemics tends to suggest aggressive fiscal policy is needed at the federal level.
- Prof. Goodman of UMass Dartmouth PPC noted that the duration of the economic downturn “is going to be a function more of epidemiological conditions than of economic conditions."
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