Save Our States (SOS) Rescue Plan: 7 Ways to Save Our Communities Amid COVID-19

State and local governments are on the front lines in the COVID-19 crisis, addressing the economic calamity hitting local communities, area businesses, and the people they employ. They often deal with homelessness, UI claims, Medicaid patients, public hospitals, public schools, community colleges and public universities, delivering food aid, enforcing social distancing, and public safety. But they are getting decimated. As a result of lost revenue and higher safety net spending, our cities, counties, and states are facing huge budget shortfalls that threaten their ability to fund local services and government jobs. Historically, every one percentage point increase in unemployment causes a $40 billion decrease in state revenues.¹

In the last month, Congress thankfully took several steps to respond to the dire budget issues facing our communities. So far, Congress has authorized $150 billion to cover state and local responses to the pandemic, $1 billion in unemployment insurance (UI) administrative funding, $1 billion to tribes and the Indian Health Service, $25 billion in emergency transit funding, $8.5 million in expanded community block grants, and $31 billion in education stabilization funds, among many other provisions.

More is needed. State governments are facing falling revenues due to delayed federal income tax filing deadlines, declining sales tax revenues, and have limited ability to spend beyond their means due to balanced budget requirements. For mayors, the situation is even worse as they are often addressing the urgent needs of the most vulnerable communities where poverty and racial disparities are already present. We are already seeing disproportionate health effects on communities of color as COVID-19 lethality rates among Black people tower above the remaining population. But instead of ramping up, states and localities are already responding to this squeeze with spending austerity by cutting spending and freezing hiring.²

As Congress considers the next aid package, it needs to act on a massive scale. We need a dedicated Save Our States (SOS) Rescue Plan that stabilizes all communities who are on the frontlines helping Americans through this crisis. Here’s how to do that:

1. Create a state fiscal stabilization fund to keep them whole.
2. Increase the federal matching rate to state Medicaid programs.
3. Modernize existing disaster response infrastructure to deploy funds.
4. Stop the public transportation death spiral.
5. Alleviate administrative burdens holding back public assistance.
6. Support Native American and Tribal health centers.
7. Create Coronabonds.

1.  Create a state fiscal stabilization fund that keeps them whole.

High unemployment and strong demand for social services will quickly put states in a tough financial bind. States that are overly reliant on sectors of the economy affected by the crisis, such as oil, gas, tourism, or gambling, will be hit especially hard. In the worst year of the last recession, states faced a $227 billion budget shortfall combined.³Given the steep and immediate decline in economic activity and the record-breaking spike in UI claims, the state budget shortfall for this recession is guaranteed to be higher. States facing budget shortages may be forced to cut spending due to balanced budget restrictions, forcing them to freeze spending, furlough workers, or reduce government services. For example, the last recession ushered in a decade of significantly reduced state higher education spending, contributing to significant tuition increases. In 2017, forty-four states spent less on higher education than they had in 2008.⁴This is only one example of an outcome states can’t afford to repeat in 2020.

Congress must create a state stabilization fund to help states bridge financial gaps caused by the COVID-19 crisis. Funding would be automatically allocated to states based on a simple formula. States would take an annual average of revenues collected over the past three years. This could include everything from sales taxes, to income taxes, to tolls and, higher education tuition. This average would be the state baseline. As state revenue fell below that baseline as a result of this pandemic, federal funds would be allocated to states to make up the difference. Economic Policy Institute estimates that at least $500 billion in direct financial aid to state and local governments is needed by the end of 2021 to offset budget shortfalls and stabilize state and local government spending.⁵Congress must also designate the District of Columbia and territories as states in order to receive COVID-19 related funds. This fund will not only prevent harmful austerity measures but also help states and localities recover from a COVID-19 recession.

2.  Increase the federal matching rate to state Medicaid programs.

As Third Way has recently written, Medicaid is an essential federal-state program that provides health insurance to low-income people, people with disabilities, families and children, seniors, and pregnant women. About two-thirds of Medicaid recipients are people of color, meaning protecting and expanding access to the program is vital to combatting inequities in health outcomes related to COVID-19.⁶For every dollar the state pays, the federal government matches somewhere between 50% and 77% of those costs. Under the ACA, states could expand their Medicaid program to cover adults with incomes just over the poverty level with a federal government matching rate of 100% initially, which fell to 90% after a phase-in period. And yet, even with this cost sharing, Medicaid is a huge part of state budgets. With COVID-19 requiring huge investments from states, many state budgets will be completely sapped dry—putting lives at risk.

To keep state budgets afloat, Congress should increase the federal medical assistance percentages (FMAP) to state Medicaid programs. Congress should increase FMAP by an additional four percentage points for the regular Medicaid population for the next two years on top of the 6.2 percentage point increase, which was included in the second rescue package. (Ten percentage points is the increase Congress enacted during the Great Recession.) Congress should also increase FMAP to 100% for the expansion population of adults for the next two years. Historically, FMAP increases have been economically beneficial.⁷

3.  Modernize existing disaster response infrastructure to deploy funds.

The current COVID-19 crisis certainly feels unprecedented, but federal and state governments have policy infrastructure to respond to crises in general. For example, states have significant experience operating major disaster response efforts under the guidance of the Federal Emergency Management Agency (FEMA) using proven funding channels. There is no reason these existing systems can’t be tapped now to deliver critical funds and coordinate efforts quickly and effectively.

In order to modernize our disaster response, Congress must add public health emergencies to the definition of eligible events for Major Disaster Declarations, as proposed by the New Democrat Coalition. This would allow states to quickly activate assistance under the Stafford Act—deploying critical funds quickly and creating stronger national coordination efforts across states, which has been a significant problem in the COVID-19 response.

Further, the Brookings Institution’s Metropolitan Policy Program suggests releasing previously appropriated disaster block grant funds for use in this crisis. They call for Congress to enact a Department of Housing and Urban Development (HUD) emergency waiver for the Community Development Block Grant Disaster Recovery Program (CDBG-DR), allowing states to tap already-awarded funds for this crisis.⁸New York City currently has $900 million awarded through this program, but without a waiver for immediate use, these funds can’t be touched.⁹

4.  Stop the public transportation death spiral.

As the economy comes to a grinding halt and people across the nation are sheltering in place, public transit ridership has dropped drastically. Nearly half of all funding for transit systems comes from fare revenues and local government funds.¹⁰This decrease in ridership and sales tax revenue is forcing transit systems to reduce or eliminate service. The Phase 3 stimulus included $25 billion for transit agencies, but as the crisis continues, it could take as much as $38 billion to maintain service levels and avoid furloughing workers.¹¹And with more than one out of three essential workers relying on public transportation to get to work, transit is more essential now than ever.¹²

Congress must provide an additional $15 billion to help transit agencies cover their operating costs to continue running during and following the COVID-19 outbreak. This funding will ensure that vital transportation routes can stay open for first responders and provide vital support for local government budgets.

When conversations shift from rescuing our economy to longer-term recovery, we will need to do far more than rescue transit. We mustn’t forget a huge economic opportunity to invest in rebuilding our infrastructure more broadly. There’s no shortage of needs, with an estimated $550 billion repair backlog for roads¹³and bridges¹⁴and a $99 billion repair backlog for transit.¹⁵We need to start getting the money out to states and localities soon so they can start planning the infrastructure projects that will put Americans back to work.

5.  Alleviate administrative burdens holding back public assistance.

As Americans turn to state governments in droves for desperately needed financial relief, administrative systems that have been neglected for years are buckling under the burden. State unemployment insurance offices are struggling to respond to the unprecedented leap in demand. For example, the New Jersey Department of Labor experienced a 1,600% jump in calls during the first week of the outbreak, creating huge administrative burdens and delays in providing vital services.¹⁶It’s too early in the crisis for comprehensive data breaking down job loss by race, but we do know that industries experiencing the biggest negative impact are more likely to employ African Americans, Hispanics, and people with only a high school education, making unemployment checks a vital lifeline to those communities.¹⁷  

Given that states and territories are at the forefront of crisis response, effective state administrative systems are critical for delivering relief to American families. The 2009 Recovery Act provided states additional funds for growing SNAP caseloads following the financial crisis, a similar program is needed to help states staff and improve unemployment insurance (UI) offices.¹⁸States were appropriated $1 billion in Families First Coronavirus Response Act to respond to increasing UI claims and accommodate administrative changes, but this amount is inadequate. Pennsylvania recently spent $350 million modernizing its unemployment claims system, explaining why the state’s UI claims data significantly dwarfs neighboring states in recent reports.¹⁹

Congress must immediately distribute funding to states to ensure they have the resources they need to administer waves of public assistance. An unprecedented amount of funding from Congress requires an unprecedented disbursement effort, and the federal government should help states respond to this challenge. The U.S. Postal System (USPS) is also experiencing unforeseen hardship just as many businesses have begun to rely solely on e-commerce to remain solvent.²⁰USPS is also responsible for delivering vital food and medications to Americans in quarantine, especially in rural areas. America can’t afford to lose its postal service, and Congress needs to include funds to rescue USPS. A bill introduced by Rep. Carolyn B. Maloney (D-NY) and Rep. Gerry Connolly (D-VA) prioritizes this effort and should be considered in future COVID-19 response legislation.²¹

6.  Support Native American and Tribal health centers.

The Native American community is uniquely vulnerable to COVID-19 for a variety of reasons. They are typically poorer, older, and have lower life expectancies and higher rates of respiratory illness and heart disease. Unfortunately, the Indian Health Service (IHS) is also underfunded and poorly equipped to properly protect and provide care for this at-risk population. At the start of the outbreak, the IHS had only 81 ventilators available for the more than 2.5 million Native Americans under its care.²²Worse still, IHS facilities don’t have trained professionals on staff to operate ventilators for sick patients and can’t process their own COVID-19 tests on site. The IHS, dealing with already drastic national supply shortages, has a 25% vacancy rate for providers including physicians and nurses needed to administer lifesaving care.

Congress must dedicate more funding to Native American health services. A recent joint letter from 574 federally-recognized American Indian and Alaska Native tribal nations requests another $1.2 billion to recruit providers, increase testing capabilities, and increase capacity to provide the necessary care on tribal grounds.²³Additionally, Congress must include tribal governments every time state and local governments are listed in future legislation.²⁴This exclusion can cause massive hurdles in access to funds and resources that other states and localities receive.

7.  Create Coronabonds.

As state and local governments face budget shortfalls, they have much more limited borrowing capacity than the federal government. Many state and local governments are only able to borrow for specific needs such as capital expenditures like infrastructure.²⁵As a result, in economic downturns and times where revenues contract, state and local governments find themselves needing to cut their own spending to balance their budgets. The Center for Budget and Policy Priorities has collected states’ estimates of plummeting revenue, ranging from 3 to 14% in FY 2020.²⁶

The federal government should step in to help by creating Coronabonds to help our states and cities. The Treasury should auction off a special issue of longer-term bonds, with at least 10-year maturities. The proceeds from this auction would then be lent directly between the federal government and states and cities. States and cities could opt to take funding to cover immediate and expected revenue shortfalls for themselves or their local governments. If some states opt not to take the initial round of funding, the remaining money could be reallocated in subsequent rounds to states and their localities. The federal government would pay all market interest from the Coronabonds, while states and local governments that gain access to this funding could budget in future years to pay off the principal over time via a sinking fund. States and cities should have at least as long as the bond issuance to repay the federal government. Finally, any lending from the federal government to state and local governments should not be a substitute for other direct relief like a state stabilization fund.

Conclusion

As we get through this crisis, there must be a robust debate on how to better support our state and local governments. One priority should be designing a series of automatic stabilizers that kick in federal support during future crises, so our communities are not as dependent on congressional action. Another priority must be improving our nation’s infrastructure. We recommend a surface transportation and transit infrastructure investment of $690 billion over five years. This would also fully tackle the nearly $650 billion highway and transit maintenance backlog, creating roughly 10 million jobs and generating tens of billions of dollars in economic returns over the next decade. It also includes $23 billion for new transit construction projects that are already in the pipeline for funding and create jobs quickly.²⁷Lastly, it would provide $2.3 billion for states and localities to deploy EV charging infrastructure,²⁸enabling a swift transition to zero-emissions vehicles. Congress should focus road and bridge funding on “fixing it first,” prioritizing repair projects over new construction because they get more money out to workers in a shorter time frame—without needlessly encouraging extra driving and emissions.

We will have time for that. But right now, many state and local governments are getting decimated. As a result of lost revenue and higher safety net spending, our cities, counties, and states are facing huge budget shortfalls that threaten their ability to fund local services and government jobs. As Congress considers the next aid package, it needs to act on a massive scale. We need a Save Our States (SOS) Rescue Plan that stabilizes all communities who are on the frontlines helping Americans through this crisis.