Empty chairs at the deck of a local restaurant that is closed due to the outbreak of coronavirus in Hoboken, N.J., March 16, 2020. (Eduardo Munoz/Reuters)

With all the attention focused on Washington it’s easy to forget that the economic bill for the current disaster will also fall very heavily on the states.

Over at City Journal, Steven Malanga puts that right (my emphasis added):

Even before any recession actually hits, states are tapping their reserves to pay for resources in the fight against Covid-19, meaning that they’ll have even less of a budget cushion should an economic downturn become severe. Washington State legislators, for instance, authorized drawing $200 million from their surplus fund for added health-care spending and to help pay for looming unemployment claims. Georgia has taken $100 million from its surplus fund to finance the coronavirus battle, and Maryland legislators have authorized Governor Larry Hogan to use $50 million for the same battle. The problem is that prior to the crisis, states collectively had only about $70 billion in these funds—enough to run state government for just eight days, on average. A few find themselves in even worse shape. A report by the Volcker Alliance, a budget watchdog group, estimated that Illinois has just a few million dollars in its fund, “enough to barely cover a few minutes of budget spending.”

So that’ll mean the taxman comes calling, but:

In addition to California, the states with the most financial-market sensitivity in their tax structures are New York, Connecticut, Massachusetts, and Oregon, according to a recent S&P Global Ratings report. New York generates 40 percent of its income-tax collections from high earners; on average, about 28 percent of its income comes from market gains, according to the Empire Center’s E. J. McMahon.

Ah yes, “market gains.”

And the (regrettable) cutback of the SALT deduction will only make matters worse for taxpayers in high-tax states, who may again be casting wistful eyes elsewhere — with consequences that will only make matters worse.

Meanwhile, the muni market will be worth watching. Rates at the moment are distorted (in different ways) by intervention by the Fed and panic-selling. When they settle down, I suspect that, relatively speaking, borrowing costs for quite a few states and municipalities will be going up, and not insignificantly so.


As the famous phrase goes, “If something cannot go on forever it will stop.”


More pessimistic investors will be looking at the PROMESA Act, the law governing Puerto Rico’s bankruptcy, and might start to wonder if a political (although not a legal) precedent has been set . . .

Anyway, read the whole thing. Warning: The passage on pension liabilities is not for the faint-hearted.