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State budgets do not run on a calendar year basis. The majority of states (46 of 50) have a fiscal year ending June 30, while Texas ends on August 31, Alabama and Michigan end on September 30, and New York ends March 31. This year, Tax Day was delayed from April 15 to July 15. This means that for many of the states, tax collections, which typically occur in April, have been pushed by three months into the next fiscal year. On a year-over-year comparative basis, state and local governments are negatively impacted by the delay in the Tax Day, and overall FY 2020 will likely show revenue declines compared to the prior year.

Since the end of the global financial crisis in 2009, state and local governments have focused on fortifying their budgets against the next economic downturn. Many states had prepared for the next economic downturn by building rainy day funds. The Commonwealth Stabilization Fund in Massachusetts, for example, had reached $3.4 billion by the end of the 2019 calendar year, up from $841 million at the end of 2009. This amount is roughly 10% of the $29.9 billion in state tax revenues budgeted for fiscal year 2020. States create and support rainy day funds for protection against economic downturns, but there are other support mechanisms for states as well through the support of the Federal government. Both Congress and the Federal Reserve have supported the states throughout this current economic downturn, with the Federal Reserve in March establishing allowance for purchases of municipal debt and Congress designating $150 billion in federal aid to state and local governments.

Fiscal Year-End and Current Stabilization Fund Balances (in $ millions)

(FY 2020 Balance as of June 17, 2020)
Source: Massachusetts Office of the Comptroller Data System, July 8, 2020

Additionally, many states have enacted supplemental appropriations or general fund revenue transfers to help alleviate the revenue declines. Continuing with our example of Massachusetts, the state appropriated $15 million from the general fund and has a number of other appropriations pending for transfer to various funds, such as the COVID-19 Assistance Relief for Elders Fund, the COVID-19 Local Food Access Emergency Fund, and the COVID-19 Public Institutions of Higher Education Emergency Fund. New Hampshire had similar legislative activity with regards to COVID-19 aid, with a COVID-19 Nursing Home and Long-Term Care Fund and childcare scholarships for working families augmented by CARES Act appropriations.

As we move into the future, with high unemployment numbers and the possibility for future shutdowns due to coronavirus resurgence, a few important details that we analyze prior to purchasing municipal credits include a diversified revenue stream and a well-balanced budget. A diverse revenue stream is a positive attribute for municipal credits during these times of uncertainty. Credits that are not reliant solely on just one stream of revenue, but instead, have multiple sources they can collect revenues from, provide more flexibility during times of economic crisis. Therefore, general obligation bonds (GOs) tend to have the most flexibility of revenue sources and durability in times of volatility. While many revenue streams may be impacted due to the economic downturn, the degree of impact will vary depending on the underlying revenue stream. While those revenues associated with sales tax receipts may be impacted from the decline in consumer purchases that happened this spring, other revenue sources like appropriations will face other challenges, such as redeployment of resources to meet needs created by the pandemic and the economic recession. Essential services bonds such as water and sewer debt are very likely to be protected and creditworthy even during crises. Budgetary discipline is an additional pillar in reviewing municipal credits, since those credits who are able to budget effectively and have reasonable budgeting expectations for both revenues and expenses in good times are more likely to be able to continue with effectiveness into harder times.

Article Sources: Massachusetts Office of the Comptroller Data System; National Conference of State Legislatures; New Hampshire Fiscal Policy Institute