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The Coronavirus Collapse

The outbreak is putting state and local governments into financial freefall

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The coronavirus outbreak has sent a wave of devastation though the community. Beyond those who have fallen ill or been killed by the virus, hundreds of thousands of Arizonans have lost their jobs and many businesses are on the edge of collapse.

Next, the virus will hit governments. While tax collections tend to lag a bit, state and local officials are already anticipating serious revenue shortfalls at the same time that demand for services will be on the rise.

The state of Arizona has a massive budget hole on the horizon. The Legislature's Joint Legislative Budget Committee staff estimated in April that with so many people out of work and so many businesses shut down, both income and sales taxes would plummet. They estimate the state could be facing a budget shortfall in the neighborhood of $1.1 billion—but added that they had so little data to work with that they could be off by $500 million in either direction. Much depends on how long the virus sticks around, how much people will be willing to spend when it passes and how long it takes people who lost their jobs to find work.

City Manager Michael Ortega told the Tucson City Council last month that it was too early to say what kind of damage the city will absorb, but in a memo ahead of this week's council meeting, he said he anticipated a 25 percent drop in estimated revenues through the end of the fiscal year ending in June. Based on information from University of Arizona economists, it appears the negative impact could be even greater than what we faced during the Great Recession of 2009, Ortega warned council members.

The federal government has sent the city roughly $96 million through the CARES Act to deal with unexpected expenses directly related to the outbreak, but Mayor Regina Romero and council members have urged the federal government to loosen the restrictions so the dollars can also go to paying police officers, firefighters and others on the front line battling the epidemic.

"Without flexibility in how we can use these funds, I am concerned that we will have millions of dollars that will be sitting idly that could otherwise be used to maintain critical city services," Romero said last month. "Our city budget is under enormous strain which is why it is critical that any federal package includes additional support for local governments that are on the frontlines of fighting this pandemic."

Councilman Steve Kozachik echoed those concerns.

"With the restrictions the feds have placed on their support, it's more like they sent us the sleeves out of their vests than a life jacket," Kozachik said. "We'll get it done but it will take sacrifice like what we managed in 2011."

Pima County Administrator Chuck Huckelberry is expecting major impacts on the county budget as well. The county mostly relies on property taxes, but it does receive state-shared revenues based on sales taxes, along with hotel and car rental taxes. Huckelberry noted in a memo to the Board of Supervisors that the outbreak will likely cost the county nearly $15 million in the current fiscal year and $26 million in the upcoming fiscal year in those state-shared dollars. He's also expecting a drop of $4 million this fiscal year and $12 million in the next fiscal year in state-shared HURF funds that come from gas taxes and car registration fees.

"I keep telling people, 'This is not a fire drill,'" Huckelberry says.

The University of Arizona is likewise anticipating a big hit. The upcoming football season is likely to be delayed or canceled and basketball remains up in the air. Both sports are major revenue generators for the university. On top of that, although Robbins has said the UA plans to resume face-to-face classes in the fall, the university projects a big drop in enrollment of out-of-state and international students. Combined with a reduction of other revenue streams and an increase in COVID-related expenses, Robbins said the UA can expect a $250 million budget shortfall.

Whether more help will be forthcoming from the federal government remains to be seen. Democrats are pushing for a new aid package to the states, but Senate Majority Leader Mitch McConnell suggested that states should consider "the bankruptcy route" instead. U.S. Sen. Martha McSally hasn't responded to questions from the Arizona Republic and the AZ Mirror about whether she agrees with McConnell, but in a teleconference with Skip Hall, the mayor of Surprise, Arizona, McSally dismissed the idea of more aid to states as an effort by "the left" to bail out cities such as Chicago and New York, which she said had been mismanaged with too much debt for decades. (McConnell himself has since said that his "bankruptcy route" comments were taken out of context and suggested that he might consider more aid to the states if it was combined with relief from coronavirus-related legal liability for business.)

But when it comes to financial hits, the federal government is already absorbing a colossal blow: Congress has already spent $2 trillion on the response to the outbreak—and is expected to spend more even as tax revenues decline, expanding the federal deficit past $3 trillion in the current fiscal year. ■

Additional reporting from Austin Counts and Jeff Gardner.

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