DETAILS MATTER by Bob Ginsburg March 9, 2021
Is The Economy Recovering? And For Whom? Why is the impact on State and Local Government Different?
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Is The Economy Recovering? And For Whom? Why is the impact on State and Local Government Different?
There has been some good economic news amid the declines in new Covid-19 cases and increasing vaccination rates. A few weeks ago, Governor Pritzker reported that income tax and sales tax revenues were going to be almost $2Billion over budget which reduced the projected FY2022 From $5.5Billion to a mere $3or $3.5Billion.
What do the March national economic data mean for Illinois budgets?
The headlines touted the results that total nonfarm payroll employment increased by 379,000 in February. That is progress but is down by 9.5 million, or 6.2 percent, from its pre-pandemic level in February 2020 and at this rate it will take another 25 months of growth like this to get back the February 2020 employment levels. This was not a broad-based recovery. Most of the job gains in February 2021 were in leisure and hospitality, which accounted for 355,000 of those job gains. Leisure and hospitality are still down by 3.5 million compared to one year ago. Manufacturing employment increased by 21,000 over the month, led by a gain in transportation equipment (+10,000). Employment in manufacturing is down by 561,000 over the year.
People are working fewer hours as employers try to match production with reduced demand and avoid more layoffs. The average workweek for all employees on private nonfarm payrolls declined by 0.3 hour to 34.6 hours in February. In manufacturing, the workweek declined by 0.2 hour to 40.2 hours, and overtime declined by 0.1 hour to 3.1 hours. The average workweek for production and nonsupervisory employees on private nonfarm payrolls declined by 0.4 hour to 34.0 hours.
Among those not in the labor force in February, 4.2 million persons were prevented from looking for work due to the pandemic. This measure is down from 4.7 million in January. (To be counted as unemployed, by definition, individuals must be either actively looking for work or on temporary layoff.)
February’s job growth did nothing to reduce the chronic disparities between white workers and people of color. The unemployment rate for Black’s rose in February from 9.2% to 9.9% which was the first increase since April 2020. The total number of African Americans who said they were employed fell by 164,000. By contrast, unemployment fell slightly for whites (from 5.7% to 5.6%) and for Hispanics from 8.36% to 8.5%) neither of which is a statistically significant difference.
What does this mean for Illinois?
While all the positive economic data is good, the interpretations are misleading. For example, 94% of the national gain in jobs (e.g 355,000 out of 379,000) were in hospitality, service industries and entertainment and mostly located in states like Texas which opened up those sectors). The economy is improving very unevenly so that those hardest hit by the pandemic economic crash are the slowest to recover. The American Rescue Plan passed will help but a broad recovery will not be seen till the last half of 2022 (the Illinois FY2023 which would start in July 2022.)
There are still 10 million people who were employed a year ago that are still unemployed and mostly were in hospitality, restaurants, etc. The Federal Reserve and the Biden Administration do not believe that even the most optimistic scenario have most of those jobs back till mid or late 2022 - which will be in FY23 for Illinois. While the overall unemployment rate dropped slightly, initial unemployment claims increased by 28,000 in Illinois last week (compared to a drop nationally of 26,000.)
Illinois revenue data through February 2021 (from COGFA) shows that most of the state revenue gains and recovery have come with income tax payments. All other revenue sources are either flat (2020 to 2021) or estimated to be slightly up (20201-2022) based on optimistic revenue assumptions. I have shown this in a table below. The conclusion is that the State’s fiscal improvement is due to stable income tax revenues while business activity revenues and property taxes will continue to stagnate or slide. Recovery of state revenues does not mean that local revenues are recovering as well. The Biden administration recognized the need of the Federal Government to provide relief to states and local governments. Now is the time for the State Legislature and Governor to provide more relief to municipal and county governments.
What are the options moving forward?
It seems that much of the state leadership has accepted that view that the defeat of the Fair Tax means no or little new revenue is possible this year. That is the message of the Governor’s budget message. That is the message from the Senate President on Chicago Tonight. The budget the legislature is considering now also does not address (or even recognize a responsibility to address) the revenue shortfalls of municipalities and counties. While a number of community organizations and coalitions are appropriately proposing an income tax increase with "refundable credits" to eliminate the impact on lower income workers, the net result is little help on local funding issues beyond what the Federal relief package (e.g American Rescue Plan) provides.
The details of the Federal Stimulus package (“American Rescue Plan of 2021 - ARP”) are well targeted to close budget holes and to give individuals and smaller businesses hurt by the pandemic an opportunity to survive a bit longer. Under the ARP individuals in Illinois will get needed financial support including extended unemployment insurance and rental/ mortgage assistance, cover transit worker wages, provide small businesses resources to cover salaries and other expenses. The State will get $7.5 Billion to pay back the $2.5B it borrowed from the Federal Reserve Bank and pay about $6B in past due bills (including Medicaid). Beyond that it is not clear what else will be covered (such as the $1.1 billion in program cuts and furloughs, funds transferred from capital to operating, and the additional payments to local schools to meet educational goals, etc.) There is no reason to believe that the Governor’s budget office statement that the state will face significant budget deficits (at least $2-4B) every year through FY2026.
The problems faced by municipalities are much more dire. Smaller towns are cutting essential services such as fire stations in Elgin. In Evanston the fight over using the relatively small cannabis tax revenue for reparations are coming under attack in part as a result of scarce funds for many projects. The Governor’s proposed budget includes a proposal to reduce the LGDF distributions by 10% and contributions to the Public Transportation Fund and the Downstate Public Transportation Fund by another 5% which would reduce funding to local governments and transit agencies by $204 Million in FY22. Chicago is said to be in line to receive $1.8 Billion from the ARP which can cover extra pandemic costs and replace some of the borrowing or “scoop and toss” included in the last budget. It will not cover the loss in sales taxes, entertainment taxes, restaurant taxes, etc, so the City will face revenue shortfalls through 2022.
Another stopgap budget may make sense but the point needs to be made forcefully that we have a revenue crisis and a lousy system to fund government and not a spending problem. (Even if most people know that programs could be better conceived and better run but the problem is not too many staff. All that cutting staff will do is make the delivery of services including IDES, Public Health, and transportation projects worse which is the goal of the libertarians and many republicans. As has been said before there are many ways to fairly raise additional revenues (such as income taxes, increases to the LGDF and broadening sales taxes to services) to fund needed services and to improve those services without layoffs and program cuts. It may take some creativity and will clearly take some political will but it should be on the table and actively discussed.