July 01,2020

Grassley on Responses to Economic Effects of COVID-19, Including Relief to States and Localities

Prepared Floor Remarks by U.S. Senator Chuck Grassley of Iowa
Chairman, Senate Finance Committee
Wednesday, July 1, 2020

Congress has taken actions in response to the coronavirus pandemic and its significant effects on workers, families and the economy generally.
We enacted four laws in March and April, which CBO says have increased the deficit by at least $2.4 trillion.
But that doesn’t measure the entirety of the relief. If you add in support from programs initiated by the Fed and Treasury, you’d be adding in trillions more of relief.
One of the recent pieces of legislation, the CARES Act, devoted $150 billion of direct federal relief to governments of the states, localities, territories, the District of Columbia and tribes. That’s around 16% of total fiscal-year 2020 state general fund expenditures enacted prior to the public emergency.
In addition to the $150 billion, CBO has identified hundreds of billions more from the various relief packages that are directed to state and local governments.
From the $340 billion of emergency funding in the CARES Act alone, Senate appropriators have told me that more than 80%, or roughly $275 billion, goes to states and localities.
So, the CARES Act alone provided $150 billion of direct aid to state and local governments, and the emergency funding adds $275 billion. That means that $425 billion in the CARES Act is directed to governments of the states, localities, territories, tribes and the District of Columbia.
That’s 47% of total state general fund expenditures enacted prior to the public emergency for fiscal year 2020, and about the same percentage of enacted total state revenue.
On top of that, the Fed has allowed use of municipal securities as collateral for bank lending, to help ease borrowing costs for state and local governments.
Treasury and the Fed also established a Municipal Liquidity Facility to, ”help state and local governments better manage cash flow pressures.”  The Fed will buy up to $500 billion of debt from states, counties, and cities.
As others have noted here on the floor, a significant amount of the funding directed to states and localities and the like are still in the pipeline, or remain unspent or unallocated.
Some states, as I understand it, have not even allocated any money downstream to local governments from the $150 billion of direct aid provided in the CARES Act.
Despite all that, we’ve heard a number of calls for massive amounts of additional funding. The reason, according to most people asking for more, is that the direct aid for states and localities in the CARES Act is too restrictive, and cannot be used to replace lost revenue.
I have to say that I’m somewhat sympathetic to the idea of giving states and localities more flexibility in how to use the $150 billion of direct relief provided in the CARES Act.
Beyond that, I’m more skeptical, but open to considering options.
I recently heard the minority leader here on the floor, attempting to scold Republicans for not doing exactly what he wants, exactly when he wants it, saying we need to immediately spend more, including more direct aid to states.
Of course, in his partisan political analysis, Republicans are blamed for not wanting massive amounts of additional aid for states and local governments because of what he believes is ideological opposition to government in general. That’s quite a stretch, even for the minority leader. Republicans supported four pieces of legislation in recent months providing hundreds of billions in relief to state and local governments in various ways.
I heard the governor of California instruct Congress on morals and ethics, saying that it is our duty to give more funding to states and localities, or else first responders will be the first ones laid off by cities and counties.   
While that may have been a subtle threat to use as leverage to pressure Congress to provide more funds to California, it is unfortunate that state and local governments laid off so many of their workers in recent months. That doesn’t seem to be much dedication by government to its workforce.
I heard from associations of governors, counties, cities, and other units of local government that they need between half-a-trillion and a trillion more in direct aid from the federal government. Usually, they cite a need to, “replace lost revenue.”
Many have asked for funds to cover lost revenue as far out as two additional fiscal years beyond fiscal-year 2020. And most of those requests are based on forecasts of what the pandemic and the economy will look for the rest of the year and in coming years.
I think you have to take those forecasts with a big grain of salt. Just look at what the last employment report looked like relative to forecasts, and you can tell how cloudy peoples’ crystal balls are right now.
I heard from some here on the floor that Moody’s thinks states and localities may need hundreds of billions more in direct relief. People haven’t been very careful, though, reading the Moody’s reports that are the basis of their arguments.
Moody’s Analytics, which makes very clear in its reports that it is not the arm of Moody’s that rates bonds, though I’m not sure everyone is clear on that.
Moody’s Analytics said in April that under their most severely adverse assumptions about the future, state and local governments would have a budget shortfall of around $172 billion over the next 15 months and more than $450 billion if you extend out to cover fiscal year 2022.
Again, this is all based on shaky forecasts, and it is not at all clear that the ratings on municipal bonds done by Moody’s ratings agency align with the forecasts of Moody’s Analytics.
More recently, Moody’s Analytics chief economist Mark Zandi, who is a regular proponent of Keynesian stimulus for Democrats, upped the estimate of needs to around $500 billion. That number remarkably matches what the National Governors Association wants.
Dr. Zandi promises so-called bang-for-the-buck magic to save states and localities, but the federal government would have to pony up perhaps half-a-trillion more to start the magic. I am skeptical of some of those promises, to put it mildly.
If you remember, it was that same kind of reasoning that led to the Obama stimulus promising big and relatively quick unemployment reductions following the financial crisis, but failed to come even close to the promised results.
Finally, regarding funding requests, there is the HEROES Act over in the House. State and local aid in that Act provides nearly $1 trillion to states and localities, inside a liberal wish list of a bill. That, along with what we’ve already done, would put state and local relief at more than 75% of all combined state and local tax collections for a year, depending on how you measure things. That’s more of a federal bailout than a partnership.    
M. President, I’ve heard a lot of calls for massive amounts of additional direct aid to states, funded by federal debt.
Yet, there still is a lot of money in the pipeline that hasn’t even been used yet. And future needs of states and localities are highly uncertain. Too uncertain, in my view, to commit the federal government today to half-a-trillion or a trillion more to states and localities, on top of the $425 or more of funding already in play and up to $500 billion of credit supports.
I am highly skeptical of schemes to index future aid to measures of the incidence of COVID-19 cases, since we already have had controversies surrounding those measures, and some of them are political.
Of course, I do understand budget rules that states and localities operate under, and they do provide constraints. I also believe that proponents of massive amounts of additional federal aid to states and localities overstate the severity of those constraints.
I think state budgets are more flexible and fungible, for example, than some would have us believe. We’ve seen that flexibility recently in legislators’ considerations of altering police funding, or using taxpayer funds to erect barriers in occupied zones of lawlessness.
There are also many issues about incentives associated with massive new amounts of direct federal funding of state and local governments.
Sending massive amounts of additional federal funds to states that were responsible in good times, and built up rainy day funds, means that they are treated the same as states that didn’t build much, if any, in rainy day funds, like Illinois and New Jersey. Those states that acted irresponsibly get rewarded.
Since funds in state and local governments are fungible, sending massive amounts of additional federal funds to states and localities means that hard-earned federal tax dollars coming from Iowa can end up helping finance unsustainable pension promises of fiscally irresponsible states.
And, it means that federal tax revenues get channeled to states run by politicians that won’t even enforce existing federal laws, and who use taxpayer resources on lawless occupied zones, or sanctuary cities, or to provide benefits to undocumented residents. There are many of my constituents in Iowa who do not support those uses of federal funds.
So, I am highly skeptical of sending massive amounts of additional funds to states and localities, since future needs are so highly uncertain and there is still unspent money in the pipeline.
I am sympathetic to providing additional flexibility for funds we have already provided in the CARES Act, so states and localities can make broader uses of those funds. And I believe that if the pandemic and the economy worsens, future needs can be addressed when needed.
I understand that there are a range of views regarding additional funds for states and localities. At this point, I believe that it may be useful to entertain more flexibility in what has already been approved. And, there may be a need to make sure that states get shares of money they’ve received to counties and cities. There may even be a reasoned case for limited additional funding to states and localities in the near term though, as I said, I’m a bit skeptical. But approving half-a-trillion to a trillion of additional funds for uncertain future needs right now, to cover unknown state and local needs as far out as two years down the road, just isn’t the responsible or prudent action to take.