- States' uncertainty about their finances due to COVID-19 and the recession is likely to cause some to delay action on fiscal 2021 spending plans beyond the July 1 fiscal start.
- 12 states have yet to enact a full-year fiscal 2021 budget. Reasons include compressed budget negotiations in a shortened legislative session, prioritizing closing current-year budget gaps, and waiting for updated economic and revenue estimates.
- Several have passed or plan to pass short-term or interim budgets until the revenue, expenditure, and federal aid picture comes into sharper focus, which is not uncommon during recessions.
- While late budget enactment is rarely a good sign, it is not necessarily an immediate threat to credit quality. Many states have procedures to keep operations going and protect debt service.
With A Day To Go, 12 States Lack A Final 2021 Budget
Fiscal 2020--which for 46 states ends on June 30--will close in the midst of a global pandemic and accompanying recession that have led to a sudden and sharp decline in primary tax revenues in the final quarter. This has made the current budget adoption environment far from ordinary. Even as states gradually lift lockdown restrictions and reopen segments of their economies, they will find it difficult to evaluate the permanent loss to their finances and to forecast the pace of the post-pandemic economic and fiscal recovery. S&P Global Ratings expects a difficult budget year for states despite various federal stimulus efforts (including the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the Federal Reserve's Municipal Liquidity Facility) injected recently to lessen the shock of an abrupt economic shutdown. (For more information, see "COVID-19 Induced Recession Throws Curveball To U.S. State Budgets", published May 21, 2020, on RatingsDirect.)
Four start their fiscal year later than July 1: New York (April); Texas (August); and Alabama and Michigan (October). Of the 46 states that begin a new fiscal year on July 1, 34 have adopted budgets, including 17 that enacted biennial budgets in 2019 (Virginia and Wyoming enacted 2021-2022 biennial budgets in 2020, and Kentucky only passed a one-year budget plan, although it has historically operated under a fiscal biennium). With only one day remaining, 12 states have yet to enact a full-year fiscal 2021 budget (excluding Michigan, which has a fiscal year-end date of Sept. 30), and the recession will invariably weigh on lawmakers' decisions. While we do not presume that each of these states will start the fiscal year without a budget plan in place, due to the significance of what remains unresolved, a number of them are unlikely to enact a full-year budget before the June 30 deadline.
States have grappled with several disruptive events during the current budget cycle. First, timing of the pandemic's spread interfered with the legislative committee negotiations and public hearings that are typical of the budget development process in many states. Due to social distancing measures across most of the U.S beginning in March, many states either suspended or prematurely concluded legislative. For example, Georgia and Rhode Island reconvened in mid-June, which substantially compressed the timeline for in-person budget negotiations to a couple of weeks from several months. In addition, states experienced both a permanent loss of tax revenue from reduced economic activity in the current recession, as well as a large temporary deferral of tax revenue from the extension of their income tax filing deadlines to July from April. Consequently, legislatures and executive budget offices have contended with policy measures to close substantial fiscal 2020 budget deficits and determine the use of CARES Act relief aid in the current fiscal year before they could turn their focus to fiscal 2021. Each of these budget-balancing measures, particularly the use of reserves or on-time budget measures, factors into the current year's budget and the budgeting calculus for fiscal 2021.
Furthermore, most state constitutions require balanced budgets and prohibit deficit spending. As states are likely to incur near double-digit declines in tax revenue for fiscal 2021, updated economic and revenue forecasts remain critical inputs that will help determine the proportionate adjustments to spending. However, fiscal 2021 executive budget proposals were submitted prior to the onset of the pandemic, and were based on now-outdated economic and revenue estimates. Across the sector, governors' budget proposals projected general fund revenue growth of 3.4% and general fund spending to grow by 2.8% for fiscal 2021, according to the National Association of State Budget Officers. As tax revenue conditions rapidly weakened in the final months of fiscal 2020, lawmakers have contended with incomplete or evolving revenue information on which to balance a fiscal 2021 budget. New estimates are also likely to influence the course of action governors take to approve or veto various budget items. The governor of Iowa is awaiting preliminary year-end estimates, which has put the state right up against the June 30 deadline. California's governor and legislature have reached a budget agreement, but more time may be needed to finalize adjustments. In addition, legislative leaders in Rhode Island have noted that the state will likely operate under an interim (month-to-month) budget until it has clarity on additional federal relief aid. Given the near-term uncertainty as to the scale or timing of further federal relief aid, this could push some budget decisions deeper into the next fiscal year.
States' government frameworks help mitigate many, but not all, risks of late budgets
Few activities are as fundamental to governance as that of enacting the annual (or biennial) plan for allocating a state's financial resources. And yet, while late budget enactment is rarely a good sign, it is not necessarily an immediate threat to credit quality. Within their government and budgetary frameworks, many states have considerable discretion over their budgets and cash flows to temporarily fund operations and debt service if a budget is not enacted by the start of the fiscal year. For more information, see our commentary, "When The Cycle Turns: Government Framework Is A Significant Factor In States’ Ability To Navigate Downturns," published May 23, 2019. In Iowa and New Jersey,a budget plan must be in place for spending to continue; without an enacted budget--temporary or otherwise--state government shuts down. However, in March, the Iowa legislature and governor agreed to allow 2/12ths of the appropriations from fiscal 2020 to be available to be spent starting July 1, 2020, which includes provisions for debt service due early in the fiscal year. Although New Jersey cannot pay non-GO debt service without a budget in place, it has structured debt service payments so that these dates do not occur before Aug. 15.
The structure of most state bonds, as well as--in many cases--the states' authority for funding debt service, tends to insulate them from credit deterioration in the event of late budget enactment. Similar to the rest of the municipal bond market, most state debt is structured with serially amortizing principal. It is rare in the state sector that the obligor's ability to fund its impending debt payments depends upon liquidity from a new round of financing obtained in the credit markets. In a late-budget situation, risks to a state's ability to fund its debt service payments often stem from administrative, structural, or timing constraints for obligations contingent on annual budget appropriations, more than from an underlying lack of fiscal capacity. For a state that has not developed countermeasures to mitigate these latent risks, however, a late budget heightens its exposure to a missed or non-payment event if the debt administration functions of agencies and departments responsible for debt payments are impaired.
In an apparent recognition of the potential for late budget enactment, however, many states have procedures in place that protect debt service. These include:
- Continuing debt service appropriation provisions or pre-funding debt service payments early in the fiscal year;
- Funding a debt service reserve fund;
- Avoiding structuring bonds with debt service payments early in the fiscal year;
- Continuing resolutions (measures that temporarily fund government operations, including debt service);
- Authorizing provisions in law allowing the treasurer to make debt service payments in the absence of a budget; and
- Piecemeal budgeting (approving appropriations for debt service or other priority payments while negotiations over other aspects of the budget continue).
Absent these protections, treasury officials in some states have told us that they interpret their constitutions as providing them with the authority they need to pay debt service. However, in numerous cases, this view remains untested in court. If a state's legal authority to pay its debt service could be ambiguous at all underscores how, in the extreme, budget politics can be perilous.
Furthermore, even the presence of special continuing appropriations authority or a legislature's approval of stopgap measures for debt service don't ensure that fiscal brinkmanship leading to late budget enactment is entirely benign from a credit perspective. Beginning the fiscal year without a budget in place has potential to disrupt governmental operations, which also can also have negative implications for a state's credit quality.
Credit risks may also materialize when states rely on the credit markets to help them finance temporary intra-year cash deficits or for purposes of deficit financing. This differs from liquidity that sovereign or corporate borrowers might require to roll over their maturing debt obligations (in those cases, the new financing is necessary to avoid a default on a bullet maturity). Nevertheless, delayed budget enactment can jeopardize, at least temporarily, a state's ability to access the markets for operating liquidity. Depending upon a state's access to internal sources of liquidity to manage potential cash flow needs in the interim, a late budget situation could undermine its capacity to fund both critical or constitutionally required functions and debt service. In this scenario, where the difficult choices become more extreme due to a pandemic-driven recession and less predictable credit markets, a state's authority to appropriate debt service payments would be cold comfort to investors if it does not also have the cash.
State Budget Roundup
We do not expect all the states below will begin fiscal 2021 without having finalized their budgets. However, given that these states will continue to navigate an unsteady economic and fiscal policy landscape, or have previously passed late budgets, we believe there is a somewhat greater risk that these states will enact their budgets late.
State budgets still requiring legislative action
Delaware. While the COVID-19 pandemic has created additional budgetary hurdles, the Legislature remains in session nearing the close of the fiscal year, and in recent years, has enacted budget budgets close to the June 30 deadline. The operating budget for fiscal 2021 has passed both houses as of June 24 and the supplemental budget bills (for grant-in-aid and bonds) are expected to be heard in the House the afternoon of June 29, 2020. A revenue forecast update by the Delaware Economic and Financial Advisory Council (DEFAC) as of June 17, 2020, increased expected general fund revenues by $78.8 million (1.78%) for fiscal 2020 and by $11.2 million (0.2%) for fiscal 2021 over the council's May projections. DEFAC is now projecting an unencumbered cash balance of $117.9 million for fiscal 2020, which helps inform the state's appropriation limits for fiscal 2021. Even in the event of a late budget, Delaware code directs the treasurer to make debt service payments in the event the General Assembly has not authorized the appropriation.
Louisiana. After unanimous approval on June 26, the senate amended budget was sent back to the house for final review; the house is set to review the budget on June 29 with the session set to adjourn on June 30. While this year's budget adoption nears the end of the current fiscal year, the state has an established track record of timely budget adoption, even in periods of economic and budgetary stress. In the absence of an adopted budget by the beginning of the fiscal year, resources collected and held in the Bond Security and Redemption Fund would still be available to support debt service on the state's general obligation (GO) bonds. Currently, there are no debt service payments requiring a fiscal 2021 appropriation until Aug. 15, 2020. For more information, please see "Louisiana's Resilience To Be Tested As Economic Pressures Weigh On Budget Outlook," published May 4, 2020.
Mississippi. Both houses of Mississippi's Legislature are working in a joint legislative budget conference to work out differences on the appropriations bills for fiscal 2021, and incorporates updated new revenue estimates. The budget also incorporates recommendations to cut spending for state agencies and a portion of CARES Act funds for eligible agency expenditures to close a portion of the projected budget gap. While the state has a track record of enacting a budget prior to July 1, the House and Senate calendars do allow members to work until July 12 to meet deadlines, if needed. In addition, both houses passed a resolution to allow each to convene again for up to six days to address COVID-19 funds from the federal government if additional legislation is passed at the federal level. If necessary, lawmakers are now required to end session by Oct. 5. With a majority vote, the Legislature may pass a continuing resolution, including authorizing provisions for the treasurer to make debt service payments in the absence of a budget if additional time for a budget agreement is needed. Currently, there are no debt service payments due that require a fiscal 2021 budget appropriation until Aug. 1.
New Jersey. New Jersey expects to enact a three-month budget by June 30 under the recent temporary extension of its fiscal 2020 year-end to September. It then expects to enact another budget in September for the remaining nine months in fiscal 2021. At that time, the state anticipates it will have a better estimate of fiscal 2021 revenue. The three-month extension allows the state to keep cash flow borrowing outstanding until it receives income tax in July due to deferred tax filing deadlines. Without an enacted budget, state government shuts down, except for limited personnel responsible for health and safety. For more information, see "New Jersey’s Revised Fiscal 2021 Budget: A Work In Progress," published June 15, 2020.
Rhode Island. In early June, House and Senate leaders announced that the General Assembly will delay action on the fiscal 2021 budget plan until after July 1. The state's Revenue Estimating Conference (REC) May forecast projects next year's revenue shortfall to be $515.8 million below the November 2019 REC forecast. The decision to delay the budget is based on Rhode Island's expectation of receiving clarity on a new federal relief package. Under law, Rhode Island will enter the new fiscal year with the ability to spend up to one-twelfth of its previous year's budget each month until the enactment of the fiscal 2021 budget. Debt service on general obligation bonds is not subject to these limitations and is appropriated in full.
States awaiting action by the governor
California. The Legislature passed a fiscal 2021 budget, and is currently in negotiations with the governor over differences with the governor's executive budget proposal. A revised budget is expected to be enacted by June 30 and signed by the governor. However, most functions of government, including debt service, remain funded under continuing budget provisions in the event of a late budget. For more information, see "California Governor’s May Budget Revision Outlines School Cuts And Reserve Drawdowns," published June 3, 2020.
Georgia. The legislature returned to session June 15 and, as required, recently sent an agreed upon budget bill to the governor prior to the July 1 start of its fiscal year. The governor has yet to enact the budget bill, which includes expenditure reductions to offset weaker revenue forecast. While the state does not have statutes allowing operation in the absence of the budget, the constitution provides that the first revenues received in the general fund be made available to pay debt service of general obligation debt. At the same time, we are not aware of timing issues related to the debt service payments related to the state's appropriation-backed debt should a budget not be enacted before July 1.
Iowa. Iowa's legislative session has typically begun in January and adjourns in March. Due to the COVID-19 outbreak, however, lawmakers paused ongoing budget discussions. The Legislature resumed its session and concluded on June 14, 2020, after lawmakers agreed on a full-year budget for fiscal 2021. The $7.78 billion general fund budget was sent to the governor on June 24, 2020; the governor has thirty days from the conclusion of the legislative session to sign any bills. The budget level-funds most agencies and departments and incorporates approximately $100 million of new funding for K-12 public education that was agreed upon in March. The state does not anticipate the use of reserve funds in the fiscal 2021 budget, and currently, reserve funds are held at statutory maximums. Iowa's constitution states that no money may be spent from the treasury unless the Legislature enacts a law to do so and the governor concurs. In March, however, the legislature and governor agreed to allow 2/12ths of the appropriations from fiscal 2020 to be available to be spent starting July 1, 2020. Officials report that payments for debt service should be available and are not dependent on bills yet to be signed.
Vermont. The governor received a temporary three-month spending plan for fiscal 2021 on June 27, but has yet to sign it. The legislature expectsto resume negotiations sometime in August to enact a full-year budget. The three-month spending plan anticipates approximately level funding for most agencies and departments on a pro-rata basis, while fully funding the fiscal year's debt service and retirement obligations at actuarially determined employer contribution levels. Vermont's Joint Fiscal Office projects a $143 million decline in revenues as of May 19, (compared to its prior forecast in January). The state expects its current cash position to be sufficient without the need for external borrowing. The governor has also signed legislation allowing for expanded interfund borrowing, if necessary. In the event of a late budget, Vermont statues give the treasurer the authority to fulfill debt service obligations of bonds without further order or authority. Management reports that the first debt service payment date in fiscal 2021 is due on Aug. 15.
States that have enacted short-term or interim budgets
Massachusetts. On June 26, the governor signed a one-month interim budget to keep state government running through July. The Legislature has traditionally enacted an interim budget before enacting a final fiscal 2021 budget in late July or August. If necessary, the state can extend the interim budget month-by-month. For more information, see "Massachusetts' Near-Term Liquidity Should Be Sufficient Through The Current Fiscal Year," published April 20, 2020.
Pennsylvania. Pennsylvania passed a $25.8 billion temporary general fund spending plan for fiscal 2021, which funds public education (including pre-kindergarten, kindergarten through grade 12, and higher education) for the full fiscal year, but will fund most other state agencies for the five months through Nov. 30. The budget sustains education funding at fiscal 2020 levels, funds debt service in full, and contributes to the state's pension plans at actuarially determined levels. Approximately $2.6 billion of federal Coronavirus Relief Fund (CRF) funding from the CARES Act is appropriated for fiscal 2021, which leaves about $1.3 billion of CRF funding available. Looking ahead, we expect Pennsylvania's estimated budget gap for fiscal 2021 will be sizable. Officials have projected up to a $5 billion general fund shortfall on a combined basis for fiscal 2020 and fiscal 2021 (about 7.1% of combined fiscal-year expenditures). For more information, please see "Pennsylvania Fiscal 2021 Short-Term Spending Plan Provides Some Breathing Room Ahead Of Substantial Fiscal Challenges," published June 5, 2020.
South Carolina. The General Assembly did not finalize the fiscal 2021 budget during the regular session, and instead passed a continuing resolution that authorizes state spending in early fiscal 2021 at fiscal 2020 spending levels. The Legislature also authorized a $250 million appropriation from the contingency fund if needed for COVID-19-related costs that, if used, would result in reserve levels equal to a good 7% of budget at the end of fiscal 2020. However, CARES Act funding could offset this spending and mitigate use of these reserves. The Legislature plans to reconvene before September to finalize the fiscal 2021 budget. Should forecasted revenue declines become significantly more severe than current estimates, we expect the state will make timely budget cuts to manage for structural budget balance.
States with later fiscal year start dates
Michigan. Michigan's fiscal year begins on Oct. 1. The state expects to adopt a budget in time for the new fiscal year, which will incorporate significant adjustments to reflect revenue declines in fiscal 2021 (as shown in its May 2020 consensus revenue estimates). Legislative deliberations are underway. The state estimates that the fiscal 2021 budget will need to address a current revenue shortfall of approximately $3 billion compared to the executive budget proposal. The state's first GO debt service payments are due Nov. 1. Due to the critical nature of debt service, Michigan has historically considered it an essential service and has therefore made payments when budget passages were late.
This report does not constitute a rating action.
|Primary Credit Analysts:||Thomas J Zemetis, New York + 1 (212) 438 1172;|
|Geoffrey E Buswick, Boston (1) 617-530-8311;|
|Secondary Contacts:||Sussan S Corson, New York (1) 212-438-2014;|
|David G Hitchcock, New York (1) 212-438-2022;|
|Jillian Legnos, Hartford (1) 617-530-8243;|
|Timothy W Little, New York + 1 (212) 438 7999;|
|Ladunni M Okolo, New York (1) 212-438-1208;|
|Oscar Padilla, Farmers Branch (1) 214-871-1405;|
|Carol H Spain, Chicago (1) 312-233-7095;|
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