How large could the shortfall in state government general revenues be, amidst the coronavirus and related crises? 

To attempt to quantify the dollar amounts, we first reviewed the record from the 2007-2009 financial and economic crisis. We tried to explain the change in total general revenue across the 50 states that arrived with, and soon after, that crisis.  Using a variety of indicators, we looked at any significant relationships to project the impact of the current crisis caused by the coronavirus pandemic on subsequent total general revenue. 

We looked over a variety of correlations, univariate and multivariate regressions, and then compared the state changes in total general revenue after the 2007-2009 crisis to state-specific indicators such as population, population growth, the severity of the housing crisis in the state, nominal state GDP growth, real state GDP growth, interstate migration trends, and the change in the unemployment rate during the Great Recession (from December 2007 to June 2009). We related those indicators to the “shortfall” in total general revenue for the states for fiscal years 2009 and 2010, which was a June fiscal year end in most cases. Total general revenue peaked in fiscal 2008, then had a significant two-year decline during and after the 18-month Great Recession. We calculated the “shortfall” as the dollar amount changes from 2008 to 2009, and from 2008 to 2010, as a percentage of the 2008 total general revenue for each state. 

After reviewing the statistical relationships, we concluded that a  simple change in the unemployment rate, by itself, was the most significant and/or simplest defensible indicator to use. From there, under the set of assumptions outlined below, we calculated a similar “change in the unemployment rate” and used it as the only explanatory variable in a simple regression, like the one we did for the Great Recession.  From this we project what the total general revenue shortfall could look like for fiscal years 2021 and 2022, for a current recession that a) started more severely, but b) doesn’t last as long as the Great Recession, and c) assumes that, after spiking in March along the lines of the national unemployment rate, the unemployment rates in the 50 states begin to recover slowly in mid-2020, as they did after the Great Recession ended in June 2009.

Those assumptions lead to a projected “change in the unemployment rate” in the current crisis that is significantly greater than the one in the Great Recession, because of  how badly this one started. In turn, the method leads to a more severe decline in projected total general revenue.

A simple univariate regression relating Great Recessionary state total general revenue shortfalls in percentage terms (TGRS) to the change in the state unemployment rate (CSUR) yields a regression result:

TGRS =  -.04 - .13*CSUR 

… with a significant t-statistic of 2.87 on the CSUR variable, and a modest R-squared (0.15). We then used that regression equation to project the percentage change in total general revenue for fiscal years 2021 and 2022 based on our projected change in the unemployment rate, after its massive recent spike upward. Those percentage changes in total revenue amounts lead to the dollar amounts (in billions) in our table below. In total, the dollar amount of the shortfall sums to roughly $400 billion for the 50 states.

These projections are clearly not perfect predictions. They depend on a variety of assumptions that may or may not be especially reliable in light of these unprecedented times. They include an assumption that a slow recovery from our recent massive downturn gets underway in mid-2020, no significant changes in inflation or interest rates, no massive relapse in COVID infection rates, no “miracle cure,” and no outbreak in social discord. 

Note that the last assumption, which we included more than a week ago, is already being put to the test.