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Twenty-one Republican attorneys general pressed the Biden administration yesterday to clarify a provision in the $1.9 trillion economic aid package that the president signed into law last week, warning that its restrictions on state efforts to cut taxes could be “the greatest attempted invasion of state sovereignty by Congress in the history of our Republic,” the New York Times reported. The seven-page letter was signed by a host of Republican officials, including the attorneys general of Texas, Arizona, Georgia and Utah. They take issue with a restriction that lawmakers included in a $350 billion relief effort for state, local and tribal governments that prevents them from using the federal funds “to either directly or indirectly offset a reduction in the net tax revenue” as a result of tax cuts. These governments have suffered revenue hits and laid off more than a million public employees during the coronavirus pandemic. The law requires repayment to the federal government of any money that violates those conditions. In their letter, the Republican officials asked Janet L. Yellen, the Treasury secretary, to clarify how expansively her department would interpret that portion of the law. Does it simply prohibit states from using the federal dollars to offset new tax cuts, or instead prohibit them from cutting taxes for any reason, even if those cuts were in the works before the law passed? The officials said the broader restriction would be damaging and most likely unconstitutional.

States have avoided a Great Depression-scale cash crisis. Despite the pandemic’s crushing toll on the economy, total state tax revenues were roughly flat in 2020 from the year before, according to the Urban Institute, a Washington, D.C., think tank, the Wall Street Journal reported. Last spring, stores shut down to contain the spread of COVID-19 and unemployment skyrocketed. People spent less money on everything from shoes to restaurants to salons. Sales tax collections fell billions of dollars short of forecasts. But widespread federal intervention buoyed households, businesses and financial markets and helped avert analysts’ doomsday projections for state revenues. The stable employment environment for the country’s most affluent workers also brought in stronger than expected tax revenue. Analysts still expect states to confront budget gaps as the pandemic enters its second year, but they are projecting smaller shortfalls partially filled in with federal aid. A Democrat-led Congress is now debating another massive round of federal aid, amid objections from Republicans. The cash that would help contain the crisis began trickling in around the country in early spring with congressional approval of a $2 trillion stimulus package. The federal government sent checks for $1,200 to many households, and Americans spent about 29% of those checks, according to the Federal Reserve Bank of New York, further boosting state sales tax revenues.

At a meeting with Treasury Secretary Janet L. Yellen last month, Jeff Williams, the mayor of Arlington, Texas, laid out his grim economic predicament: Heavy spending on coronavirus testing and vaccine distribution had dwarfed dwindling tax revenue, forcing the city to consider painful cuts to services and jobs. While sluggish sales and tourism were partly to blame, the big worry, Mr. Williams said, is the empty buildings, the New York Times reported. Those dormant offices, malls and restaurants that have turned cities around the country into ghost towns foreshadow a fiscal time bomb for municipal budgets, which are heavily reliant on property taxes and are facing real estate revenue losses of as much as 10 percent in 2021, according to government finance officials. While many states had stronger-than-expected revenue in 2020, a sharp decline in the value of commercial properties is expected to take a big bite out of city budgets when those empty buildings are assessed in the coming months. For states, property taxes account for just about 1 percent of tax revenue, but they can make up 30 percent or more of the taxes that cities and towns take in and use to fund local schools, police and other public services.

New data shows that a year after the pandemic wrought economic devastation around the country, forcing states to revise their revenue forecasts and prepare for the worst, for many the worst didn’t come, the New York Times reported. One big reason: $600-a-week federal supplements that allowed people to keep spending — and states to keep collecting sales tax revenue — even when they were jobless, along with the usual state unemployment benefits. By some measures, the states ended up collecting nearly as much revenue in 2020 as they did in 2019. A J.P. Morgan survey called 2020 “virtually flat” with 2019, based on the 47 states that report their tax revenues every month, or all except Alaska, Oregon and Wyoming. A researcher at the Urban-Brookings Tax Policy Center, a nonpartisan think tank, found that total state revenues from April through December were down just 1.8 percent from the same period in 2019. Moody’s Analytics used a different method and found that 31 states now had enough cash to fully absorb the economic stress of the pandemic recession on their own.

The power supply shortages that slammed Texas last week drove spot electricity prices sky-high for some locally owned utilities, with one town on the hook for more than $200 million and other municipalities anxiously awaiting their bills, Bloomberg News reported. Denton, northwest of Dallas, racked up at least $207 million in power purchases over the span of a few days, more than triple its entire electrical power costs for fiscal year 2020. It left the city of 140,000 without enough cash to keep buying power at market rates and said in regulatory filing it may need to borrow more money to cover the costs. Across the state, local utilities that were forced to buy power at prices as high as $9,000 a megawatt-hour when a deep freeze hobbled the state’s power grid are potentially facing outsize debts that could wreck their credit rating and linger on their balance sheets for years. CPS Energy, a municipally owned utility in San Antonio, said it expects its costs from the winter storm to be “substantial” and is considering ways to limit the impact on its 840,750 electric customers. Fitch Ratings on Wednesday placed all retail and wholesale electric utilities operating within the Electric Reliability Council of Texas, the grid operator known as Ercot, on rating watch negative. It cited concerns regarding funding requirements and liquidity in the near term, and cost recovery and the potential for increased financial leverage over the medium term. The Kerrville Public Utility Board, a community-owned, not-for-profit electric company that serves 23,000 customers northwest of San Antonio, also said it is facing “significant and unexpected” energy costs.

Puerto Rico moved closer to resolving the largest municipal-debt default in U.S. history after creditors owed roughly $11.7 billion backed a settlement framework, the most Wall Street support yet amassed for a restructuring of the territory’s core public debts, the Wall Street Journal reported. The proposed settlement released today would reduce roughly $18.8 billion in general obligation debt to roughly $7.4 billion, lowering interest payments to bondholders to levels that Puerto Rico’s financial supervisors believes it can support after years of population loss and economic decline. Some bonds covered by the deal have gained value in recent months, buoyed by fixed-income investors’ appetite for high-yielding municipal debt and expectations that Puerto Rico’s court-supervised bankruptcy is nearing its end. The agreement marks the culmination of months of private talks between finance officials and creditors to assess the long-term damage to Puerto Rico’s economy stemming from Covid-19. Investment firms that participate would exchange their claims for a mix of cash, restructured bonds and tradable securities known as contingent value instruments that only pay out if sales-tax collections exceed certain projections. A sustained rally in high-yield municipal bonds, including Puerto Rico’s, helped to ease the deal, according to bondholders and advisers involved in negotiations. Yield-hungry investors have been drawn to risky municipal bonds in part due to the U.S. Federal Reserve’s commitment to ultralow rates. Also fueling the rally are expectations that federal support for Puerto Rico will increase with the White House and both houses of Congress under Democratic control, according to analysts and investors.

The City of Tucson, Ariz., decided last year to pay rent on five golf courses and a zoo — to itself. In California, West Covina agreed to pay rent on its own streets. And in Flagstaff, Ariz., a new lease agreement covers libraries, fire stations and even City Hall. They are risky financial arrangements born of desperation, adopted to fulfill ballooning pension payments that the cities can no longer afford, the New York Times reported. Starved of cash by the pandemic, cities are essentially using their own property as collateral of sorts to raise money to pay for their workers’ pensions. It works like this: The city creates a dummy corporation to hold assets and then rents them. The corporation then issues bonds and sends the proceeds back to the city, which sends the cash to its pension fund to cover its shortfall. These bonds attract investors — who are desperate for yield in a world of near-zero interest rates — by offering a rate of return that’s slightly higher than similar financial assets. In turn, the pension fund invests the money raised by those bonds in other assets that are expected to generate a higher return over time. If they can pull off the strategy, cities issuing these bonds can reduce their pension bills by an amount that’s the difference between what they earn and what they pay out. But as with any strategy based on long-term assumptions, there is risk. Taxpayers can still owe the pension fund money if the investments don’t get the return they expect. And although most municipal debt is considered bulletproof because a government pledges to make its creditors whole in the event of a default, bonds like the ones West Covina issued don’t have that guarantee.

A bipartisan group of Ohio’s mayors said of the policies they’ll be watching over the next year, keeping the income tax changes implemented early in the pandemic is the most vital, Cleveland Scene reported. Members of the Ohio Mayors Alliance met on Monday to lay out their priorities, which unsurprisingly focus mainly on the end of the COVID-19 pandemic and healing their economies and communities as the state gets out of it. “When we looked at the prior recession, it took us nearly a decade to come out of the 2008-2009 recession,” said Findlay mayor Christina Muryn. “That’s unacceptable.” The city leaders said a saving grace for their local governments has been a tax change made under House Bill 197, passed in March, which taxes earnings based on an employer’s location rather than where the employees work. Because of so many people working from home, officials said this helps the municipalities as much as they can during a time of significant revenue loss. “Unlike the state budget, we haven’t had the benefit of a strong sales tax,” said Parma Mayor Tim DeGeeter. “Cities have had the dual challenge of declining revenue and increased costs as frontline communities respond to this pandemic.” Because income tax is often the largest source of economic resources for Ohio cities, this type of monetary loss would mean essentially a loss of independence for cities. “I think most of the cities would have to declare bankruptcy right away, because there is just no path forward if this revenue would be taken away and nothing would be put in place,” said Dayton Mayor Nan Whaley of Dayton and cities in surrounding areas.