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State and local governments face a $225 billion shortfall for the coming fiscal year, according to a study from the left-leaning Center for Budget and Policy priorities, The Hill reported. The study estimated that the governments' revenues, which had in recent months come in higher than expected, were still 7.8 percent below pre-coronavirus estimates. Once federal aid was taken into account, states, localities, tribal nations and territories were left about $300 billion short of revenues. States still have an estimated $75 billion in rainy day funds that could be used to plug some of those holes. President Biden has requested $350 billion in state and local aid as part of his $1.9 trillion COVID-19 relief bill, a figure that is likely to be pared back in negotiations with Republicans. Other relief efforts and proposals have sought to address some of the additional costs states face, such as education costs, funding related to the coronavirus and various public health measures. The study noted that shortfalls among state and local governments had already contributed to 1.4 million jobs lost since the pandemic took hold, including 177,000 in the fourth quarter alone.

Municipal bond issuance in 2020 was the highest in a decade, reflecting the collapse of interest rates and the increased costs cities and state governments are facing from COVID-19 shutdowns, the Wall Street Journal reported. Bonds for new projects reached $252 billion last year, according to Refinitiv, a small increase from the previous year. The new borrowing drove the total amount of outstanding muni debt above $3.9 trillion for the first time since 2013, according to the Federal Reserve data from the third quarter. The muni issuance boom is unlikely to abate as cash-strapped local governments struggle to make up for ongoing COVID-19–related shortfalls and pay back old debts. Before the pandemic, many city and state governments had already been operating on tight budgets. Despite the increase in availability of muni bonds, investor demand remains strong. Central bank rate cuts have left investors clamoring for yield. Muni bond investments produced steady returns last year in a low-interest rate environment.

Rating agency Fitch yesterday downgraded New York City debt to ‘AA-’ from ‘AA’, while maintaining its negative outlook, on concerns of a prolonged impact to the city’s economic growth due to the coronavirus crisis and related containment measures, Reuters reported. Fitch’s move comes close on the heels of S&P Global Ratings changing its outlook on the city’s debt to “negative” from “stable” due to uncertainties stemming from a recent uptick in the virus transmission rate. S&P’s revision relates to the city’s general obligation (GO) and associated appropriation-backed bonds, while the Fitch downgrade includes industrial development revenue (IDR) bonds, special revenue bonds and GOs. It reflects a one-in-three chance S&P could lower its rating during the outlook period, which typically spans two years, the rating agency said. The coronavirus transmission rate increase could hurt the city’s financial forecast, and could negatively affect global tourism trends and additional federal stimulus funding for state and local governments as well as service reductions at the Metropolitan Transportation Authority, S&P Global Ratings credit analyst Nora Wittstruck said in a statement.

Randy Levine, president of the New York Yankees and former deputy mayor of New York City, said Sunday that the coronavirus pandemic has left a “bleak” financial situation in the city, suggesting that the city “will go bankrupt” if the issue is not addressed, The Hill reported. “Because of the pandemic, because of what’s happened here, the fiscal situation in the city is really, really bleak. It hasn’t gotten the attention that it deserves,” Levine said during an interview with John Catsimatidis on his radio show on WABC 770 AM. “If this city is not on good financial footing, then nothing else can happen,” said Levine, who served as the deputy mayor for economic development, planning and administration from 1997 to 2000. “If you don’t solve this problem, then nothing happens,” he added. “The city will go bankrupt.” State and city governments across the United States have exhausted their coffers since the start of the pandemic, using money to provide protective equipment and gear up for other preventative measures as the virus spread. The New York Times reported in November that New York City itself spent $5.2 billion combatting the pandemic, including paying for ventilators, food assistance, testing and reopening schools safely. Mayor Bill de Blasio (D) warned at the time that if the city did not receive additional resources from a major federal stimulus package, that New York would be forced to make "extremely difficult choices", referring to cuts to municipal jobs. The mayor reported a $4 billion budget gap as a result of increased spending due to the pandemic, according to the Times. Levine said that while other issues may exist in the city, such as homelessness and crime, he argued that economic policy should be the foundation to solving any wider socioeconomic issue exacerbated by the pandemic.

A bipartisan group of lawmakers yesterday introduced a coronavirus aid proposal worth about $908 billion, aiming to break a months-long partisan impasse over emergency federal relief for the U.S. economy amid the ongoing pandemic, the Washington Post reported. The new plan came amid a flurry of congressional jostling about the shape of economic relief, with House Democrats assembling a new proposal, Senate Majority Leader Mitch McConnell (R-Ky.) creating a new plan and President-elect Joe Biden calling for a massive government response. The plan circulated by the bipartisan group of senators is light on details but seeks to reach a middle ground on numerous contentious economic issues. It would provide $300 a week in federal unemployment benefits for roughly four months — a lower amount than the $600 per week Democrats sought, while still offering substantial relief to tens of millions of jobless Americans. The agreement includes $160 billion in funding for state and local governments, a key Democratic priority opposed by most Republicans, as well as a temporary moratorium on some coronavirus-related lawsuits against companies and other entities — a key Republican priority that most Democrats oppose. The measure also includes funding for small businesses, schools, health care, transit authorities and student loans, among other measures. Read more. 

In related news, U.S. airlines would receive $17 billion for four months of payroll support under a new $908 billion bipartisan Senate COVID-19 relief proposal, Reuters reported. A bipartisan group of lawmakers announced a package of $45 billion in transportation assistance, and the offices of Senators Mitt Romney and Mark Warner said the plan includes $15 billion for transit systems, $4 billion for airports, $8 billion for private buses and $1 billion for passenger railroad Amtrak. The $45 billion in transportation assistance is designed to provide assistance for four months. Congress and President-elect Joe Biden can decide next year if more funds should be approved beyond March, Senator Joe Manchin (D-W.Va.) said. The White House has not yet said it supports the plan, and neither have Congressional leaders. A separate Senate Republican leadership relief plan summary sent to lawmakers later on Tuesday had no reference to additional transportation assistance. Read more. 

Additionally, Senate Majority Leader Mitch McConnell (R-Ky.) yesterday circulated a new coronavirus relief proposal that could garner support from the White House among Senate Republicans, The Hill reported. McConnell said that he had been speaking with Treasury Secretary Steven Mnuchin and White House chief of staff Mark Meadows about what President Trump could sign. Congress is quickly running out of time to pass lame-duck legislation with the House poised to leave as soon as next week. Congress faces a Dec. 11 government funding deadline and McConnell said any coronavirus relief will ride on that. McConnell previously twice offered a roughly $500 billion coronavirus relief bill that was rejected by Democrats. McConnell's new proposal would provide protections against coronavirus-related lawsuits, extend unemployment insurance for roughly a month and provide another round of Paycheck Protection Program (PPP) small business assistance. It would also provide more money for the Postal Service, schools, testing and vaccine distribution. If Congress is going to pass additional relief, McConnell said he expected it would be folded into a must-pass government funding bill. Read more. 

West Covina, Calif., which sold $204 million of pension bonds in July, is at the fiscal brink because of its ineffective management and raiding of reserves, according to a report yesterday by State Auditor Elaine Howle, Bloomberg News reported. The southern Californian city of about 105,000 residents helped cover salary and benefit costs for its public safety workers by siphoning from reserves, halving its year-end balance in fiscal 2019 to about $10 million over four years, the report said. The city, which has about $227 million in outstanding municipal debt, has made “questionable” financial decisions, has likely understated the impact of the coronavirus pandemic and doesn’t have a fiscal recovery plan, raising the risk of bankruptcy, according to Howle’s report. “West Covina is at high risk of being unable to meet its future financial obligations and provide effective city services,” the audit said. “If West Covina is unable to resolve its structural deficit, it risks becoming embroiled in the lengthy and complex process of declaring municipal bankruptcy.” In July, West Covina’s financing authority sold $204 million of taxable lease-revenue debt rated A+ by S&P Global Ratings, with the top yield of 3.89 percent for a bond maturing in August 2044. A bond due in August 2038 traded on Monday at a 3.12 percent yield, according to data compiled by Bloomberg.

A growing number of governors are calling for another round of coronavirus-relief legislation from Washington, D.C., saying that they are unable to provide additional funds to small businesses amid budget shortfalls, the Wall Street Journal reported. The issue is gaining urgency as money from federal relief passed earlier this year runs out ahead of a year-end deadline to spend it. States have funneled hundreds of millions of dollars in federal aid into everything from personal-protective equipment and hazard pay for front-line health-care workers to schools and food banks. Businesses, which generally got a smaller slice of the aid than programs directly tied to the public-health emergency, are in a particularly precarious spot. In addition, federal loans to businesses during the shutdown earlier this year — known as the Paycheck Protection Program — have since run out. The crunch is tough in the Midwest, where some of the nation’s strongest coronavirus restrictions have been implemented amid increases in COVID-19 cases, hitting businesses just ahead of the holiday season.