States Remain Resilient through the Pandemic | Lord Abbett

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Fixed-Income Insights

Overall, revenues for the recent fiscal year held up well despite the economic impact of COVID-19. But what about the months ahead?

Read time: 4 minutes

This article is from the forthcoming edition of the Lord Abbett Muni Quarterly.

When the COVID-19 pandemic reached the U.S. in March 2020, headlines warned that U.S. states would face unprecedented fiscal distress. Businesses shut down, travel came to a halt, and unemployment spiked to rates rivaling those of the Great Depression. Fears of a precipitous decline in state tax revenues and difficult-to-solve-for budget gaps were widespread. There was even talk about states filing for bankruptcy (which is prohibited by the U.S. Constitution). However, our analysis found that revenue declines have been significantly lower than projected. States, for the most part, have weathered the storm well, revising their budgets accordingly.

States’ Revenues Weathered the Downturn

For the period March through October 2020, which saw the most volatility, tax revenues were down only 5.2% percent from the same period the year before, according to data from the Urban Institute. This is far less than the than 11%-15% that the rating agencies and economists had projected. Broken down by component, personal income taxes were down only 2.8%, sales taxes were down 5.8% and corporate income taxes declined 8.9%.

In prior recessions, rising unemployment rates resulted in lower tax revenues. However, the COVID-19-induced recession behaved differently. This recession has disproportionally affected lower wage earners, while mid- and high-wage professionals have largely remained employed. Most states have progressive tax rate structures, with the highest wage earners paying the most income taxes. This, along with a surging stock market and increasing home prices, have reinforced income taxes and prevented sales taxes from declining significantly.

Stimulus Played a Role

Although these factors were critical in minimizing revenue loss, it would have been much worse if it was not for the federal stimulus funding. Not only did the states receive direct funding of $150 billion, but the $600 checks sent to low income individuals and the expanded unemployment benefits bolstered sales tax revenues. More stimulus funding is expected as new COVID-19 relief legislation was moving through Congress as of early March 2021.

Income Tax a Factor in States’ Resilience

Revenue recoveries have been quicker in those states that tax income, particularly those that tax the wealthiest at the highest rates. States most reliant on travel and tourism for tax collections, and those which do not levy income taxes, are recovering more slowly. Several examples illustrate the better than expected revenue performance this year:

  • Connecticut estimated a $930 million operating shortfall in fiscal 2020, before closing with a $50 million surplus, and in August, estimated a $2.1 billion shortfall for fiscal 2021 before cutting that estimate 58% by November to $880 million.
  • California went from forecasting a two-year, $54.3 billion deficit at the height of the crisis to the Legislative Analyst Office now projecting a one-time, $26 billion general fund increase that the legislature can allocate in the upcoming budget process for 2021-2022.
  • The Illinois Governor’s Office of Management and Budget (OMB) revised the fiscal 2021 budget forecast in November lowering its estimated budget deficit by nearly $1 billion, as revenues are outperformed expectations by 6.5% year to date.
  • Texas is projecting a nearly $1 billion shortfall for the current budget cycle, down from a July estimate of a $4.58 billion gap.

Figure 1 illustrates the fact that many states outperformed their revenue expectations for the year, through October, significantly.


Figure 1. Many States Exceeded Revenue expectations through October 2020
Year-over-year revenue collections versus expectations for fiscal 2020

*Versus the state’s mid-year updated financial plan, fiscal year-to-date collections through October were 1% below estimates.

Source: BofA Global Research. YOY=Year-over-year. For illustrative purposes only.


Unlike the Great Recession of 2008-09, most state and local governments entered this

recession from a position of strength. State and local government revenues increased over 40% from their pre-2008 financial crisis peak, and governments have been managing their budgets more prudently. The median state rainy-day fund reached 7.6% of general fund expenditures in fiscal year 2019, as compared to 2.1% in fiscal 2008, according to data from the National Association of State Budget Officers. Thus, they have more dry powder to offset the revenue declines that have occurred. Figure 2 shows the less-than-expected revenue impact, as analyzed by Urban Institute.


Figure 2. Overall, State Revenue Impact from the Pandemic was Less than Expected

Change in tax revenue, March–October 2019 versus March–October 2020

Source: State Tax and Economic Review Project, State and Local Finance Initiative at Urban Institute. For illustrative purposes only.


Budget Gaps Emerge

Although revenues have not declined as much as expected, budget gaps have opened. States for the most part have been proactive in taking meaningful corrective measures. At the start of the pandemic, state and local governments immediately furloughed employees. Employment at the state and local sectors was at the lowest level that it had been since 2001. Many states cut back expenditures in their recent budgets. California’s FY21 enacted budget includes $11 billion in spending cuts that will go into effect, barring additional Federal aid. Connecticut’s Governor asked agencies to identify 10% cost-cutting measures. The Governor of Texas proposed a 5% cut for various agencies in the state’s two-year budget.

Looking Forward

As the pandemic continues to constrain commerce for large segments of the economy, tax revenues likely will be affected. State governments may face challenges to maintain fiscal balance and take corrective action. Fortunately, states have remained on their feet during this crisis. With possible further federal stimulus, and an acceleration in U.S. COVID-19 vaccination efforts, we think recovery should not be too far off.



This commentary may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

This material is provided for general and educational purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, or any Lord Abbett product or strategy. References to specific asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations or investment advice.

References to specific securities and issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. The securities referenced may or may not be held in portfolios managed by Lord Abbett and, if such securities are held, no representation is being made that such securities will continue to be held. This is not a representation of any securities Lord Abbett purchased or would have purchased or that an investment in any securities of such issuers would be profitable.

A Note about Risk: The value of an investment in fixed-income securities will change as interest rates fluctuate and in response to market movements. As interest rates fall, the prices of debt securities tend to rise. As rates rise, prices tend to fall. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The municipal bond market may be impacted by unfavorable legislative or political developments and adverse changes in the financial conditions of state and municipal issuers or the federal government in case it provides financial support to the municipality. Income from the municipal bonds held could be declared taxable because of changes in tax laws. Certain sectors of the municipal bond market have special risks that can affect them more significantly than the market as a whole. Because many municipal instruments are issued to finance similar projects, conditions in these industries can significantly affect an investment. Income from municipal bonds may be subject to the alternative minimum tax. Federal, state and local taxes may apply. Investments in Puerto Rico and other U.S. territories, commonwealths, and possessions may be affected by local, state, and regional factors. These may include, for example, economic or political developments, erosion of the tax base, and the possibility of credit problems.

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett’s products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.

The opinions in this commentary are as of the date of publication, are subject to change based on subsequent developments, and may not reflect the views of the firm as a whole. The material is not intended to be relied upon as a forecast, research, or investment advice, is not a recommendation or offer to buy or sell any securities or to adopt any investment strategy, and is not intended to predict or depict the performance of any investment. Readers should not assume that investments in companies, securities, sectors, and/or markets described were or will be profitable. Investing involves risk, including possible loss of principal. This document is prepared based on the information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.



    Muni Quarterly


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