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Industry Updates

Economic Hardships Begin to Take Shape for State Lawmakers

The massive drop in gross domestic product last quarter has reiterated the deteriorating economic situation facing all 50 states. States face unprecedented medical and financial threats without knowing the full damage already wrought by the COVID-19 virus, let alone what will come.

The first priority for state lawmakers remains the health and welfare of their constituents, but a close second is alleviating a dire economic situation that has left millions unemployed. Wednesday’s report of the largest national economic contraction since the Great Recession has reaffirmed the worsening financial situation, which officials still can’t fully calculate.

With unemployment up and revenues down, new taxes seem out of the question, said Tim Storey, executive director of the National Council of State Legislatures, in a podcast interview with the NCSL published earlier this week. That forces elected officials to consider new ways to generate revenues in order to fund crucial government programs.

“The revenue projections in the world of coronavirus and its impact on the U.S. economy, the uncertainty is like a magnitude of a hundred,” Storey said. “It’s dramatic. No one ever imagined this kind of scenario.”

Storey said the radically different nature of the modern economy as well as the unprecedented scope of the coronavirus leaves few historical parallels from which to draw inspiration, but that elected officials will have to consider a 5% to 10% downturn similar to the financial crisis 10 years ago.

That could add momentum for new forms of legal gambling. More than a dozen states considered legal sports betting or other gaming expansions before the coronavirus outbreak, and their millions in potential new tax revenues are undoubtedly enticing for cash-strapped state coffers.

But even the most robust gambling expansion would garner a comparatively small return. As state lawmakers deal with their new economic reality, and a legal mandate for most to balance their budgets, gambling dollars could be overshadowed by the herculean balancing act ahead of them.

“Nobody knows how deep will it go. Nobody knows for certain,” Storey said. “I think smart legislators and fiscal staff are already anticipating sharp declines in revenue.”

Situation Takes Shape

The 4.8% retraction of the U.S. economy in the first quarter is just the latest bad news for a worsening monetary picture. The economy still saw its largest single-quarter drop since 2008 despite a relatively strong financial situation in January, February and parts of March. The second quarter will almost assuredly be worse.

This follows weekly reports that show since social distancing measures went into effect last month, more than 26 million Americans have filed for unemployment, which doesn’t account for every American without a job.

The April unemployment report, scheduled to be released next month, will likely show an even more dire situation. Unemployment could exceed 20%, a level not seen since the Great Depression.

Legislators now are left with a series of difficult options that seemed impossible just a few months ago. Since virtually all states are forced by statue or constitutional mandate to balance their budgets, most were in excellent financial shape preparing for the 2020-2021 fiscal year beginning in July. The strong economy in the past few years even left some states underbudgeted and flush with excess funds.

Those surpluses are now deficits just a few months later. Consumer spending, which accounts for about 70% of American GDP, declined as many Americans suffered layoffs or furloughs and the majority were ordered to stay home.

That in turn hurt sales tax receipts, which make up a significant chunk of most state’s budgets. States with large tourism and gambling industries such as Nevada, Pennsylvania and Illinois were in even more trouble as both travel and casino visits have essentially ceased for the past six weeks.

Compounding the lost revenues is an increased need for government services. Unemployment offices and hospitals saw dramatic spikes in nearly every state. Even with coronavirus starting to abate, lines for unemployment (and even food) remain long.

Changed Spending Alters Picture

At the same time, the coronavirus has eliminated some spending needs for states, while generating unexpected new revenues.

With schools closed, state and local governments have been able to cut back on education spending, typically their largest single program. Other services such as DMV offices also remain closed.

Meanwhile the federal government has injected trillions into the economy, including $150 billion to state governments. Storey said the money can be a big boost, especially for smaller states, where the extra federal dollars can help ameliorate the lost revenues.

But that alone will not be enough, Storey said, especially for larger states such as California, New York and Texas, where annual state spending exceeds $100 billion. The virus also presents future spending challenges that can’t even be calculated, such as new sanitation or social distancing equipment and construction for schools.

“We’re in uncharted waters,” Storey said. “We’re off the ends of the maps.”

Next Steps Remain Unclear

Even in the best of times, states’ multi-billion dollar budgets are difficult to manage. About half of all states finalized a 2020-2021 fiscal year budget before adjourning, meaning the other half still have work to do. Even those with a preliminary budget will likely have to make drastic adjustments for revenue declines that were inconceivable just a few weeks earlier.

New gambling dollars from iLotteries, retail and mobile sports betting, internet casinos or online poker could be an answer, but these are just a few, relatively minor, possibilities in a difficult and evolving situation.

“States are going to use their own creativity and their own resources. They’re going to look at spending money efficiently,” Storey said. “And, again, can they do anything to increase revenue?”

Like corralling a budget, passing legislation is seldom an easy task. Gambling remains controversial in many states even as they face unprecedented financial strains.

In Kentucky, which seemed in good shape to legalize sports betting and real money online poker earlier this year, a bill stalled in the General Assembly before the full extent of the COVID-19 outbreak. It was rejected again even as the severity of the virus became clear and the state was all-but forced to pass a dramatically reduced final budget.

Kansas, seemingly another state positioned to approve legal wagering, passed only a handful of bills in its 2020 legislative session before it was cut short. Major issues for Kansas, among other states, including Medicaid expansion and abortion rights that dominated the early parts of the session remain, and are now overshadowed by the dual medical and economic threats from the virus.

In Topeka (and elsewhere), larger coronavirus response measures could squeeze out the time and political capital necessary for a meaningful gaming expansion.

Storey said all that lawmakers can do now is prepare for bad, worse and catastrophic scenarios. Significant work remains in the months, and likely years, to come. It remains impossible in April 2020 to tell what role new gambling dollars will play.

“How do you pass a responsible budget with so much uncertainty right now?” Storey said. “This changed the world.”

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