Jim Armstrong, PHADA Policy Analyst
Clouds Remaining on the Horizon
- Continuing Claims.
- February 29: 1,699,000.
- May 9 (peak): 25,073,000.
- May 16: 21,052,000.
- Initial Claims.
- February 29: 217,000.
- March 28 (peak): 6,867,000.
- May 23: 2,123,000
- Total: 30,000,000.
- Small Employers: 5,600,000.
- Receiving PPP Loans: 4,100,000.
- Tax Revenue Impacts.
- Local, state, and federal income taxes.
- Payroll taxes that fund.
- The Social Security Trust Fund.
- Medicare’s Hospital Insurance Trust Fund.
- Gas taxes funding the Highway Trust Fund.
- Fees supporting airport operations.
- Supplemental appropriations have added trillions of dollars to the $25 trillion national debt.
- Private sector use of inexpensive debt has raised risks for businesses lacking revenue to maintain repayments.
- State and local governments lack access to debt to support ongoing general expenses. They will
- Increase taxes, or
- Eliminate payroll and other expenses.
Since March 2020, HAs have faced rapid changes resulting from the COVID-19 pandemic and its economic impacts. They have also benefited from steps taken by the federal government to moderate those economic impacts. However, uncertainties over medium- and long-term effects of the dramatic national economic contraction remain. Federal policies seem to presume a relatively brief period of distress and a rapid return to pre-pandemic circumstances. Unfortunately, medium, and long-term impacts on the workforce, on businesses, and impacts of other medium and long-term circumstances may be pointing toward a longer period of economic hardship and uncertainty.
With initiation of shelter in place orders or recommendations and closure of venues with high contagion risks, significant portions of the national economy shut down. In particular, service, transportation, and meals and lodging sectors experienced immediate declines in business of 90 percent or more. As a result, the Department of Labor (DoL) reported dramatic growth in initial and ongoing claims for unemployment benefits (UI). DoL publishes unemployment benefit data weekly, and in its May 15 report, indicated that initial weekly UI claims grew from 0.211 million at the end of February to 0.287 million at the beginning of March (35 percent growth), and to 3.3 million by the middle of March (1,467 percent growth). Those weekly initial claims reached a peak of 6.687 million at the end of March and have trended downward since then. However, initial claims for the week before May 15 were 2.438 million, over 10 times higher than typical weekly initial claims in February.
Eligible initial claims result in continuing claims for applicants approved to receive UI. Until March 14, continuing claims remained below 1.8 million. The following week they increased to 3.057 million (70 percent growth) and reached 25.073 million in the week before the May 15 report (1,203 percent growth).
Federal UI Action
By the end of March, the federal government enacted several laws designed to support employment and expand and increase UI benefits. Pandemic Emergency Unemployment Compensation (PEUC) expanded UI eligibility to cover workers otherwise ineligible for UI (e.g., contract workers, self employed workers, workers with inadequate quarterly earnings), and extended the period of time workers could receive UI by 13 weeks. Pandemic Unemployment Assistance (PUA) provided a supplemental UI payment of $600 per week from the date a worker submitted an initial claim through July 31, 2020. These expansions offer most workers full replacement of their earned income through the end of July, and ongoing UI thereafter for up to 39 weeks. In response to the Great Recession of 2008, the federal government enacted the American Recovery and Reinvestment Act (ARRA) that eventually extended the UI benefit period to 99 weeks.
Weaknesses in This Approach
Unemployment Insurance is one of the few remaining New Deal programs established (that also include Social Security and the public housing program). UI is administered by the individual states which set eligibility standards, benefit levels, and the time over which recipients may receive UI. While most states support the maximum benefit period of 26 weeks, eight states have set shorter periods. The national average weekly UI benefit is $378 but may range from $233 to $555 by state.
Since UI is a state administered program, application and eligibility for the program are managed by state governments (typically an Employment Commission), and each state has its own process for submitting applications. Nationally, the system was able to manage submission initial claims and timely eligibility determination for 211,000 workers. When those weekly submissions skyrocketed to 3.3 million and remain at over 2 million per week, state systems receiving and evaluating applications were overwhelmed. There were media reports that it took unemployed workers days and sometimes weeks to actually apply, and they experienced similar delays in receiving an eligibility determination. In general, eligible unemployed workers must file a claim for continuing benefits each week. In the past, those claims may have been filed at employment commission offices, many of which have been closed, or electronically through a state department’s website. Application processes that rely on overwhelmed web sites particularly disadvantaged people with limited internet access.
In addition to overwhelmed UI intake systems, state programs also faced the need to radically revamp their eligibility standards and their benefit schedules to accommodate PEUC and PUA provisions. Some states managed new eligibility standards in their existing systems while some states required otherwise ineligible applicants to submit applications, receive standard program denials, and then appeal those denials in order to access PUA and PEUC resources. The latter approach tended to further delay receipt of UI benefits. Individuals have publicly reported that they have waited more than 8 weeks to receive initial UI benefits.
Small businesses (with fewer than 500 employees) represent a large proportion of businesses and employ a substantial proportion of the national workforce. There are slightly fewer than 30 million small businesses nationally, about 5.6 million of which employ people (89 percent have fewer than 20 employees). These less well capitalized businesses were at particular risk from the economic downturn, and many of them were earmarked for closure by state or local orders (e.g., restaurants, bars, hair and beauty businesses, health and fitness centers, and some medical and health care businesses). These businesses offered a significant level of lower wage, entry level employment opportunities. While many struggled to remain open, others simply lacked the working capital to stay open without adequate revenue.
Federal Internal Revenue Service Action
The federal government provided a one-time $1,200 stimulus payment to everyone with a Social Security Number, payable through the Internal Revenue Service (IRS) to provide funds for people to use immediately for any expenses and to help provide some revenue to small businesses. The IRS distributed some funds electronically based on its records for distributing income tax refunds. If the IRS did not have direct deposit information, it attempted to get that information from the Social Security Administration for beneficiaries and announced that it would send all others a check by July. Common estimates are that approximately 165 million people will eventually receive stimulus payments.
Federal Small Business Administration Action
In response to circumstances faced by small businesses, a Payroll Protection Program (PPP) administered by the Small Business Administration (SBA) through local commercial banks offered potentially forgivable loans to small business. Loan proceeds could be used for payroll costs, mortgage payments, and utility expenses among other things. The SBA also administered an Emergency Injury Disaster Loan (EIDL) program that could provide $10,000 to eligible businesses. The administration has now limited EIDL eligibility to agricultural businesses.
When the SBA began taking applications for PPP loans, approximately 60 percent of small businesses (18 million businesses) applied and 5 percent were successful (approximately 1.5 million businesses) in the SBA’s first round of loans. That round exhausted appropriations in approximately 2 weeks. Additional appropriations were enacted, the SBA has approved a total of 4.6 million PPP loans as of May 9, 2020, and the administration reports that some funds still remain available for potential PPP loans.
Weaknesses in This Approach
The IRS faced the challenge to distribution approximately $2 trillion quickly. Some payments were made within days of the availability of funds, but payments requiring coordination between the SSA and the IRS took weeks longer. Checks mailed to recipients may still be in process. Some eligible people still face significant waits to receive stimulus payments.
The SBA and local banks created new standards and processes for receiving and evaluating PPP loan applications, and banks dealt with rapidly rising PPP demand for which they were not prepared. Rapidly drafted eligibility standards resulted in questionably “small” businesses receiving loans, and some recipients chose to return the funds in the face of public criticism of their eligibility. Finally, only a small number of businesses have actually received a forgivable loan, partly because many businesses affected by the pandemic cannot maintain payroll (restaurants can’t maintain staffing when they are under orders to close), and in some instances employees may be better off economically by accepting expanded UI benefits under the PUA and PEUC programs. In general, it appears that small businesses that received PPP loans have benefited from them, but it also appears that demand far exceeded appropriations, at least for the first round of these loans.
Other Medium- and Long-Term Considerations
Federal, State and Local Taxes
With the general exception of property taxes, most government revenue is based on levels of economic activity (sales, income, payroll) many of which have been adversely affected by the Pandemic. These may have serious medium- and long-term repercussions. For example:
- Unemployment insurance is funded by payroll premiums paid by employers. With historic numbers of unemployed workers, revenue to support UI benefits has probably dropped substantially while payments for states’ standard UI benefits has grown dramatically. Some states have announced that their unemployment benefit fund may be insolvent before the end of the year.
In general, when this happens, states make up shortfalls by increasing the unemployment benefit fees employers may pay in the next year. At the moment, those deficiencies may be quite large, resulting in large increases in those fees in 2021 to replenish UI benefit reserves.
- Social Security and other support programs are funded through the Social Security Trust Fund supported by a national payroll tax. As of last year, the government projected that the trust fund would support full payment of benefits through 2034. However, since the fund is replenished through a payroll tax, the fund will lose contributions from those taxes for the 23 million people who have become unemployed and are receiving UI benefits. The deeper current unemployment becomes and the longer it lasts, the more adverse the impact will be for the trust fund.
- Medicare is also supported by payroll taxes that contribute to a hospital insurance trust fund for Medicare Part A. Last year, trustees reported that the hospital insurance trust fund will become insolvent in 2028. As with Social Security, the Medicare trust fund will lose substantial contributions in 2020 due to very high unemployment. The trust fund may become insolvent earlier than the 2019 estimate.
In 2020, the federal government had planned to spend approximately $4.9 trillion in mandatory spending, discretionary spending, and interest on the national debt. Since March, the federal government has enacted supplemental appropriations of more than $3 trillion, almost doubling federal spending planned for 2020. In January, the Concord Coalition estimated that the national debt of $25 trillion in 2020 will reach 81 percent of gross domestic product. COVID-19 federal expenditures will likely grow further, contributing a larger 2020 budget deficit and larger national debt.
Some companies have used debt extensively and are highly leveraged. Although that debt is inexpensive at the moment due to policies of the Federal Reserve System, businesses with sizable debt obligations and significantly lower revenue may be at significant risk of failure with inadequate working capital. Those failures will eliminate whatever employment those businesses might be able to reconstruct during an economic recovery.
At the opposite extreme, many state and local governments are prohibited from using debt to support their operations, having adopted balanced budget amendments or other constraints on the use of debt. As a result, with significant declines in tax revenues, states and localities will face pressures to reduce their staffs to control their costs and exacerbate local unemployment pictures and burdens on state UI benefit programs.
What Lies Ahead
The administration seems to assume that the worst of the pandemic’s economic fallout will be over by the end of July (when PUA assistance will end unless extended, and when several of HUD’s COVID-19 waivers expire), or by December 31, 2020 (when most of HUD’s new waivers expire and supplemental appropriations must be spent). Many impacts of the economic crisis point to a much longer term of instability and uncertainty with potential structural disturbance of markets (e.g., petroleum, agricultural products) and distribution systems. It may take some time for the economy to absorb potentially fundamental changes. During such a time, HAs perform a critical role as part of the social safety net. Agencies may focus on core missions to make sure they remain a viable part of local support systems for people suffering during the economic downturn.