By David Harrison / Photographs by Katie Currid for The Wall Street Journal 

In March, as the coronavirus was beginning its march across the country, Kansas City leaders approved a budget flush with new spending.

Five months later they pared it back.

The pandemic-induced economic downturn hit the nation's state and local governments harder and faster than any other in almost 70 years. In May, public-sector employment plummeted, with fewer people working for state and local governments than at any point since 2001, according to the Labor Department.

As hard as this year has been, next year could be worse. Governments went into the downturn with fat reserve funds and have benefited from federal aid. Barring a quick economic recovery or another round of stimulus, state and local officials could have to make more cuts.

Moody's Analytics estimates state and local governments faced a $70 billion to $74 billion shortfall in the 2020 fiscal year. That could balloon to $268 billion in 2021 and $312 billion in 2022 absent more federal help. Unlike the U.S. government, almost all state and local governments are required to balance their budgets every year.

In Kansas City, Mo., as in many communities across the country, workers have lost jobs or taken pay cuts. Fewer buses ply their routes. Social workers juggle more cases. And fewer police officers are on the street, despite an alarming rise in crime.

Officials anticipate more difficult decisions next year.

"All those sorts of things that are important to how we function in our daily lives are things that we may not be able to address," said Kansas City Mayor Quinton Lucas.

State and local government spending on public services fell at a seasonally adjusted annual rate of 3.7% in the third quarter from the second, according to the Commerce Department. That followed a 6% decline in the second quarter, the sharpest since 1952.

By October, the sector had roughly 1.2 million fewer jobs than a year earlier.

It could take four to eight years for the national economy to recover from the pandemic, estimates Dan White, director of fiscal-policy research at Moody's Analytics. State and local governments could take up to 10 or 15 years, he said.

Further budget cuts could weigh on the national economy for years, analysts warn. Public-sector spending at the state and local level accounted for 8.5% of the U.S. economy and 13.1% of all jobs in 2019, making it a larger sector than retail on both counts.

"State and local governments provide essential services," Federal Reserve Chairman Jerome Powell told lawmakers in June. "It will hold back the economic recovery if they continue to lay people off and if they continue to cut essential services."

The pandemic's toll of job losses and closed businesses hit governments' main revenue sources -- income, sales and corporate taxes. Between March and September, state revenues in those three categories were down 4.8% from the same period a year ago, according to data compiled by Lucy Dadayan, a researcher at the Urban Institute.

Several factors mitigated the damage. First, states and local governments entered this downturn with ample reserves. Kansas City, for instance, used $12 million from its rainy-day fund to help fill a roughly $50 million budget gap.

Second, President Trump and Congress approved a coronavirus relief package in March directing $150 billion to state and local governments to cover pandemic-related expenses this year. Of that, Kansas City received about $30 million.

Third, the recession mostly hit lower-paid service workers and spared higher-earning white-collar workers able to work from home, moderating the decline in income-tax revenues. And expanded unemployment benefits through July propped up consumer spending and limited the drop in sales-tax receipts.

But the slowing economic recovery, rising new infections, dwindling rainy-day funds and the uncertain prospects of more federal aid could spell trouble for governments in the future.

In August, Kansas City officials cut department budgets by 4.5% except for police and fire, which faced a 2.25% reduction. The city also laid off 13 employees, froze hiring and temporarily furloughed managers.

"I doubt that you will ever see the same post-Covid number of employees in Kansas City that you saw pre-Covid," Mr. Lucas said.

The grass on public property is mowed less frequently. The city turned off some of its famous fountains. Fewer drivers will be available to plow snow. It may take longer to receive building permits.

"Our boulevards look terrible because they don't cut them," said Pat Clarke, a community activist.

The police department canceled this year's roughly 30-person class of new recruits, which will put fewer officers on the street. As of Nov. 16, the city had recorded 161 murders, the highest on record.

The city's bus system pared back service by half but is now up to about 80% of its pre-pandemic level. Sales-tax revenues that account for most of its funding are down 15% from a year ago.

Sheila Styron, a Kansas City resident who is blind and relies on public transit to commute to work, said her morning bus now comes every half-hour, up from every 20 minutes before the pandemic.

"I really don't think things are going to get a lot better with public transit in the near future," she said.

The state of Missouri has made its own spending cuts. In June, Gov. Michael Parson cut nearly $440 million in general-fund spending, roughly 4%. About $133 million has since been reinstated.

The move eliminated about 300 filled positions. Of those, 200 came from a single agency, the Department of Social Services. And about 80 of those were in the Children's Division, which handles foster care.

Stephanie Whitaker, a spokeswoman for Mr. Parson, said reorganizing the Department of Social Services was under consideration before the pandemic.

Katy Perry, one of the Children's Division employees whose position was eliminated, worries the cuts will mean greater workloads for social workers.

Ms. Perry, a former adoption specialist in Kansas City, said the agency offered to keep her on at a lower salary and with added responsibilities -- including handling 10 additional foster-care cases. She refused and has since found a new job with a nonprofit helping foster families.

She expects front-line workers in Kansas City will frequently end up with 30 or more cases each. The ideal number is about 18, she said.

"At that point you're putting out fires," she said. "You're not doing good social work. You're not able to get in there and see what the problems are and spend a couple of hours to build a rapport with the kiddos."

Rebecca Woelfel, a spokeswoman for the agency, said the positions eliminated "performed duties which could be eliminated or distributed to other team members without negatively impacting services."

Officials are bracing for another difficult budget year. According to the Urban Institute, Missouri's revenue from income, sales, and corporate taxes between March and September was 4.4% below the same period last year.

Kansas City Mayor Lucas said he expects to have to cut spending by up to 11% next year. That could mean more staff reductions, closing some city-owned properties, less frequent recycling pickup, or longer wait times on 911 calls, he said. The police chief warned the department would have to eliminate 400 positions.

"At a certain point we're not going to have the money to do all these things," Mr. Lucas said.

Write to David Harrison at david.harrison@wsj.com

(END) Dow Jones Newswires

November 29, 2020 12:14 ET (17:14 GMT)

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