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August 2020

State and Local Governments Forced to Do More with Less

According to the most recent data published by the U.S Census Bureau, state and local government sector 

operating expenditures represented 15% of all economic activity in the United States in 2017 - measured by Gross 

Domestic Product (GDP) - making it an influential sector for the economy. However, the COVID-19 pandemic is causing 

state and local governments to spend more while taking in less revenue. As residents lose jobs, states must allocate 

more revenue to unemployment insurance. Some of these newly unemployed residents also qualify for Medicaid 

benefits, requiring states to allocate even more revenue to public healthcare. Simultaneously, with social distancing 

requirements, as well as general concern from many people in venturing out, much of local economic activity has 

slowed, giving states less revenue from taxes.

Nevertheless, by law, the majority of state governments must balance their budgets and many local municipalities seek 

to keep expenses in line with revenue. Forty-five states have fiscal years that run from July 1 – June 30. As a result, the 

effects of COVID-19 hit state revenues primarily in the last quarter of fiscal year 2020, leaving little time to balance 

budgets. While many states have built up reserves in “rainy day funds,” additional strategies are expected to be 

implemented to combat revenue shortfalls over the coming year. These can include cutting spending on services, 

increasing taxes, freezing state and local employees’ salaries, and imposing furloughs or layoffs. There has already 

been an impact on state and local government employment. And with state and local governments looking to trim their 

budgets, the construction of new affordable housing is expected to be negatively impacted as well. 

Sources of State and Municipal Revenue 

Revenue for state and local governments comes from several sources. About one-third of the revenue generally comes 

from intergovernmental transfers. In the case of states, this is money that comes from the federal government, for 

specific programs like Medicaid, for example. In the case of local municipalities, intergovernmental transfers come 

primarily from the state government and generally include transfers for affordable housing programs. 

Breakdown of State and Local Government Revenue by Category, Fiscal Year 2017

33.3%

23.1%

18.8% 17.8%

4.7%

2.3%

35.6%

30.1%

7.3%

22.7%

2.0% 2.4%

Intergovernmental

transfers

Property Taxes Sales taxes Charges and fees Individual income

taxes

Other taxes Corporate income

taxes

State Revenue

Local Municipal Revenue

Source: Urban-Brookings Tax Policy Center State and Local Finance Initiative

General Fund Revenue

Multifamily Economic and Market Commentary
Source: Moody’s Analytics, Current Employment Statistics S.A., Fannie Mae

Change in Jobs Since December 2007 (%) 

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Jun-20, -0.4%

Jun-20, -6.9%

Jun-20, -4.4%

-9%

-7%

-5%

-3%

-1%

1%

3%

5%

7%

9%

11%

Jan-08

May-08

Sep-08

Jan-09

May-09

Sep-09

Jan-10

May-10

Sep-10

Jan-11

May-11

Sep-11

Jan-12

May-12

Sep-12

Jan-13

May-13

Sep-13

Jan-14

May-14

Sep-14

Jan-15

May-15

Sep-15

Jan-16

May-16

Sep-16

Jan-17

May-17

Sep-17

Jan-18

May-18

Sep-18

Jan-19

May-19

Sep-19

Jan-20

May-20

Total Nonfarm Change % Local government Change (%)

State government Change (%)

The bulk of annual revenue for both state and local municipalities’ general funds accounts, which are used to support 

annual budgets, comes from taxes. For example, in 2017, most states received about half of their revenue from taxes: 

23% from sales tax; 18% from individual income taxes; and 7% from corporate income and other taxes. Local 

municipalities received slightly more than 40% of their revenues from taxes, of which 90% came from property taxes 

alone. In addition, charges and fees represented another 19% of state revenues and 23% for local municipalities.

A Substantial Share of Jobs Lost

Prior to the pandemic, as of February 2020, there were just under 20 million jobs with state and local governments, 

representing an estimated 13% of all non-farm jobs in the United States. However, the number of state and local jobs 

has quickly declined by an estimated 5.5% and 8.2%, respectively, in just four months. 

State and Local Jobs Remain Below Level of Last Recession

During the Great Recession, total non-farm jobs declined by a little more than 6% between December 2007 and 

December 2009. Job losses in state and local governments lagged until April 2010 when employment fell 0.3% below 

pre-recession levels. The lag reflected ongoing job losses taking place over several months, producing a gradual 

decline in revenue resulting from the reduction in sales and income taxes from so many people being out of work.

This time, the effects are far more immediate. Because most state governments are under a mandate to balance their 

budgets by the end of their fiscal year, usually ending June 30, coupled with the fact that state governments also 

moved the deadline for payment of income taxes to July 15, 2020 to be in line with the federal income tax deadline, 

state and local governments have already experienced revenue losses. As a result, state and local government job 

losses have now moved in tandem with national job losses over the past few months. Since the beginning of March 

through the end of June, state and local governments eliminated just under 1.5 million jobs on a seasonally adjusted 

basis. This leaves the number of jobs with state and local governments at about 7% and 4%, respectively, below where 

they were pre-recession at the beginning of December 2007.

State and Local Governments Forced to Do More with Less

State Jobs Lost in Education

Prior to the pandemic, jobs in education represented 48% of all state jobs largely due to big public colleges 

and universities. However, with school closures due to the COVID pandemic, state jobs in education have 

borne the brunt of losses as they have declined by an estimated 10% since February, compared to just 1% for 

state jobs excluding education. This has had a disproportionate impact on some metros.
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State and Local Governments Forced to Do More with Less

College Towns Impacted

Metros that lost the largest share of their state jobs in the second quarter 2020 were predominantly smaller metro areas 

dominated by larger public colleges and universities, like the University of Wisconsin in Madison, Purdue University in 

Lafayette, Indiana, and the University of Florida in Gainesville. When state schools closed due to COVID-19, many 

instructors continued teaching students online. But most support staff, including administrative staff and those in food 

service and building maintenance, were furloughed or temporarily laid off. In addition, the online learning model 

created less need for instructors. As a result, many of these metros lost a substantial share of their state job base. 

For instance, Madison lost 29% of the state job base, Lafayette, Indiana lost 30%, and Ames, Iowa, home to Iowa State, 

lost 29% of its job base. Some of these temporary furloughs may become permanent job losses. That’s because, even if 

colleges and universities are able to have classes on campus this upcoming fall, fewer classes may be offered, duplicate 

programs at different branches of state schools may be eliminated, and some students will not return, requiring fewer 

staff members. In addition, many state schools have already implemented a pay freeze which will further impact 

spending locally.

Metro Area

Total 

Employment

Q1 2020

State Share of 

Jobs

Q1 2020

State Jobs Lost

Q1 to Q2

(a)

Total State 

Jobs (b)

Share of State 

Jobs Lost

(a)/(b)

Madison, WI 405,700 12% -14,333 50,267 -29%

Lansing-East Lansing, MI 237,733 21% -8,000 48,833 -16%

Lafayette-West Lafayette, IN 111,900 24% -7,933 26,333 -30%

Muncie, IN 51,067 18.1% -2,100 9,267 -23%

Ames, IA 53,133 30% -4,633 16,033 -29%

Blacksburg, VA 77,267 22% -3,033 16,733 -18%

Logan, UT 65,000 13.7% -1,867 8,933 -21%

State Job Statistics - Select College Town Metros 

Source: Moody’s Analytics, Current Employment Statistics S.A., Fannie Mae

Metro Area

Total 

Employment

Q1 2020

State Share of 

Jobs

Q1 2020

State Jobs Lost

Q1 to Q2

(a)

Total State 

Jobs (b)

Share of State 

Jobs Lost

(a)/(b)

Tallahassee, FL 188,500 24.8% -2,333 46,733 -5.0%

Raleigh, NC 654,833 7.1% -5,833 46,800 -12.5%

Richmond, VA 686,900 5.8% -5,300 40,133 -13.2%

Austin-Round Rock, TX 1,131,700 6.7% -4,733 76,133 -6.2%

Sacramento, CA 1,021,500 12.2% -1,767 124,400 -1.4%

Denver, CO 1,538,900 3.1% 133 48,033 0.3%

Albany-Schenectady, NY 469,967 10.9% 133 51,000 0.3%

Metros with State Capitals Not as Hard Hit

Outside of education, state jobs declined by only 1% since February (pre-pandemic) and this is reflected in state jobs 

in many metros that are state capitals. Many of these metros are aided by having diversified economies. For 

example, Denver’s state job category represents only about 3.1% of the metro’s entire job base. Further, although 

many state agencies have instituted pay freezes, they have not cut jobs – at least not yet. Rather, it seems that most 

of the state job losses in state capitals are due to temporary layoffs at public colleges and universities. For instance, 

although Austin lost about 4,700 state jobs, this represented just 6% of state jobs in first quarter 2020. Further, most 

of these job losses stemmed from temporary layoffs at University of Texas - Austin rather than state agency jobs.

Source: Moody’s Analytics, Current Employment Statistics S.A., Fannie Mae

State Job Statistics - Select State Capital Metros 
Some Housing Trust Funds Rely on General Fund Revenue...

In addition to having a direct impact on employment, the fiscal health of state and local governments may have an 

impact on the production of affordable housing. State and City Housing Trust Funds (HTFs), which rely on government 

funding, provide in excess of $2.5 billion annually to advance affordable housing initiatives in their states. HTFs are 

distinct funds established by state, city, or county governments to support the preservation and production of 

affordable housing, usually by providing secondary sources of financing. Most programs funded by HTFs assist 

households earning 80% or less than the median income for their location. However, some state HTFs rely on annual 

appropriations from their state’s general fund, which provides revenue for a state’s annual budget. These HTFs are at 

higher risk of having funds diverted to non-housing state budget items. These may include the Georgia, Kansas, 

Michigan, New Hampshire, New Mexico, New York, Texas, Utah, and Virginia HTF.

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State and Local Governments Forced to Do More with Less

Local Job Losses Too

Virtually every metro with municipal jobs has experienced some level of job loss over the past few months. Just as 

job losses at the state level are being driven by cutbacks at state colleges and universities, job losses in local 

governments are being driven by layoffs and furloughs at public schools due to school closures. In fact, nationwide, 

jobs in education at the local level have declined 8% since pre-pandemic levels in February as many school districts 

have laid off support staff, such as bus drivers, cafeteria staff, and maintenance workers, among others. However, 

jobs losses in education only account for 55% of local government job losses compared to 90% of state 

government job losses. As a result, other types of local government jobs were impacted. Excluding jobs in local 

public education, employment for local governments was down about 8% in June 2020 from pre-pandemic levels 

in February. Local governments have issued hiring freezes, furloughed staff, and laid off seasonal employees. 

Second Quarter 2020 Local Government Job Losses

Among the most populous locations, the New York metro area is estimated to have lost the most local government 

jobs, at more than 31,000 in a single quarter. The Chicago metro area lost an estimated 20,000 local government 

jobs, and the Los Angeles metro area with its large unified school district is estimated to have lost almost 14,000 

local government jobs. Although Charlotte is estimated to have lost fewer jobs, at just under 11,000 in the second 

quarter, they represented almost 9% of Charlotte’s jobs with the local municipal government. 

Metro Area

Total 

Employment

Q1 2020

Local Govt. 

Share of Jobs

Q1 2020

Local Jobs Lost

Q1 to Q2

(a)

Total Local 

Govt. Jobs 

(b)

Share of Local 

Govt. Jobs Lost

(a)/(b)

New York, NY (Division) 7,170,067 10.7% -31,467 768,067 -4.1%

Chicago-Naperville, IL (Division) 3,742,300 8.8% -19,567 329,633 -5.9%

Phoenix, AZ 2,221,433 7.9% -18,300 175,467 -10.4%

Washington, DC 3,347,833 7.7% -17,967 257,100 -7.0%

Minneapolis-St. Paul, MN 1,992,333 8.3% -15,900 165,833 -9.6%

Los Angeles-Long Beach, CA (Division) 4,597,833 10.1% -13,867 464,600 -3.0%

Dallas-Fort Worth, TX 3,826,767 8.8% -13,567 336,767 -4.0%

Seattle-Tacoma, WA 2,094,867 8.5% -12,500 178,033 -7.0%

Charlotte, NC 1,240,300 10.3% -10,867 127,433 -8.5%

Riverside-San Bernardino-Ontario, CA 1,543,033 13.5% -9,633 208,567 -4.6%

Oakland, CA (Division) 1,177,633 10.4% -9,133 123,000 -7.4%

San Diego-Carlsbad, CA 1,504,367 10.0% -8,367 149,767 -5.6%

Atlanta-Sandy Springs, GA 2,861,367 7.6% -8,300 216,967 -3.8%

Local Government Job Statistics - Select Metro Areas

Source: Moody’s Analytics, Current Employment Statistics S.A., Fannie Mae
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...Others have Dedicated Sources of Funding 

Most HTFs have at least one dedicated source of funding, and some have multiple dedicated sources, which leave 

them somewhat insulated from states’ budget processes. The predominant dedicated funding source is real estate 

transfer taxes, including documentary stamp fees. Fourteen states have adopted this dedicated source for at least one 

of their HTFs, including Florida, Illinois, New Jersey, and Oregon. Another seven states provide dedicated revenue 

from document recording fees, including California, Massachusetts, and Ohio. Maryland, Minnesota, and Wisconsin all 

fund their HTFs with interest on either title or real estate escrow accounts. 

Other states have dedicated sources of funding not tied to real estate. One of Oregon’s three state HTFs, the Housing 

Development Grant Program, supports its fund with a Public Purpose Charge, which is a fee on utilities. While Arizona 

uses net revenue from single-family mortgage programs to fund its HTF, it also dedicates income from the state’s 

unclaimed property fund, which contains unclaimed assets such as stocks and bonds. This source type is also used by 

Colorado. Finally, Indiana uses e-cigarette taxes to fund its HTFs. However, these sources produce limited revenue.

Several states, including Michigan, have used a large initial source of capitalization such as the National Mortgage 

Settlement to fund or augment HTFs. However, only Arkansas, Louisiana, and Oklahoma rely exclusively on the 

original source of funding. 

State Housing Trust Funds With Dedicated Funding Sources 

Notes: Oregon has three housing trust funds. The General Housing Account Program is funded with document recording fees, the Housing Development 

Grant Program is funded with utility fees and the Low Income Rental Housing Program is funded with Interest and Fees 

New Jersey to Spend $60 Million

Despite many states providing dedicated sources of income for their HTF, these funds are sometimes diverted to fill a 

state’s budget gaps. However, New Jersey’s HTF, which is funded with realty taxes, does not appear to be at risk of 

having those funds diverted to non-housing programs this year. According to the New Jersey Spotlight published 

online on August 12, 2020, with the exception of diverting some funds to rental assistance, the state of New Jersey will 

fully funded its HTF for fiscal year 2020 with $60 million. According to the article, the money will be used to build new 

units affordable to renters with household income up to 80% of area median income in smaller projects up to 25 units. 

State and Local Governments Forced to Do More with Less

Source: Community Change
The money will be divided among several funds and roughly half of the $60 million will help pay for developments 

municipalities have already committed to building. 

Some HTF are Specialty Funds

While many of the HTFs address a variety of housing issues for both single-family and multifamily properties, a 

number have specialty funds to address issues such as homelessness, special needs housing, or rural housing. In fact, 

one of Nevada’s two HTFs provides assistance for low-income owners of manufactured housing from fees levied on 

mobile home park owners. Several state housing HTFs are dedicated solely to rental housing. These include Hawaii’s 

Rental Housing Revolving Fund, Illinois’ Rental Housing Support Program, and Oregon’s Low Income Rental Fund. 

These programs all have relatively stable, dedicated sources of income from fees on real estate transactions. 

State Housing Trust Fund Name Revenue Sources

Hawaii Rental Housing Revolving Fund Real estate conveyance tax Stamp Taxes 

Illinois Affordable Housing Trust Fund Real estate transfer tax

Rental Housing Support Program Real estate document recording fee 

Nevada Assistance for Low-Income Owners of Mobile Homes Fees from mobile home park owners

Oregon Low Income Rental Housing Fund Interest and fees

Oxnard, CA Affordable Rental Housing Trust Fund Developer Impact Fees

Source: https://housingtrustfundproject.org/wp-content/uploads/2020/01/State-htfund-revenue-sources-2020.pdf

Select State Housing Trust Funds 

Some Dedicated Sources More Stable

As long as commercial and residential real estate continues to exchange hands, dedicated sources based on fees 

from real estate transactions and earned interest are generally stable sources of income for HTFs, providing states 

do not elect to divert the revenue. However, as the economy contracts, the number of residential and commercial 

real estate transactions is likely to decline. As a result, revenue from real estate transfer taxes, document recording 

fees, and interest on title and real estate escrow accounts will likely decrease in volume, leaving less income to fund 

HTFs, which in turn means less funding available for affordable housing. By contrast, some HTFs rely on revenue 

from sources that are expected to be less impacted by adverse economic conditions. For example, Oregon’s 

Housing Development Grant Trust Fund, and HTFs in Arizona, Colorado, and Indiana rely on revenue from utility 

charges, e-cigarette taxes, and unclaimed property.

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Sources of HTF Funding by Stability of Funding

Less Stable More Stable

No Dedicated Source Non-Real Estate Taxes Development Related Real-Estate Transaction Related Property Taxes Less Dependent on the 

Economy*

Annual Appropriations Sales Tax Developer Impact Fees Realty Transfer taxes Property Taxes Unclaimed Property Revenue

General Funds Hotel/Motel Tax Inclusionary In-lieu fees Document Recording Fees Tax Revenue on 

Properties... Smokeless Tobacco Revenue

Transient Occupancy Construction Excise Tax Interest on escrow and title accounts

...previously 

owned by city of 

Austin

Public Purpose/Utility Charges

Source: Fannie Mae

State and Local Governments Forced to Do More with Less

* While Stable, these sources do not provide a significant amount of revenue 
State and Local Governments Forced to Do More with Less

State Housing Finance Agencies Do Not Require Annual Contributions

Like state HTFs, Housing Finance Agencies (HFAs), help finance the development of new affordable housing and the 

preservation of existing affordable housing. They are generally mandated to help both renters and first-time 

homebuyers. However, unlike state HTFs, which generally require outside funding, most HFAs are quasi-governmental 

agencies and are financially self-supporting through their programs. HFAs generate their own revenue through issuing 

bonds backed by single-family and multifamily housing programs and by earning interest on loans. This leaves them 

somewhat insulated from state and local revenue shortfalls. Even so, reduced state and municipal revenue may still 

impact HFAs in several ways. 

State Housing Finance Agencies May Offset State and Local Budget Shortfalls

A state or city may “sweep” an HFA’s excess funds by suggesting that the HFA contribute a defined amount of money 

to the state to help fill a budget gap. While not usually legally required, most of the time the HFAs comply with the 

state’s request. In addition, a state or city may request that an HFA pick up the administration and funding of a 

housing program previously run and funded by the state. According to Moody’s, as of 2017, more than half of the 49 

state HFAs had been asked to provide revenue to their states at some point over the past 25 years. 

7

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Multifamily

Single Family

National Private Activity Bond Activity by Category

($millions) 

Source: Council of Development Finance Agencies

Multifamily Bond Issuance 

Doubled

HFAs fund the development of affordable 

rental housing through the issuance of 

Private Activity Bonds. As the affordable 

housing crisis has grown, so has the volume 

of multifamily bonds issued. According to 

the Council of Development Finance 

Agencies, the volume of multifamily bonds 

issued more than doubled to $14.7 billion in 

2018 from $6.6 billion just three years 

earlier. The volume of multifamily bonds 

issued in 2018 was double the $7.4 billion 

volume of single-family bonds. 

Receive Reduced Housing Subsidies During Recessions

According to Moody’s, revenue shortfalls may force a state or city to reduce housing subsidies provided to an HFA to 

pass along to its borrowers. This could include funding for single-family down payment assistance or subsidies on 

multifamily projects to reduce the interest rate. While this does not impact the financial position of the HFA directly, it 

could potentially reduce the volume of loans that an HFA is originating if it cannot afford to finance subsidies to 

replace subsidies lost from the state itself. This is important since any decline in bond issuance will slow the 

production of new affordable housing. 
State Rainy Day Funds Designed to Help During Economic Downturns

States are in better shape to weather an economic downturn than they were at the start of the last recession in 2007. 

To offset lost revenue from recessions, states put money into reserve funds, usually called rainy day funds, to mitigate 

disruptions to state services during an economic downturn and other unanticipated events, like natural disasters. 

According to the National Association of State Budget Officers, the average state’s rainy day fund balance as a share of 

general fund spending has grown from 1.6% during the last economic downturn in fiscal 2010, to 7.6% in fiscal 2019. 

Looking at state-level data on rainy day funds, the Center on Budget and Policy Priorities notes that two states, 

Wyoming and Alaska, have built up their rainy day funds to in excess of 85% of the fiscal year 2019 budgets. However, 

most rainy day funds are more modest. North Dakota and New Mexico, for example, have rainy day funds that 

represent about one-third and one-quarter of their 2019 fiscal budgets, respectively. Among more populous states, 

such as Michigan, California, and Texas, their rainy day funds represent between 12% and 18% of their 2019 fiscal 

budgets. Further, many states funds are below 10% of their 2019 budgets.

A Great Deal of Uncertainty Ahead

During the last recession, state and local governments were able to offset some of the impact of the recession on the 

economy. However, it is unclear to what extent they will be able to do so during this recession. According to the 

National Association of State Budget Officers, most states are still in the planning phase for how they will make the 

necessary adjustments to their existing fiscal 2021 budgets, which already started on July 1, 2020. State and local 

budgets generally have contracts for services, making it likely that changes across state and local budgets will occur 

somewhat gradually. In addition, transfers from the federal to the state government make up about one-third of 

annual revenue. Transfers may increase as the federal government considers new legislation to counteract the 

economic effect of the COVID-19 pandemic. As a result, we believe it will likely take some time to know the true impact 

on local economies from state and local budgets cuts due to the loss of revenue from taxes expected over the coming 

fiscal year. 

Source: Center on Budget and Policy Priorities

States’ Rainy Day Funds as a Percentage of 2019 State Budget 

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State and Local Governments Forced to Do More with Less
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State and Local Governments Forced to Do More with Less

Tanya Zahalak

Senior Multifamily Economist

Multifamily Economics and Research

August 2020

Opinions, analyses, estimates, forecasts, and other views of Fannie Mae's Economic & Strategic Research (ESR) group included in these materials

should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to

change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses,

estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is

accurate, current or suitable for any particular purpose. Changes in the assumptions or the information underlying these views, including assumptions

about the duration and magnitude of shutdowns and social distancing, could produce materially different results. The analyses, opinions, estimates,

forecasts, and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the

views of Fannie Mae or its management.