Weathering a $2.8 billion shortfall

In light of the COVID-19 pandemic, consumers across the globe have shuttered themselves in their homes, making only occasional public appearances to shop for groceries or go for a socially distanced jog. Once-bustling city streets and storefronts are hauntingly empty. Unemployment levels have skyrocketed with unprecedented speed and magnitude. Hundreds of thousands of beloved small businesses have shut their doors, some temporarily in accordance with government orders, but many for good.

These realities have laid the foundation for an economic contraction rivaling the Great Depression of the 1930s. “This is like a category five mammoth hurricane coming in off the ocean and hitting the land, and on top of it, all of the sudden, there's a huge tornado that develops,” Maryland Comptroller Peter Franchot tells Silver Chips. “This thing we’re in right now is historically bad and catastrophic.”

Maryland’s economy, along with the national economy, is in dire financial straits precipitated by the pandemic. On April 10, Franchot and the Maryland Bureau of Revenue Estimates Director Andrew Schaufele announced a projected revenue loss of $2.8 billion for the state, indicating a total loss of nearly 15% to the annual general fund––and that’s just for this fiscal year, which ends on June 30. 

Cumulative Maryland initial employment claims, recent recessions

Photo: Insurance claims in Maryland have risen at rates astronomically higher than in recent recessions.

Insurance claims in Maryland have risen at rates astronomically higher than in recent recessions. Photo courtesy of Prayag Gordy.

Much of the revenue shortfall stems from a collapse of proceeds from sales tax, ballooning unemployment numbers and general decreased consumer spending, all of which have put many small businesses at immediate risk. “We have 175,000 small businesses here in Maryland,” Franchot explains. “Tens of thousands of them have already gone bankrupt and will never open again.” 

Franchot, who lives in Takoma Park, was also the Comptroller of Maryland in 2008 when the Great Recession plundered the economy. But 2008, he explains, was merely a stiff wind compared to now. “That was a very painful period, but that [was] like a picnic compared to what will happen in the next month.” 

The road to recovery will be long and painful, but Franchot highlights one potential benefit that could emerge. “The only silver lining to this horrible disease is that we get to reinvent the state of Maryland,” he says. “We’re talking about reinventing the state budget, frankly.”

Keeping the lights on

Whether it’s small business owners seeking access to federal and state relief funding, or unemployed individuals struggling to make ends meet for end of month payments, Franchot emphasizes that the people in immediate financial crisis need the most assistance. “The people I believe are most threatened are on the outside looking in,” he says. 

How exactly that assistance manifests depends on the situation. For example, people who are fortunate enough to have a financial cushion to fall back on should be grateful and generous, but still careful. 

“To anyone who is getting a salary and is not threatened right now: first of all, count your blessings; second of all, be just as vigilant about your financial issues as someone who doesn’t have the money to pay today’s rent,” he says. “If you do have the ability to spend $1,200, pick out 12 stores and buy a gift card.” Giving struggling businesses the money now will help them weather the storm down the road. 

Justin Kaplan-Markley, one of the morning managers at Takoma Beverage Company, stresses that community support has been vital in outlasting the crisis so far. On a normal day, the cafe is hopping with teleworkers, coffee-drinkers, and local patrons from breakfast through dinner, but public health directives currently prohibit any in-person dining. In light of dine-in business being closed, heightened carry-out traffic has helped keep money flowing into Takoma Beverage Company and neighboring businesses in the area. “I know a lot of the small businesses in the Old Town Takoma area and everyone is very grateful,” Kaplan-Markley says. “Let’s keep supporting each other and local businesses.”

Destitute owners and individuals can assist themselves, too. One notion that Franchot has lobbied for in the past weeks is that the taxpayer is the best advocate for themself. “You should do what rich people do, which is continue to communicate, advocate, and negotiate,” he says. “Get on the phone with your landlord and say, ‘I don’t want to pay my rent for the next three months.’”

The idea that Franchot is advancing is called asking for forbearance, which he has helped push legislatively as well. In late March, as the tax collector of the state, he enacted a 90-day tax holiday for small businesses which allows owners extra time––until July 15–– to scrape together money to pay the bills. “The aim is to keep billions of dollars in people’s reserves,” he explains. 

This sort of financial vigilance will prolong the ability of currently insolvent businesses and individuals to stay afloat and, quite literally, keep the lights on.

More than a ‘Rainy Day’

Another way that the state is hoping to protect threatened businesses and individuals is by funneling them federal and state relief funds.

On April 27, the Federal Reserve Board announced an expansion of the scope of the Municipal Liquidity Facility (MLF), which was first established in early April. The MLF is part of a federal initiative to provide loan support to U.S. households, businesses, communities, and state and local governments. 

Lorig Charkoudian, a District 20 Delegate for the Maryland House of Delegates, explains that the MLF can reduce cash flow strains at the state and local levels, including in Maryland. “It's a way to borrow and to fill some of these gaps at an interest rate that is almost zero,” she explains. “It’s kind of the way that the federal reserve has previously bailed out Wall Street and now essentially does some bailing out of state governments.”

Trillions of additional federal relief dollars have also been approved, including more than $650 billion for the Paycheck Protection Program (PPP), which offers loans to help small businesses stay afloat and keep as many workers as possible employed.

The distribution of these federal relief funds has incited a firestorm of controversy, however, as many truly small businesses have been unable to tap into the money stream while scores of large public companies, including Shake Shack and Potbelly, received millions. 

“Everyone that has sophisticated financial advisers got taken to the front of the line,” Franchot explains, which has left businesses with a small infrastructure and few employees out of the picture. The PPP also experienced problems, including glitches and delays, when launching their program online. Generally, Franchot says, it's better to advocate for yourself than wait for help from what he considers the less reliable federal programs. 

Maryland also has an emergency relief fund that currently holds $1.2 billion called the “Rainy Day” fund. There’s been back-and-forth over how much of the fund the state should use to respond to the COVID-19 pandemic. Franchot believes all $1.2 billion should be allocated.

“It’s far more than just a rainy day,” he says. “It’s a stormy day, and it’s exactly what the fund was set up to do.” According to Franchot, a sliver of the fund should be used to patch the most essential items that will undergo budget cuts, but the overwhelming majority should be directed to small businesses and helping revitalize the economy.

Reinventing the budget

Maryland is currently seen nationally as a very liberal state when it comes to the state budget and spending, Franchot says. But the stark economic downturn presents what Franchot recognizes as an opportunity to tighten up the budget and reposition the fiscal habits of the state. “Down the road, we need to shift gears and reinvent ourselves as a state that's fiscally moderate, welcomes small businesses, appreciates education, but is not interested in spending more taxpayer dollars on each and every initiative just because it sounds good,” he says. 

Maryland legislators and decision-makers around the country are now faced with the necessity of restructuring budgets and pivoting on agendas in order to ride out revenue shortfalls. Charkoudian hopes that the Board of Public Works––a fiscal legislative body composed of Franchot, the state treasurer, and the governor––will look at all options before moving directly to cuts in the short-term. “We have to balance our budget, but I don’t think the first step ought to be to look for budget cuts.” she says. “We need a situation where the state is investing in the recovery.”

Evidently, reconsidering the budget is political and may not proceed smoothly, but leaders alike are forced with repairing the damage, and Franchot, for one, is hopeful about coming away from this catastrophe as a state with a reimagined national image. 

Conceiving a new image, he notes, may mean slashing massive amounts of state funding and programs. After announcing a budget and hiring freeze in early April, Gov. Larry Hogan highlighted the unlikelihood of any bills requiring increased funding being passed. This includes the more than 679 bills the Maryland General Assembly deliberated on for over two months before the reality of COVID-19 led to an early adjournment. The torrent of gubernatorial vetoes began in earnest last week when Hogan elected not to sign several bills, including a highly anticipated public education reform spending package called the Kirwan bill.

The Great Depression was the last time the United States suffered an economic cataclysm of this magnitude. Around 25 percent of Americans lost their jobs, and President Franklin D. Roosevelt was forced to revitalize the economy from the ground up. In devising a framework to effectively rebound from the fiscal impacts of COVID-19, Franchot says he is looking to Roosevelt. “He tried hundreds of things, and he threw them all up against the wall… some of them worked, some of them didn’t work,” he says. “That's what we're going to have to do.”