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U.S. states and local governments have weathered the coronavirus downturn far better than expected when the pandemic first erupted in 2020. That’s in large part because of the massive federal financial stimulus enacted earlier this year, the first disbursements of which are just now starting to roll out.
Even with additional guidance from the Treasury Department on how the funds can be spent, there are still big questions among local governments about how best to deploy it, and among public-finance sector observers and advisors about how to help with those decisions.
“There are so many moving parts,” said Natalie Cohen, a longtime public finance analyst now running a consulting firm called National Municipal Research.
While most municipal revenues held up over the past year, it’s not clear which sources of income — property tax, income tax, or sales tax — might start to falter soonest and to what degree, she pointed out. Meanwhile, costs are rising fast for the big-ticket items municipalities need most, like vehicles and building supplies. “We kind of slid from, oh my god look at the impact of the tariffs in the last administration into the unexpected demand we have now,” Cohen said.
“We’re very grateful, but some of this is a little confusing,” said Emily Swenson Brock of the Government Finance Officers Association. “Not a lot of jurisdictions understand what they’re going to do with the proceeds yet.”
Still, there are some big themes that will define the spending of the money that she and others are going to be watching closely.
Prohibited expenditures: According to the final guidance published by Treasury Monday, communities may not use the funds to make deposits to pension funds, for debt service payments, or for legal settlements. Those restrictions may be a bit “frustrating,” Brock said, but in general there is so much allowable, that many jurisdictions will use the windfall to pay for other budget items and simply allocate more spending to areas of concern, like unfunded pensions.
What’s a little harder to swallow is that payments to rainy day funds are not permitted. “One of the big reasons states and locals didn’t get hurt as much going into the downturn was that they’d built up rainy day funds after the Great Recession,” Cohen said. Spending from those reserves helped last year, but now they need to be replenished.
Funny timing: It may seem semantic, but Brock has been hearing from many finance officers who are struggling to understand whether they can apply funds to expenses already accrued or revenues already lost, or only for budget items in the future.
“Can you use funds retroactively?” she said rhetorically. “If you’re saying you can’t apply it retroactively, it ties hands for those communities that went through a trauma in 2020 and are trying to recover.” Meanwhile, the federal government –– and forward-thinking city officials –– are also trying to look to the future.
Another wrinkle: many local governments would be inclined to use the funds for infrastructure spending – but the White House has proposed an additional stimulus package devoted solely to those kinds of expenses, and many jurisdictions aren’t sure whether to wait and see if more money will be allocated.
It’s also worth noting that the funds will be delivered in two tranches, one now and one in a year. And, there is an extensive audit process in place.
More autonomy: If timing considerations are a little squishy, the delivery is crystal-clear: the American Rescue Plan directs money directly to many municipalities, rather than funneling it through the states for them to distribute. One exception is communities with fewer than 50,000 residents.
A painful lesson of the Great Recession in 2008 for municipal leaders was that sending money to the states meant a longer wait and, usually, less money, for localities. As the former mayor of San Jose, Chuck Reed, told MarketWatch last summer: “it would be helpful if it flowed directly and didn’t go through the states because the states always take a cut.”
That means some local communities are experimenting in unusual ways. The city of Alexandria, Virginia, for example, is seeking community input on the second tranche of money, to be paid in approximately one year. Many cities around the country are also considering ways to partner with local nonprofits.
Building back better: “Aid to state, local, territorial, and Tribal governments will help turn the tide on the pandemic, address its economic fallout, and lay the foundation for a strong and equitable recovery,” Treasury notes in its May 10 guidance document.
“There’s been a lot of discussion at the local level of fixing things better and more equitably,” Cohen told MarketWatch. “The ‘equitable’ discussion is definitely out there.”
In large part, that’s because of a recognition that the effects of the pandemic have fallen more heavily on more vulnerable Americans – those who work in service jobs, have more insecure food or housing situations, or are more susceptible to public-health concerns. In part, it’s also because Washington understands those same people haven’t been part of the solution in the past.
“An important lesson from last year’s CARES Act is that moving resources very quickly through existing systems can exacerbate economic and racial inequality,” noted a recent Brookings Institution analysis. “Many minority-owned micro-businesses did not access loans through the federal government’s Paycheck Protection Program due to lack of awareness, lack of connectivity, and outright discrimination.”
More equitable infrastructure spending, for example, might include making crosswalks more plentiful and safe, not just repaving roads. It might include swapping out diesel school buses for those that run on clean energy.
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