State, Local Governments Now Flush With Cash Even Without Federal Aid

What a difference two years—and $5.7 trillion in federal money—makes in fostering dramatic reversals of fortune for state and local budget managers.

In spring 2020, governments were confronted with cascading costs in managing the public health response to the COVID-19 outbreak, spiking unemployment, and steep revenue declines resulting from business disruption and restrictions.

Two years later, lawmakers are awash in federal funding after Congress approved five COVID-19 assistance packages, pumping at least $5.7 trillion into the economy, including $900 billion to state and local governments.

The Washington-based Committee for a Responsible Federal Budget estimates that as much as $800 billion of that $5.7 trillion remains uncommitted across a spectrum of federal, state, local, and public-private agencies, and in statehouses, county seats, and city halls.

The scenario now has flipped from spring 2020. During the second quarter, from April to June, the U.S. Government Accounting Office (GAO) reported state and local government revenues declined by $61 billion compared to the year-earlier period.

Overall in 2020, state and local governments reported $117 billion less in revenue than the previous year, mostly stemming from the second quarter, according to estimates of 2020 pandemic-related revenue losses filed with the U.S. Treasury.

But the economy—and state and local government coffers—rebounded sharply beginning in July 2020, largely fueled by the March 2020 adoption of the $2.2 trillion Coronavirus Aid, Relief and Economic Security Act (CARES) Act.

The U.S. Department of Commerce’s Bureau of Economic Analysis reported that government revenues in the third quarter of 2021 were 23 percent above pre-pandemic levels “thanks to massive federal transfer payments from COVID relief legislation.”

Other factors that boosted government revenues cited in a Jan. 28 Associated Press analysis include inflation ignited by stimulus-check spending that leavened sales tax collections, a spike in capital gains tax revenues generated by a strong stock market, federal padding of state unemployment relief, and a pandemic-induced increase in home-based employment.

In reviewing 3,700 reports from governments estimating 2020 pandemic-related revenue losses filed with the U.S. Treasury, AP found that two-thirds documented declines during 2020’s “steep but short-lived national recession” in the second quarter.

Texas lost $12 billion in anticipated revenues in spring 2020, according to the Treasury.

In many places, the AP reported, state and local government 2021 revenues exceeded those of pre-pandemic levels.

A December 2021 Urban Institute report states that total state and local government revenues in the second quarter of 2021 increased by 20 percent over the same period in 2019.

Among examples of sudden red-to-black transitions cited by AP is Poughkeepsie, New York, which had a $7 million deficit and nothing in reserves going into 2020. It reported a $4.5 million revenue loss to Treasury and was authorized to receive more than $20 million in Coronavuris State and Local Fiscal Recovery Funds (SLFRF).

The federal money is authorized to allocate but much remains unspent.

The deadline to expend CARES Act Coronavirus Relief Fund (CRF) money was Dec. 31, 2021, but sunsets for the last of the five federal packages, the March 2021 $1.9 trillion American Rescue Plan Act (ARPA), extend through Dec. 31, 2026.

The CARES Act’s $150 billion coronavirus fund for state and local governments couldn’t be used to cover revenue shortfalls. ARPA includes a $350 billion recovery fund that provides more discretion.

States will receive $195.3 billion and local governments $65 billion from the fund, which they must earmark by Dec. 31, 2024, and spend by Dec. 31, 2026.

As of Sept. 30, 2021, the Treasury had distributed $245 billion in SLFRF, although most recipients hadn’t spent most of their allocations. Determining how to do so is being discussed in statehouses, county seats, and city halls across the country.

Under the Treasury’s May 2021 guidelines, governments that showed a revenue loss could spend an equal amount in SLFRF money on nearly any priority, including roads and infrastructure. A final rule issued on Jan. 6 expanded recovery fund flexibility to allow governments to claim up to $10 million of revenue losses.

“What we’re seeing now with the ARPA is certainty,” said Kathryn Vesey White, director of budget process studies for the National Association of State Budget Officers (NASBO).

“Both pots of money provided a fair amount of discretion for states. States were able to use CRF to cover public health, public safety, payroll expenditures. With [SLFRF], you’re going to see recipients using some for revenue loss.”

Eryn Hurley, National Association of Counties (NACo) deputy director of government affairs, said the Jan. 6 rule provides two options to calculate revenue loss.

“There’s a lot of flexibility under the final rule that counties are very appreciative of,” she said, noting the nation’s 3,000 counties lost more than $202 billion in revenues during the past two years.

The GAO, U.S. Treasury, and U.S. Office of Inspector General’s (OIG) Pandemic Response Accountability Committee (PRAC) have published data that confirms state and local governments are flush with cash—even before many expend SLFRF allocations, adding weight to criticism by watchdogs who maintain the $350 billion fund is an unneeded bailout for bad budget managers and a boondoggle.

According to reports detailing how they will use ARPA SLFRF allocations filed with the Treasury, some of the nation’s most prosperous cities and ZIP codes are benefitting greatly from the federal assistance.

OpenTheBooks.com CEO and founder Adam Andrzejewski, whose website features an interactive map that allows users to look up SLFRF allocations for each county and city, said the fund favors the big and wasteful, and the small and wealthy.

The largest cities are receiving huge allocations under SLFRF, Andrzejewski notes, with New York earmarked for at least $4.3 billion—more money than half the state governments—and Chicago “with their bonds at junk status” is receiving $1.98 billion, more than 12 states will receive.

According to OpenTheBooks, some of the nation’s most wealthy cities will receive plugs of federal cash to spend locally. In fact, the nation’s 50 richest places, as defined by Bloomberg, would receive more than $100 million in “bailout funds.”

For example Atherton, California, “the wealthiest city in America with an average household income of $525,000, received $1.3 million from the legislation,” OpenTheBooks states.

Other cities include Beverly Hills, California ($6.3 million); Hamptons, New York ($8.6 million); Key West, Florida ($10.1 million); Greenwich, Connecticut ($21 million); Oyster Bay, New York ($32.7 million); and Cambridge, Massachusetts ($65 million).

SLFRF earmarks $1 billion for the top 10 richest counties across the United States, OpenTheBooks maintains, but Andrzejewski told The Epoch Times the giveaways aren’t restricted to big and the wealthy.

He said “a boondoggle in the ARPA that nobody is talking about” is why 574 federally recognized Native American tribes with a total population of 6.8 million received more than $20 billion in SLFRF.

Michigan has 10 million people and received roughly $10.1 billion in SLFRF, he said.

“Tribes have a third less people but got twice as much aid. I don’t understand why. Why did they get so much? Nobody wants to answer this question,” he said.

So Andrzejewski provided his own: “Why did tribal governments get so much more money than others? They have a big lobbyist association in D.C.”

Taxpayers for Common Sense, a Washington-based nonpartisan budget watchdog, said in a Jan. 14 “Emergency Spending is Endemic” statement that wasteful spending by state and local governments is guaranteed unless lawmakers and budget managers stop acting as if they are in a house-on-fire emergency.

“Nearly two years, and $5 trillion+ of federal spending into the COVID-19 pandemic, the budgetary emergency nature of COVID-19 is waning,” the group stated.

“COVID-19 is here and will be for some time. Lawmakers who want to continue, or even expand, federal spending in response need to plan and budget accordingly.”

But with billions on the table and midterm election campaigns heating up, politics will likely trump prudence in how SLFRF and other federal aid is allocated at state and local levels, Taxpayers for Common Sense stated.

As a result, “long-term fiscal emergency may be upon us,” it stated. “And it’s in large part because lawmakers in both parties continue to designate spending in response to COVID-19 as an ‘emergency’ to avoid making tough choices.”