As Influx of Aid Nears, Some Spending Principles For States and Localities to Consider

If the Treasury Department sticks to a timeline described in the coronavirus relief law that President Biden signed last month, then billions of dollars of federal aid payments to state and local governments could be flowing about 11 days from now.

In the meantime, local finance officials are eager for Treasury to issue guidance to better clarify how that money, around $350 billion in total, can be used. There are a number of technical questions—for instance what budget categories count as "government services" that can be backfilled using the money and what qualifies as "water" infrastructure that governments can pay for with the funds.

"Every morning, I hit refresh about 10 times on the U.S. Treasury website," Emily S. Brock, director of the Government Finance Officers Association's Federal Liaison Center, said during an online event S&P Global Ratings held Thursday.

"We are hoping every day now that we will see guidance," she added.

The American Rescue Plan, which President Biden signed on March 11, set a target for paying the first tranche of the funds to cities and counties 60 days after the bill was enacted, which would be May 10.

Thousands of cities and counties are poised to get a combined $130 billion in direct aid, split into two evenly divided payments, with the second infusion coming at least a year after the first.

There's another $219 billion in the measure for states, tribes and territories, with the timing of initial state payments set to be 60 days after they submit a "certification" described in the law to Treasury.

The sums of money in play are significant. Phoenix, for example, is in line to receive an estimated $416 million. Akron, Ohio, is waiting on a payment of around $153 million. It's somewhat unusual for the federal government to drop relatively flexible slugs of money that are so big into state and local budgets all across the country.

Some of the money will go to filling budget holes, and covering ongoing pandemic response costs. But decision-makers in many places are also thinking about longer-term investments in areas like infrastructure and economic development and, in some cases, are now turning to their communities for input on how to use the funds.

Recommendations from Government Finance Group

Against this backdrop, GFOA has issued a set of principles for finance officers and elected officials to think about as they move ahead.

For starters, the association cautions that the federal aid is temporary and, based on the parameters of the law, must be spent by December 2024. This means that officials in places that receive the funds may want to think twice before they use the money to create new programs that will have recurring costs after the funding expires.

Similarly, if governments use the money to cover operating deficits, or to paper over structural budget problems, it may help in the short term. But officials in those places will have to recognize that the money will eventually run dry and may want to think of it as a stopgap that can help ease the transition toward more permanent fixes.

Another GFOA principle suggests that places that emptied rainy day reserves over the past year may want to use the funding to replenish those savings accounts. On the other hand, jurisdictions that have fared better financially during the pandemic, might think about using the money for one-time investments, like items on their capital projects wishlist or other previously identified priorities.

The American Rescue Plan specifically says that one of the allowable uses for the state and local aid is for "necessary investments in water, sewer, or broadband infrastructure." But those categories, especially "water" infrastructure, have room for interpretation and could conceivably refer to anything from levees to drinking water pipes. The Treasury guidance could provide further clarity on this.

Brock said that there appears to be leeway under the other eligible spending categories for putting money toward infrastructure projects. "We think that there's a lot of flexibility written in here for infrastructure," she said.

Pandemic response efforts, "premium pay" for essential public workers, and diffusing the economic fallout from the pandemic—possibly with assistance to struggling renters or businesses, or other similar programs—are among the other types of costs that states and localities could potentially cover with the money.

There's also a provision that would allow the funding to be used to pay for services that might otherwise be cut due to losses in revenue that stem from the pandemic. But this is another area where there are some open questions that the Treasury guidance could answer. Not just what qualifies as "services," but also what the time frame is for comparing revenues to determine the extent of any losses.

Brock also pointed out that there are substantial sums of federal relief funding that are outside of the direct aid program for states and localities. This money is going into areas like education, transit, the arts, and assisting households with rent and utility payments. That means it could make sense for officials to look across the recipients of the funding in their state or region and try to coordinate spending.

More about GFOA's spending principles for American Rescue Plan funding can be found here.