States Gearing Up for Fiscal Recovery Funds

5/6/2021

New Federal Funds

By Emily Maher | May 6, 2021 | NCSL Fiscal Briefs

The American Rescue Plan Act of 2021 (ARPA), signed into law by President Biden on March 11, created the $195 billion Coronavirus State Fiscal Recovery Fund (CSFRF) to mitigate the continued effects of the COVID-19 pandemic. States are gearing up for disbursement of this second round of direct federal aid, set to “launch” no later than May 11. As legislative sessions wind down, state decisions on spending their one-time federal allocations vary. Ultimately, the CSFRF will afford states additional time and flexibility compared with funds received last year from its predecessor, the Coronavirus Relief Fund (CRF), under the Coronavirus Aid, Relief and Economic Security (CARES) Act.

Two Tranches Over Two Years

The CSFRF funds will be distributed in two tranches, with 50% delivered in the first tranche and the remainder delivered no earlier than one year later:

  • $25.5 billion equally divided to provide each state a minimum of $500 million.
  • $169 billion allocated based on the states’ share of unemployed workers over a three-month period, from October to December 2020.

States will need to distribute funds to smaller towns within 30 days of receiving a payment from the department. State and local government recipients can use the funds to cover costs incurred before the deadline on Dec. 31, 2024. States that miss the deadline will need to pay back any undistributed funds.

Allowable Uses

Like the CRF, ARPA outlined overarching statutory language on the eligible uses of CSFRF. Those uses include:

  • Responding to the COVID-19 emergency and addressing its economic effects, including through aid to households, small businesses, nonprofits and industries such as tourism and hospitality.
  • Providing premium pay to essential employees or grants to their employers. Premium pay cannot exceed $13 per hour or $25,000 per worker.
  • Providing government services affected by a revenue reduction resulting from COVID-19.
  • Making investments in water, sewer and broadband infrastructure.

State and local governments cannot use te funds toward pensions or to offset revenue resulting from a tax cut enacted since March 3, 2021. However, Treasury released early guidance permitting conformity to federal income tax law.  

In the coming week, Treasury is expected to release additional guidance on how the funds can be used. States are hoping the guidance will be delivered in a less piecemeal fashion than was taking for the CRF. 

New Trends Emerge, Old Priorities Remain

Compared with its first-round counterpart, the CRF, the CSFRF has a lengthier spending deadline, affording states the ability to make gradual allocation decisions and providing flexibility for longer-term projects or programs. Despite the breathing room, lawmakers are taking a cautious approach to appropriations, expressing concerns over using funds to fill recurring budgetary items or inflate budgets. Additionally, many states are awaiting guidance from Treasury before appropriating funds, pushing some legislatures into special session this summer.

At least seven states have appropriated CSFRF as part of their budget bills or as standalone actions, including Florida, Hawaii, Indiana, Kentucky (Senate Bill 26 and House Bill 382), Montana, and Vermont. Washington has also appropriated CSFRF, and three additional bills (Senate Bill 5092, Senate Bill 5165, and House Bill 1080) await the governor’s signature. Broader bills are on governors’ desks in Georgia and Maryland. Pending bills are being floated in Alaska, Louisiana, Minnesota and North Carolina. In Pennsylvania, House Democrats have laid out their own rescue plan before negotiations begin with Republicans, who hold the majority in both chambers.

New spending trends have emerged because of enhanced spending flexibility in the latest stimulus plan. These categories include:

  • Backfilling budget shortfalls.
  • Environmental protection.
  • Premium pay.
  • Transportation infrastructure.
  • Water and sewer infrastructure.

State lawmakers also continue to prioritize spending that was supported with CRF dollars, signaling a persistent need for financial assistance to communities, businesses and individuals. These categories include:

  • Public health needs.
  • Broadband.
  • Hazard pay.
  • Housing.
  • Human services.
  • State administration and operations.
  • Small-business assistance.
  • Unemployment.
  • Workforce development.

NCSL will be releasing a database tracking state actions on CSFRF.  

Debates Over Spending Authority

Governors in most states have released proposals, or at least indicated priority areas, for spending CSFRF dollars. Tension exists in many states between the legislative and executive branches over the authority to spend these unanticipated federal funds and emergency powers.

Legislatures overrode governors’ vetoes in Indiana and North Dakota for bills that give legislators authority over federal fund spending decisions. Indiana Governor Eric Holcomb (R) filed a lawsuit over the legislature’s action. New Mexico Governor Michelle Lujan Grisham (D) vetoed the legislature’s plan to appropriate CSFRF in the state’s budget bill, House Bill 2, because of contrasting interpretations of state law regarding the spending of federal funds.

In Wisconsin, the legislative and executive branches have competing CSFRF spending efforts. Governor Tony Evers (D) has begun appropriating funds without legislative action.

In contrast, West Virginia has given the governor authority to spend up to $150 million of any emergency federal funds through House Bill 2014. Additionally, Connecticut Governor Ned Lamont (D) signed House Bill 6555, which instructs the executive branch to submit a proposal for allocation of federal funds to House and Senate leaders.

In the end, authority is largely determined by the way states interpret their individual laws.

Emily Maher is a policy associate with NCSL’s Fiscal Affairs Program. She covers budget, tax, state-local, and economic development issues for NCSL.

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