Unprecedented. Uncertain. Historic. Those words apply to the COVID-19 pandemic, the state budgets it disrupted—and the subsequent massive infusion of federal stimulus. All three kicked off a unique era of decision-making challenges for governors, legislators and staff alike.
States Needed Help—and They Got It
To prop up budgets and avoid economic upheaval from pandemic shocks, Congress passed six federal stimulus packages in a matter of a year, totaling nearly $5.2 trillion in aid—an unheard-of transfer of funds from the federal government to states, tribal governments, territories and localities.
“The baby beast and the big beast” is how Montana Rep. Llew Jones (R) describes the two largest packages. Like many lawmakers, Jones, vice chair of the House Appropriations Committee, appreciates the help during an extraordinary time but says it has come with extraordinary complexity. He’s still getting calls months after the end of the 2021 legislative session for guidance on how to manage the money the state authorized. He’s not sure the state can absorb it all in the ways required by the relief and recovery measures, and he’d like more control over how to spend the money to meet his rural state’s needs.
“It’s creating some chaos at a level I’ve never seen before,” says Jones, who has served in the Legislature since 2005 and is chair of the House Appropriations Committee.
And that’s before the Biden administration’s far-reaching Infrastructure Investment and Jobs Act passed, adding $1.2 trillion for states to spend on traditional infrastructure and broadband.
The “beasts” Jones mentioned are his names for the Coronavirus Aid, Relief and Economic Stimulus Act and the American Rescue Plan Act of 2021, known as ARPA—a life raft for state, local, territorial and tribal governments. The acts created two separate funds: the $150 billion Coronavirus Relief Fund and the $350 billion Coronavirus State and Local Fiscal Recovery Fund. These helped buoy states, keeping virus-related expenses at bay without sinking general and reserve funds. The cash infusion buffered otherwise insurmountable pandemic costs for states and the nation.
Rescue vs. Recovery
The first round of flexible stimulus funds for states, the Coronavirus Relief Fund, provided discretion to cover pandemic-related expenses not accounted for in fiscal year 2020 budgets and incurred from March 2020 to December 2021. The fund calmed spiraling revenues early in the pandemic and mounting public health and economic pressures from increasing spending demands.
But the aid came with key restrictions. Relief funds could be used only for coronavirus-related expenses. Funds could not be used to cover lost revenues, which was clearly the biggest need for most states early in the pandemic. Although revenues recovered later in 2020, the pandemic’s early months left states reeling from sharp, unexpected revenue declines. The ineligibility of aid for revenue replacement left states grasping for solutions to immediate budget woes. Additionally, a lack of clear guidance on what were considered allowable expenses and the piecemeal release of federal information were the biggest challenges for state and local governments in allocating funds, according to the Government Finance Officers Association.
Rollout of the Coronavirus Relief Fund was fast and furious. It was no mean feat to allocate, administer, implement and expend funds appropriately and effectively within eight months of receipt. (The CRF deadline was later extended to Dec. 31, 2021, under the Consolidated Appropriations Act of 2021). Despite the obstacles, states successfully dispersed their funds on time.
“The expanded flexibility in the use of the ARPA fiscal recovery funds and timely technical assistance from Treasury provided state legislators and legislative staff an opportunity to use their funds for short- and long-term needs,” says Mandy Rafool, NCSL’s director of financial affairs.
The focus of the state portion of ARPA’s flexible dollars, the Coronavirus State Fiscal Recovery Fund, shifted to recovery and revitalization. It addresses public health costs and the replacement of lost public sector revenue, helps stabilize families and businesses, and provides “premium pay” for essential workers. There is also enhanced, though still limited, spending flexibility for infrastructure needs related to water, sewer and broadband. For example, the Treasury Department’s interim final rule allows for a wide range of broadband initiatives, but it requires eligible projects to reliably deliver minimum download and upload speeds.
Uncertainties loom as the virus continues to mutate and spread, but states have moved into another phase of recovery, one where legislatures can tackle and bolster recovery efforts. States must commit their funds by Dec. 31, 2024, and spend them by Dec. 31, 2026. The longer clock affords time for methodical, conscientious decision-making. And it may let states address long-term projects.
Managing the Influx
As soon as ARPA was signed in March 2021, states began planning how to spend the funds, which were a jolt to state budgets. The Pew Charitable Trusts says that for 37 states, “ARPA aid is equivalent to between 5% and 10% of total spending last fiscal year, including capital expenditures and spending from federal funds and bonds.” Federal funds as a percentage of general fund revenue for states range from 22.7% in Wyoming to 4.9% in Wisconsin.
In Washington state, lawmakers finalized their budget in the regular session. Rep. Nicole Macri (D) says lawmakers relied on the 24/7 efforts of legislative staff who constantly reviewed interim guidance from Treasury and quizzed federal officials to ensure the state was on the right track. Macri, vice chair of the House Appropriations Committee, says the Legislature gave funds to agencies with general guidelines rather than the detailed direction they might normally provide—which required trust.
“We’d say, ‘We’re going to appropriate $1.5 billion to the Department of Health and leave it relatively flexible,’” she says. “It’s like, ‘You have to follow the federal regs, you have to use it for COVID response—but go put it where you need it the most.’ And a lot of legislative and executive branches don’t have that level of trust.”
At first glance, it looks like a pretty good problem to have. But the sheer magnitude of funding means lawmakers are under pressure to make lasting improvements for their communities. The Treasury Department encourages recipients to help those households, businesses and nonprofits in communities disproportionately impacted by the pandemic. The department also is requiring recipients to exercise diligent oversight of the funding, especially for large projects.
Macri says in Washington, one group disproportionately impacted was undocumented workers, particularly in agriculture, who had to continue working and had no health care.
“There’s not really an easy way to quickly stand up a new health coverage program, so we pushed dollars out to federally qualified health clinics and rural health centers, saying these dollars are intended to ensure you have the capacity to address the surge in the number of uninsured and underinsured patients,” Macri says.
Montana’s Jones says it was nerve-wracking—but necessary—to make decisions before federal guidance was finalized.
People ask him, “ ‘Is it within the guidelines, does that fit?’ ” he says. “And you’ll get 10 different opinions.”
Jones says he’s talked to lawmakers from other states who had to work through similar uncertainty, but adds, “There’s a general sense that if you are working hard to do right with a reasonable argument, potentially the feds will not be too aggressive on saying ‘Hey, this doesn’t align.’”
He also wanted more flexibility in general to meet the needs of his rural state. For instance, he says, Montana could not spend all the money for rental assistance and would have preferred to invest that money in affordable housing. Workforce training money doesn’t make as much sense when your state essentially has full employment, he says.
“Our unfunded liability on retirement, that would be a great place to use one-time money, that would save you a great deal going forward. Or deferred maintenance in education, that would be a great one-time spend,” Kansas Sen. Rick Billinger (R) said at NCSL’s recent fiscal meeting.
At the same meeting, City Council Member Brooke Pinto, of Washington, D.C., noted the “huge” number of people without homes in her city. “I wish we’d had more flexibility from the feds to move people out of tents and into stable housing,” she says.
The task at hand, though, required setting priorities with the federal guidance in mind.
And states are taking a variety of approaches to creating, setting and implementing priorities over the ARPA funds. For example, Utah rated proposals based on criteria and divided the funding into eight buckets, while Massachusetts is rolling out funds in a three-phased recovery plan.
A handful of states, including Florida, Kentucky and Washington, acted on the funds before their 2021 sessions adjourned and Treasury had issued its interim final rule. Most states, however, hesitated to act on the funds before guidance was issued, a lesson learned from the Coronavirus Relief Fund. States that did not allocate funds in 2021, or those with a large portion still to allocate, point to apprehension that the guidance may change significantly in the final rule, and expenditures outside proper parameters might be clawed back or subject to audit ramifications. The department issued its final rule Jan. 6.
Of the states waiting on Treasury’s guidance, many allocated funds before their fiscal years wrapped up or, like Alabama and Virginia, met for special sessions throughout the summer and fall. In some cases, such as Nevada, interim committees met to sign off on allocations. Other states plan to act in their upcoming sessions, including Missouri and North Dakota.
Coronavirus State Fiscal Recovery Fund relief is being distributed in two tranches, based on state unemployment rates. States with a rise of more than 2 percentage points in the rate since February 2020 will receive their full funding allotment in the first tranche; other states will get half their funds in the first tranche, the rest in the second in 2022. Nineteen states and Washington, D.C., have received their full disbursement, while 31 states have received half their eligible funds. For some states, the staggered disbursement affected the amounts they could allocate and spend.
Who’s in Charge?
And many states grappled over who had the power to control the money: the executive branch, the legislature or some combination. Governors in some states have the authority over unanticipated federal funds, and in some of those states, lawmakers arranged to be involved or even changed the rules to give the authority to the legislature.
Even when one branch has the control, Rhode Island Rep. Marvin Abney (D) says, it’s still a matter of extensive collaboration.
Abney, who is head of the Rhode Island House Finance Committee, says an analyst found a line in the state Constitution making it clear the House had the authority to lead the budgeting.
“There’s a lot of cooperation between the executive and the legislative branches,” Abney said at the NCSL fiscal meeting. “In my particular case, because the line says the appropriation begins in the House, it doesn’t mean I don’t work with the Senate and executive branch. We tried to boil down a huge budget into 25 or 30 things we have to negotiate on.”
Legislatures largely have control, or are working in partnership with governors, in Wyoming, Minnesota and Massachusetts. In other states, including Wisconsin, Arizona, New Mexico, Oklahoma and Iowa, the executive currently has power over the fiscal recovery funds.
More Autonomy for Local Governments
About a third of local governments received no relief through the Coronavirus Relief Fund, according to the National League of Cities. But the threshold for local government direct recipients was substantially expanded under ARPA. Local governments are set to receive $130.2 billion of their own Coronavirus Local Fiscal Recovery Funds, and states do not have discretion over local governments’ spending decisions. Moreover, Coronavirus Local Fiscal Recovery funds also include $19.5 billion to municipalities with populations smaller than 50,000—known as non-entitlement units. For states, this funding expansion means less pressure to set aside money for local government relief and no need to keep tabs on local government spending.
Whatever good is coming from the influx of funds, lawmakers are keenly aware it is setting up a fiscal cliff when funding comes to a halt on programs that may have become popular in the meantime. Coronavirus State Fiscal Recovery Fund relief cannot be obligated beyond 2024.
“No matter how much you tell people this is for a special temporary purpose, when a favored program gets in and the money runs out, you are the bad guy” for not funding it again, Arkansas Rep. Carlton Wing (R) said at the NCSL fiscal meeting.
Leaders described how they are trying to build the programs with a clear end date.
Colorado has set administrative caps to discourage adding too much additional state staff, says Rep. Leslie Herod (D), adding, “We’ve partnered with community partners to allocate the money rather than take on staff.” Tennessee Rep. Patsy Hazelwood (R) says her state has tried to add contract workers wherever possible, rather than expanding the roster of permanent state employees.
Washington’s Macri says if the public is clamoring to keep these new initiatives in place, that could be guidance for lawmakers about priorities. States would be hard pressed to find anything like the dollars they got from the pandemic relief and recovery funds to keep projects and programs going at the same pace. Still, Macri is willing to face that music.
“I believe that assisting people early and at a level that actually helped them helped to keep our economy moving in Washington state, and we would have been much worse off if not for that,” Macri says. “There will come a time in the future where we’re going to have to make difficult decisions. But I think it will be worth it.”
Emily Maher is a senior policy specialist in NCSL’s Fiscal Affairs Program. Kelley Griffin is an NCSL writer and editor.