Coronavirus State and Local Fiscal Recovery Funds: How Do They Work and What Does It Mean to the Fifth District?

Introduction

Over the last 14 months, the U.S. Congress has taken a series of unprecedented fiscal steps to support the public health response to the COVID-19 pandemic and to help the economy bounce back from the recession. We’ve been following these steps, including the impacts on state revenues, the extension and enhancement of unemployment benefits, and the availability of rental assistance, among other topics. The response from Congress has also included help for state, local, and tribal governments facing new budgetary demands in an unpredictable fiscal environment. As discussed in a Regional Matters post last year, many states were predicting significant revenue declines due to the pandemic. Those predictions, however, especially for state governments within the Fifth District, have most times proven to be far more severe than reality, as local governments have reported significant reductions in revenue related to the economic shutdowns.¹ Over the last year, both states and local governments have faced significant uncertainty, while they have simultaneously had to take on additional costs related to the pandemic response.

In order to help state and local governments continue to meet both the financial obligations and aid in the economic recovery, Congress most recently created the $350 billion Coronavirus State and Local Fiscal Recovery Funds (CSFRF/CLFRF or Fiscal Recovery Funds) as a part of the American Rescue Plan (ARP) passed in March. The rules governing these funds provide states, tribes, territories, and local units of government more flexibility in using the money for responding to the pandemic, which importantly, can go toward promoting an economic recovery, particularly for the hardest-hit communities.

This post will explain how governments can use the Fiscal Recovery Funds, the amount of funding coming into the Fifth District, and how states within the district are using the funds to support their operations and their citizens.

Who Is Eligible for Funding? How Is It Awarded?

Virtually all levels of government across the United States are eligible to receive funding through the CSFRF/CLFRF. States and the District of Columbia, counties, metropolitan cities, tribal governments, and territories are eligible to receive direct payments from the Treasury Department. Non-entitlement Units of Local Government (NEUs), typically smaller cities and counties with less than 50,000 and 200,000 people, respectively, are eligible to receive funds indirectly through their state governments.

Counties and NEUs will receive funds proportionate to their population within their states, while metropolitan cities are designated and allocated funds in line with how Community Development Block Grants are awarded. Using this formula, 142 cities across the country qualify for direct funding. For the Fifth District, the ARP allows consolidated units of government to receive allocations for each formula for metropolitan cities, counties, and NEUs. The District of Columbia, for example, will receive allocations under the state, city, and county categories, and the largest independent cities in Virginia, such as Richmond and Alexandria, will receive allocations for both metropolitan cities and counties.

Out of the overall $195.3 billion allocated to the states and the District of Columbia, $25.5 billion is split equally among the 51 recipients, while the remaining $169 billion is allocated proportionally to the average seasonally-adjusted employment rate in each state over the last three months of 2020. The District of Columbia will also receive an additional $759.9 million “top up,” which makes up for a lower-than-expected allocation in an earlier stimulus bill. Payments will be split into two tranches across 2021 and 2022, though states that have experienced higher-than-expected unemployment are eligible to receive their entire allotment in one payment this year. States have until Dec. 31, 2024, to appropriate the money, and projects must be completed by the same date in 2027.

Finally, tribal governments, including the nine federally recognized tribes in the Fifth District,² will receive their $20 billion allocation across two payments but allocated in a slightly different manner. One billion will be split evenly among eligible tribal governments, and the remaining $19 billion will be allocated using a formula that takes into account tribal enrollment and tribal employment rates. Treasury has stated they are not releasing individual tribal allocations at this time in order to protect the privacy of tribal government information, but it is safe to assume these funds will be a significant fiscal boost for those nations located within the Fifth District.

Funding Allocations for the Fifth District

As shown in the following charts, the CSFRF/CLFRF will bring in approximately $19.1 billion in financial support directly to states and the District of Columbia and an additional $11.5 billion spread across 358 qualifying counties, 87 qualifying metropolitan cities, and all other nonmetropolitan areas throughout the Fifth District.

How Can the Money Be Spent?

The ARP purposefully set very broad categories for how government can spend allocations from the Fiscal Recovery Funds, all aimed toward supporting state and local responses to the pandemic, replacing lost revenues, supporting vital public services, helping retain jobs, supporting the stabilization of households and businesses, and addressing systemic challenges that have contributed to the unequal impact of the pandemic. The overall eligibility categories are as follows:

• Support Public Health Expenditures.
• Address Negative Economic Impacts Caused by the Public Health Emergency. Directly help families and businesses through grants, loans, or technical assistance. Treasury has emphasized there is a preference that funds be used to address systemic disparities affecting low-income communities and communities of color.
• Replace Lost Public Sector Revenue. Governments have broad latitude to use the State and Local Fiscal Recovery Fund to replace revenue lost due to the COVID-19 pandemic. Once identified, funds can be used to avoid cutting government services and jobs and to support general operations. According to the National Association of Counties, this category may allow governments to fund a range of services including, but not limited to, maintaining and building roads, modernizing cybersecurity, providing educational services, pursuing environmental remediation, and improving health services so long as the funds replace revenue lost due to the pandemic.³
• Provide Premium Pay for Essential Workers.  The preference is to boost the wages of low-income workers.
• Invest in Water, Sewer, and Broadband Infrastructure. Funds can only be spent on these types of infrastructure except, as noted above, with replacing lost revenue.

There are, however, two specific ineligible uses of funds. Governments cannot use these funds to directly or indirectly offset tax cuts, and governments cannot use these funds to make extraordinary deposits into pension funds, though routine payroll contributions for qualified employees are allowable expenses.

Tribes have additional leeway in spending their funds in an acknowledgement that the pandemic has taken a disproportionate toll on the health and economic well-being of tribal communities. These uses include addressing health disparities and social determinants of health, developing affordable housing and addressing homelessness, providing early childhood education, and fixing funding gaps between high- and low-poverty schools.

Plans for Spending the Funds

Now that Treasury has released these plans, many states within the Fifth District are starting to make proposals and plans on how to spend the first infusion of federal dollars. When state revenues were projected to be lower due to the pandemic, most states had adopted more conservative budgets. Some of the worst financial fears of the pandemic did not happen for state governments, and many states, including those within the Fifth District, have experienced surpluses in their revenue collections. In addition to the budget controls that states adopted in the early days of the pandemic, these surpluses can be attributed, in part, to the rebound in the jobs market, the surge in consumer spending, and the booming housing market. This rosier fiscal picture, plus the influx of federal dollars, has created an opportunity for states to think about making significant investments to boost vaccination rates and extend other types of response infrastructure into previously underserved or unserved communities.

Maryland, Virginia, and North Carolina have released the most detailed proposals at this time. While these are still largely proposals and the legislatures in each state will have to make the final decision on how to allocate the funds, these plans offer a window into the needs of each state and how the funds may ultimately be spent.

In Maryland, the governor and legislative leadership have announced a bipartisan plan that would shore up the state’s Unemployment Insurance Trust Fund, help schools prepare to fully reopen, and invest in broadband infrastructure as well as apprenticeships and employment training programs. The governor of Virginia has also proposed to shore up and upgrade unemployment systems as well as accelerate their timeline for closing the digital divide, modernize public school buildings, and infuse local and state public health agencies with funds for long-term capacity improvements. Finally, the governor of North Carolina is proposing to make significant investments in broadband, water, and sewer infrastructure, create recovery grants for the hospitality and tourism industry, and invest in scholarships for lower-income families to defray the cost of attending community college or a public four-year institution.

West Virginia and South Carolina have also begun to consider how to spend their allocations. The West Virginia General Assembly has recently made significant increases to both their health and human services and education budgets and used an unexpected surplus to make other investments in their transportation system.⁴ South Carolina has recently reinstituted a raise for public employees and has indicated they will use part of their federal allocation to make special hazard payments to essential front-line workers.⁵

Conclusion

The COVID-19 pandemic has taken a significant toll on the economic well-being of our nation. In response to that challenge, Congress has made an equally unprecedented fiscal response to help states and other units of government weather the emergency and try to build upon recovery efforts already underway throughout the United States. The $350 billion in aid given to states, counties, territories, tribes, and local governments through the Coronavirus State and Local Fiscal Recovery Funds — intended to help combat the pandemic and build an equitable economic recovery — is one of the most significant, one-time allocations of federal dollars in a generation. Within the Fifth District, governments are already identifying opportunities to send those funds to their most at-need residents, help their businesses reopen, and invest in their public health and physical infrastructure to help them address future pandemics or help them in their current economic recovery. Using these funds over the next several years will continue to be of heightened interest to citizens, and how governments choose to deploy these new resources could be a determining factor in their communities’ ability to thrive post-pandemic.

Reference Materials

U.S. Department of the Treasury: Coronavirus State and Local Fiscal Recovery Funds

CSFRF: Methodology for State Allocations

CSFRF: Allocations for States

CLFRF: Allocations for NEUs

CLFRF: Methodology for Counties

CLFRF: Allocations for Counties

CLFRF: Methodology for Metropolitan Cities

CLFRF: Allocations for Metropolitan Cities

Guidance for Tribal Allocations

CSLFRF: Fact Sheet

CSLFRF: Interim Final Rule

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Views expressed are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of Richmond or the Federal Reserve System.