State and Local Officials Push Back Against Calls to Redirect Federal Aid

Mayors and a group of Democratic state treasurers are among the state and local officials rejecting calls to redirect federal aid dollars allocated under coronavirus relief legislation.

They’re staking out their opposition as Republican senators on Thursday suggested repurposing a portion of the money to pay for infrastructure spending. At the same time, some economists and fiscally conservative groups are questioning whether all of the aid that flowed under the American Rescue Plan is necessary, particularly given better than expected state tax revenues.

The Treasury Department this month began distributing aid to states and localities through a $350 billion program meant to help them recover from the pandemic.

How any repurposing of aid might take place—and to what extent it could specifically affect payments to states and localities—is not clear. Where the money is supposed to go, and how it is to be used, is prescribed in law and would likely take action by Congress to change.

“Any calls to take away or repurpose these funds will harm the people and communities who have suffered the most from this pandemic,” U.S. Conference of Mayors president and Louisville, Kentucky Mayor Greg Fischer, Dayton, Ohio Mayor Nan Whaley and Arlington, Texas Mayor Jeff Williams said in a joint statement released Friday morning. 

“The worst may be behind us, but it will take years to rebuild a solid footing, and we simply cannot take steps backwards now,” they added.

State and local government advocacy groups lobbied hard to get direct aid for their jurisdictions included in the latest round of relief legislation, known as the American Rescue Plan. They argued not only that revenues had taken a hit, but that they’d had to cover unplanned costs to respond to the public health crisis and its economic fallout.

Fourteen Democratic state treasurers signed onto an open letter that voices concerns similar to those raised by the mayors.

“As state treasurers and guardians of our states’ fiscal health, we urge Congress to resist calls to raid Covid relief funding. The risks are too great and will cause a longer, more difficult economic recovery for everyone,” they wrote.

“Repurposing Covid relief funding would result in a massive loss of revenue for large and small communities alike, at precisely the moment they need to be doing everything to get our economy going again,” the treasurers added.

Among the treasurers who signed the letter are California’s Fiona Ma, Illinois’ Mike Frerichs, Maryland’s Nancy Kopp, Washington’s Mike Pellicciotti and Wisconsin’s Sarah Godlewski.

Some Budgets Better Than Forecasts

Many state budgets fared better than initially forecast in the early days of the pandemic.

Figures the Urban Institute released this month indicate that, after sharp declines in the April to June 2020 timeframe, total state revenues were up by $9.5 billion, or 1%, between April 2020 and March 2021, when compared with the same period a year earlier.

Revenues increased in 31 states, the data show. But they fell in 18 and declined by 8% or more in six: Alaska, Hawaii, Florida, Nevada, North Dakota and Texas—states with economies entwined with the tourism or oil and gas sectors, which were hammered by the downturn.

Urban notes that healthy personal income tax collections were a key driver propping up revenue. A large share of job losses during the pandemic were among lower-wage workers, as opposed to higher earners. Legions of office employees switched to remote work and continued to have income tax withheld from their paychecks.

Another factor that softened the hit to state budgets is that the federal government pumped billions of dollars into the economy with programs to aid households and businesses, like expanded unemployment benefits and the Paycheck Protection Program. This money buoyed economic activity and tax revenues along with it.

In California, which has an estimated budget surplus for the fiscal 2021-2022 budget cycle that is either $38 billion or $76 billion depending on how the number is calculated, Gov. Gavin Newsom this month proposed direct payments of up to $1,100 for many families. The state is in line to receive about $27 billion in direct aid from the federal government.

Other states that expect surpluses include: New Jersey, Arizona, Texas and Idaho, the Committee for a Responsible Federal Budget, a watchdog group, pointed out in a May 18 analysis.

While state and local governments are often lumped together, the outlook at the local level, for towns, cities and counties, has been more mixed and uncertain throughout the crisis and as the nation turns the corner towards recovery. 

Local governments tend to rely more on property taxes, which typically see ups and downs that lag behind broader economic trends. Housing markets are hot in many places. But there are questions about how downtowns and commercial property, which emptied during the pandemic, will recover in the months and years ahead. 

Doubts About Need for Extra Funding

It’s not just GOP lawmakers who are raising doubts about the need for all of the spending in the $1.9 trillion American Rescue Plan that President Biden signed into law in March.

In an op-ed this week, warning of rising inflation risks, Lawrence Summers, an economist who held posts in both the Clinton and Obama administrations, suggested that, “where possible, infrastructure investments should be financed by reprogramming of Rescue Plan funds.”

The Committee for a Responsible Federal Budget noted in its recent analysis that, when adding aid to public schools to the $350 billion recovery fund, and other money in the American Rescue Plan, the state and local dollars in the law total roughly $525 billion.

“Funding from the American Rescue Plan is likely to push state and local receipts to record levels in the second quarter of 2021,” the analysis says. “While some states—for example, tourism-dependent states like Hawaii—may need these funds, for many it will represent a substantial windfall,” it adds.

The group, similar to Summers and the GOP lawmakers, recommends that some of the aid should be used to pay for infrastructure investments like those outlined in the roughly $2 trillion proposal the Biden administration has been advocating for.

In their letter, the treasurers make a case that federal aid to states and localities fell short during the 2008 recession. “It took nearly a decade for state and local governments to return to pre-crisis employment levels, slowing the pace of the recovery for the entire country,” they wrote. “Clawing back funds from the American Rescue Plan would be making the same mistake again, and even more so.”

Citing low jobless rates in their states and concerns about workforce shortages, many Republican governors have moved to end expanded unemployment benefits adopted during the pandemic, including $300 a week extra payments financed by the federal government.

Sen. Shelley Moore Capito, the West Virginia Republican who has taken the lead on infrastructure negotiations between GOP lawmakers and the White House, on Thursday highlighted this as one potential area where federal relief dollars could be repurposed.

“Certainly those dollars are not going to be spent,” she said.

Among the allowable uses for the direct state and local aid provided by the American Rescue Plan are broadband and water and sewer infrastructure. Recipients may also use the money for public health costs, economic assistance for businesses and households, hazard pay for public workers, and replacing revenue lost due to the pandemic.

But an interim final rule the Treasury Department released earlier this month for the money specifies that, “general infrastructure spending is not covered as an eligible use,” unless the spending is related to water, sewers or broadband, or if it is within the amount that a state or locality is counting towards lost revenues it is replacing.