What the American Rescue Plan Act (ARPA) Means to State and Local Governments

By: Tracy Bedgood, Senior Manager

On March 11, 2021, the American Rescue Plan Act of 2021 (“ARPA”) was signed into law. The relief package provides funding in several areas such as state and local aid, education, rental assistance, transit, stimulus payments for individuals, and other provisions. This article focuses on the state and local government aspects of this legislation. A detailed summary of provisions by title are available on the GFOA website here and the full text of the legislation is available here. The GFOA’s Federal Liaison Committee also prepared an analysis of the American Rescue Plan that provides highlights by section and additional resources for each provision; click here for the GFOA analysis.

ARPA provides $350 billion in additional funding for state and local governments. The funding is provided through the U.S. Treasury, referred to in the Act as “Coronavirus State and Local Fiscal Recovery Fund (“CSLFRF”), and is included in Subtitle M, section 9901 of the Act. This is basically an augmented form of the Coronavirus Relief Funds provided through the CARES Act in 2020; however, the requirements and criteria have significant differences between the two Acts. The state funding portion is approximately $195 billion, with $25.5 billion distributed equally among the 50 states and the District of Columbia, and the remaining amount distributed according to a formula based on unemployment.

The local funding portion is approximately $130 billion, equally divided between cities and counties. Localities will receive the funds in two tranches – the first, after the U.S. Treasury certifies the proceeds to each jurisdiction and the second, one year later. Funding must be spent by the end of calendar year 2024.

For cities, $65 billion is divided between jurisdictions that are Community Development Block Grant (CDBG) entitlement jurisdictions and those that are not. $45.5 billion of the $65 billion will be allocated to metropolitan cities utilizing a modified CDBG formula, and the remaining amount for jurisdictions that are non-entitlement CDBG, will be allocated according to population. For the non-entitlement jurisdictions, the amount will not exceed seventy- five percent of their most recent budget as of January 27, 2020. Additionally, non-entitlement jurisdictions proceeds will be allocated through the state for redistribution to local governments.

For counties, the $65 billion will be allocated based on the county’s population. Counties that are CDBG recipients will receive the larger of the population or CDBG-based formula.

Estimates of the allocations to state and local government entities is available here.

Eligible uses of these funds include:

• Revenue replacement for the provision of government services to the extent of the reduction in revenue due to the COVID-19 public health emergency, relative to revenues collected in the most recent fiscal year prior to the emergency
• COVID-19 expenditures or negative economic impacts of COVID-19, including assistance to small businesses, households, hard-hit industries, and economic recovery
• Premium pay for essential workers
• Investments in water, sewer, and broadband infrastructure

Restrictions on the uses of these funds include:

• Funds allocated to states cannot be used to directly or indirectly offset tax reductions or delay a tax or tax increase
• Funds cannot be deposited into any pension fund

As with previous COVID-19 relief packages, specifically with previous funding through Coronavirus Relief Funds, it is expected that additional updated guidance will be provided by the U.S. Treasury. To be proactive with this process, several local government associations, including GFOA, have provided input to the U.S. Treasury regarding various aspects of the funding. These comments and requests for clarification of the provisions of ARPA are included here.

In addition, the GFOA has published an outline of Guiding Principles for the use of ARPA funds for consideration by local governments. A summary of that outline is included below and on GFOA’s website.

Temporary Nature of ARPA Funds

ARPA funds are non-recurring so their use should be applied primarily to non-recurring expenditures.

• Care should be taken to avoid creating new programs or add-ons to existing programs that require an ongoing financial commitment.
• Replenishing reserves used to offset revenue declines during the pandemic should be given high priority to rebuild financial flexibility/stability and restore fiscal resiliency.
• Use of ARPA funds to cover operating deficits caused by COVID-19 should be considered temporary and additional budget restraint may be necessary to achieve/maintain structural balance in future budgets.
• Investment in critical infrastructure is a particularly well-suited use of ARPA funds because it is a non-recurring expenditure that can be targeted to strategically important long- term assets that provide benefits over many years. However, care should be taken to assess any on-going operating costs that may be associated with the project.

ARPA Scanning and Partnering Efforts

State and local jurisdictions should be aware of plans for ARPA funding throughout their communities.

• Local jurisdictions should be cognizant of state-level ARPA efforts, especially regarding infrastructure, potential enhancements of state funding resources, and existing or new state law requirements.
• Consider regional initiatives, including partnering with other ARPA recipients. It is possible there are many beneficiaries of ARPA funding within your community, such as schools, transportation agencies and local economic development authorities. Be sure to understand what they are planning and augment their efforts; alternatively, creating cooperative spending plans to enhance the structural financial condition of your community.

Take Time and Careful Consideration

ARPA funds will be issued in two tranches to local governments. Throughout the years of outlays, and until the end of calendar year 2024, consider how the funds may be used to address rescue efforts and lead to recovery.

• Use other dedicated grants and programs first whenever possible and save ARPA funds for priorities not eligible for other federal and state assistance programs.
• Whenever possible, expenditures related to the ARPA funding should be spread over the qualifying period (through December 31, 2024) to enhance budgetary and financial stability.
• Adequate time should be taken to carefully consider all alternatives for the prudent use of ARPA funding prior to committing the resources to ensure the best use of the temporary funding.

We will continue to monitor developments and share updates as additional guidance related to the American Rescue Plan Act becomes available. If you have further questions, please contact us.