People Spending Other People’s Money

Sheila Weinberg, Christine Kuglin  |  May 3, 2023

"Balanced budget requirements exist in 49 states and the 75 most populous cities in the U.S. This essential link between spending and taxing allows citizens to hold their elected officials accountable. Former U.S. Department of the Treasury (Treasury) official Frank Cavanaugh said it best:
“Politicians should not have the pleasure of spending (i.e., get votes) without the pain of taxing (i.e., lose votes.)”

Government response to the COVID-19 pandemic exemplifies Cavanaugh’s concerns. Trillions of dollars were appropriated, yet the question remains whether it was ethical, given taxes have not increased to cover pandemic spending and deadlines for spending the money continue to be extended. The pleasure of spending goes on, but the pain of repayment seems nowhere in sight. The American Rescue Plan (ARP) was enacted to grant state and local governments money to rescue their budgets and economies in the crisis. Treasury administered over $1 trillion of funds appropriated through the legislation. One part of ARP, the Coronavirus State and Local Fiscal Recovery Funds (SLFRF) program, delivered $350 billion to state, local and tribal governments to support their response to and recovery from the public health emergency. Almost $195 billion went to states, mostly based on the number of unemployed people in each state. Treasury said funds provided for many state and local projects in “affordable housing, quality education, and public health to reduce the health, economic and educational disparities that left them more vulnerable to COVID-19.”4 Examples of uses of the funds include:

  • Premium pay for more than 740,000 essential workers, such as teachers, nurses, police officers and grocery workers, to compensate for extra work and sacrifice through the pandemic.
  • Investments by over 380 state, local and tribal governments in projects toward affordable housing, education and public health.
  • Advance Child Tax credits for families with children.
  • Economic Impact Payments to more than 170 million people.
  • Fund recovery dollars to over 270 local, state and tribal governments to assist more than 100,000 businesses through the pandemic.
  • Emergency rental assistance to prevent evictions.
  • $8.7 billion in investments to 186 community financial institutions through the Emergency Capital Investment Program.

This list is not exhaustive, but indicative of the scope of the plan.

The Government Finance Officers Association released guidelines for the $350 billion in aid for state and local governments — some
clearly defined, others open to interpretation. One noteworthy guideline is that funds cannot be used to offset tax cuts or delay a tax. Also, according to National League of Cities guidance, they cannot be deposited into a pension fund. More precisely, the final rule does not permit this funding to be used to make a payment into a pension fund if both of these statements apply:

  1. The payment reduces a liability incurred prior to the start of the COVID-19 public health emergency.
  2. The payment occurs outside the recipient’s regular timing for making such payments.

Funds may be used to replace lost revenue, and spending guidelines dictate they are not required to be obligated, let alone spent, beyond 2026. During research for the Annual Financial State of the States report for 2022, Truth in Accounting discovered that states, mostly because of the large inflow of pandemic-related cash and increases in market valuations of pension plans, are reporting massive surpluses and substantially improved financial outlooks. All but one state, New Jersey, reported an improved outlook for fiscal year (FY) 2021. By replacing lost revenue with COVID-cash, states and cities are able to report massive surpluses despite unfunded pensions or other post-retirement obligations.

“Many lawmakers are also giving money back to their constituents rather than letting it go to waste. Almost half of states have sent or plan to send bonuses to government employees, such as health care workers, police officers and teachers,” The Economist reported. For example, despite the unfunded liabilities in each of the following states:

  • California reported a $97 billion surplus,12 which is being spent on rental relief, utility bills, retention bonuses, and child care fees.
  • Illinois reported a $1.7 billion surplus, yet documents released by the budget office show the state ended the year with a $1.5 billion deficit.
  • Colorado distributed refunds of $750 to individuals and $1,500 to couples.

When we examine the way different states are using the pandemic relief funds, it’s important to consider whether the actions fall within Congress’ intended uses of funds. For example:

  • Alabama: The governor announced a plan to build two new 4,000-bed prisons; $400 million would come from the state’s $2.1 billion share of ARP funds. The American Civil Liberties Union of Alabama called it “a gross misuse of funds when Alabama is at the bottom of the country in providing health care.”
  • Illinois: State Fiscal Recovery Funds received totaled more than $8.1 billion. Approximately $2.8 billion of that money was included in the FY 2022 state budget. Illinois paid off the money borrowed from the Federal Reserve during the pandemic. In a February 2022 press release, state Comptroller Susanne Mendoza said the “payments to the Federal Reserve were drawn from state revenues without using direct federal relief funds.” What a coincidence that Illinois could pay off its loans as well as billions of dollars of other accumulated debt shortly after receiving federal aid!
  • Virginia: Governor Glenn Youngkin moved to eliminate the state’s grocery tax and raise teachers’ salaries, key planks of his winning election campaign.
  • Colorado: The state plans to spend $275 million on behavioral-health programs, along with $13 million for a future universal pre-kindergarten program.

ARP and SLFRF funds afforded states the ability to reform their economic outlooks and tax structures in ways that most likely would not have been possible without the extreme intervention of the federal government. As a result, the apparently flexible funding seems to shift state debt
and other problems to the federal government. For example, in developing tribal SLFRF policy, Treasury prioritized tribal engagement and
feedback in order to “provide tribal governments with flexibility to meet the unique needs of their citizens.”

The federal government’s debt clock now measures national debt at more than $31 trillion. According to Truth in Accounting’s debt clock, if unfunded Social Security and Medicare promises are included, the debt is more than $147 trillion dollars. This leads us to return
to the original question: Will the federal subsidies eventually require federal tax increases organized by politicians in office, or is Frank Cavanaugh once again prophetic? Will today’s lawmakers enjoy the pleasure of spending and getting votes, then leave their successors to impose the pain of
increased taxes? Unfortunately, we won’t know until more time passes."

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