The American Rescue Plan (ARP) was enacted to provide state and local governments with the money needed to rescue their budgets and economies during the pandemic. The Treasury administered over $1 trillion of funds appropriated through the legislation. Almost $195 billion went to the states mostly based upon the number of unemployed people in each state. According to the US Treasury, the Act provided funds for many state and local projects, including “affordable housing, quality education, and public health to reduce the health, economic, and educational disparities that left them more vulnerable to COVID-19.”
The Government Finance Officers Association (GFOA) released guidelines for the $350 billion in aid for state and local governments. Some guidelines are pretty specific; others are open to interpretation. Specifically listed in the GFOA guidelines is a noteworthy point: Funds cannot be used to offset tax cuts or delay a tax; funds cannot be deposited into a pension fund.
However, funds may be used to replace lost revenue. Additionally, spending guidelines dictate that funding is not required to be obligated until December 31, 2024, and jurisdictions have until December 31, 2026, to expend their funds fully. This extended time frame and the ability to replace lost revenue is now leading states and cities officials to report massive “surpluses” in spite of unfunded pensions or other post-retirement obligations. This is like you saying that you have “surpluses” because you have money in the bank, while you ignore your bills and credit card balances.
Interestingly, shortly after Illinois received the ARP federal aid, it was able to pay off billions of dollars of bills. The State paid off the debt it borrowed from the Federal Reserve during COVID 19. This borrowing came at an interest rate similar to junk bonds after the State previously tried to issue bonds through private markets but failed.
In a press release concerning the repayment of the borrowed funds, state Comptroller Susanne Mendoza highlighted, “It is important to note that these payments to the Federal Reserve were drawn from state revenues without using direct federal relief funds.” Was it simply a coincidence that the debt repayment successfully occurred after receiving the huge inflow of ARP money to cover what would have been the State’s responsibility? A year earlier, the State had to borrow the funds to meet normal obligations. Could the borrowed funds from 2020 have been repaid if the federal government hadn’t subsidized Illinois’ budgetary spending?
Gov. JB Pritzker’s most recent budget includes providing $1.8 billion in tax relief to the working families of Illinois and a $1 billion contribution into the state’s Rainy-Day Fund, as well as a $500 million overpayment toward the state's pensions. Should Illinois, other states, and cities be giving tax cuts, putting extra money into their pension systems, and paying down debt after they received ARP funds, which were not supposed to be used for those items?
The federal ARP program afforded states the ability to reform their economic outlooks and tax structures in a way that most likely would not have been possible without the extreme federal government intervention, shifting state debt and problems to the federal government. The federal government’s debt clock now measures the reported debt in excess of $31 trillion dollars. According to Truth in Accounting’s debt clock, if unfunded Social Security and Medicare promises are included the federal debt is more than $144 trillion dollars.
Questions remain. Will states return unspent ARP funds? Have the states been in compliance with the rules governing the expenditures of the ARP? Until the deadlines for the use of these funds expire, we may not have the answers.