Using Federal Funds to Build a Stronger PA: Treasury Guidance on How State and Local Governments Can Use American Rescue Plan Funds

Diana Polson |

The much-awaited Treasury guidance on how states and local governments can use American Rescue Plan (ARP) funds is now in. The ARP will provide a massive influx of funds—$350 billion nationally—to state and local coffers. State and local governments will need to make decisions about how to spend this money quickly. But to spend this money well will be a challenge. Our goal should be to build Pennsylvania back better than it was before the pandemic so that families across our Commonwealth can live with more security, stability, and dignity; resources can be distributed more equitably to reach those most in need; and our public sector can be strong and prepared to deal with crises like this moving forward.

The American Rescue Plan was passed to bring much-needed resources to families, businesses, states, and local governments that have struggled during the COVID-19 pandemic and its economic aftermath. Typically, economic downturns are slow to recover because state and local governments make austerity decisions to get through the hard times, laying off public sector workers and cutting budgets. In fact, during Pennsylvania’s last economic downturn, Governor Tom Corbett cut nearly a billion dollars from our state’s public education system, a decision that still haunts our schools and kids today. The ARP would kickstart the recovery by infusing significant funds into local communities. The plan’s Coronavirus State and Local Fiscal Recovery Funds will provide $7.3 billion to Pennsylvania’s state government and billions more to local governments across the state. There is tremendous flexibility with these funds, but there are some basic guidelines for how they may be spent to be sure any spending matches up with the spirit of the ARP.

How Funds Can Be Used
States and local governments can use Coronavirus State and Local Fiscal Recovery Funds from the American Rescue Plan for the following purposes.

• Support public health expenditures. This includes funding for COVID-19 mitigation efforts, medical expenses, behavioral and mental healthcare, and certain public health and safety staff. Pennsylvania’s public health system has been underfunded, spending only $39 per capita on public health, ranking 7th from the bottom among all states.

• Address negative economic impacts caused by the public health emergency. Funds can be used to deliver assistance to workers and families, which would help with buying food, paying rent or other bills, as well as provide cash assistance, legal aid to prevent eviction, job training, and other supports. It could also be used to support small businesses that have been negatively impacted by the COVID crisis with services such as technical assistance; support the industries most impacted by the COVID crisis, like tourism, travel, and hospitality; and rebuild the public sector, including rehiring public sector staff and replenishing unemployment insurance trust funds up to pre-pandemic levels.

• Replace lost public sector revenue. Local and state governments experienced revenue loss due to the pandemic. Unlike previous federal COVID support, these funds can help governments make up for this loss. Governments can assess their loss once funds are received and will have the opportunity to re-calculate loss at several points through the program so as to bolster the lagging impact of the crisis on revenues.

• Provide premium pay for essential workers. The pandemic has shone a light on the vital work so many Pennsylvanians have performed throughout the crisis to the benefit of all of us in the Commonwealth and despite tremendous risk to themselves. This includes health care workers, food systems workers, janitors and sanitation workers, truck drivers and warehouse workers, childcare workers and educators, social and human services staff, and more. Premium pay offers additional support to workers who have faced the greatest health risks because of their service in critical infrastructure sectors. The Department of the Treasury emphasizes the need to prioritize premium pay for lower-income workers: up to $13 per hour in premium pay and up to a total of $25,000 per worker is allowed.

• Invest in water, sewer, and broadband infrastructure. States and localities can make necessary investments to improve access to clean drinking water, support vital wastewater and stormwater infrastructure, and expand access to broadband internet.

States may not use funds to offset a reduction in net tax revenue due to a tax change. The purpose of the ARP is to provide much-needed support to governments, families, and businesses and should not be used as a replacement for existing tax revenue due to tax cuts. If a state were to cut taxes and use these funds to offset these cuts, the equivalent amount would have to be paid back to the Treasury. States and localities may not use these funds to make a deposit into a pension fund. And finally, funds may not be used to fund debt services, legal settlements, or judgments, or to make rainy day fund deposits.

One Payment for Pennsylvania, Two for Local Governments
States with unemployment rates that are 2 percentage points higher than in February of 2020 will receive funding in one tranche, or portion. More than half of states fit into this category, including Pennsylvania. Pennsylvania’s unemployment rate was about 5% in February 2020, it spiked to 16% in April 2020 and has been slowly declining since then. By January 2021, our unemployment rate was still more than 2% higher than our starting point, hovering around 7.3%. Therefore, Pennsylvania should expect the entire $7.3 billion imminently. We have until December 21, 2024, to use all of our funds.

Local governments will receive their funds in two tranches—one this month and one a year later.

Community Input For State and Local Spending Plans
There is informed fear that Pennsylvania’s General Assembly will use this once-in-a-lifetime funding opportunity to fill in budget holes made worse over the last decade by corporate tax cuts and Pennsylvania’s failure to establish stable recurring revenue sources. For nearly a decade, the General Assembly has passed budgets that were balanced in name only, relying on one-time revenues and budget gimmicks. The fear is that the General Assembly will use these federal funds meant to speed our collective recovery to simply replace the one-time gimmicks that are needed to balance the budget.

While money can be distributed in line with state and local rules about how to decide on federal funds, the Treasury encourages governments to engage the public in discussion about the ways that funds should be used. The Treasury “urges State, territorial, tribal and local governments to engage their constituents and communities in developing plans to use these payments, given the scale of funding and its potential to catalyze broader economic recovery and rebuilding.”

The American Rescue Plan provides a tremendous opportunity for our state and local governments to invest in a future that is more equitable, more transparent, and rebuilds with the intention of emerging from this crisis better than we were before the pandemic. Let’s make sure our leaders—who we voted into office—use ARP funds in this spirit.

For more information about the American Rescue Plan, see our tracking spreadsheet here, which details where ARP funds are going, the purpose of these funds, regulations, and the distribution process.