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Final Rule for Spending Pandemic Fiscal Aid Creates Opportunities and Risks

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The Treasury Department’s recently released final rule for how state and local governments, tribal governments, and territories can spend the American Rescue Plan’s $350 billion in fiscal aid makes it easier for them to help people and communities hurt economically by the COVID-19 pandemic and to address long-standing racial and economic inequities. The rule allows a wide range of investments in households or communities with low incomes. But it also somewhat increases state flexibility over how to use the funds, which comes with some trade-offs.

The American Rescue Plan created the $350 billion State and Local Fiscal Recovery Fund (SLFRF) for states, localities, tribal governments, and territories to spend over more than three years to address the impacts of the pandemic and support an equitable recovery. States have made substantial progress using these funds, allocating 60 percent of their share in one year, and have roughly $80 billion remaining.

The nation’s economic recovery remains incomplete; there are still nearly 3 million fewer jobs than before the pandemic, and many households still struggle to pay rent or afford food. With the impacts of the pandemic still being felt, states should use the final rule as an opportunity to address needs caused or exacerbated by the pandemic — such as affordable housing, food aid, or direct cash assistance — with added confidence that those investments are allowable. States should not squander this opportunity by using federal aid in ways unrelated to the hardships created by the pandemic.

Rule Gives Green Light to Investing in Households and Communities With Low Incomes

The final rule creates new definitions of individuals and communities that have been “impacted” or “disproportionately impacted” by the pandemic and lists the kinds of services that states and localities can provide for each group using SLFRF. The new definitions build on Treasury’s interim final rule, which encouraged states and localities to use the funds to “foster a strong, inclusive, and equitable recovery” and to focus on “households, businesses, and non-profits in communities most disproportionately impacted by the pandemic.” The interim final rule made it clear that investments to support people or communities with low incomes were allowable, and the final rule clarifies and simplifies the process for making these kinds of investments.

  • “Impacted” households are those with incomes below 300 percent of the federal poverty line (about $66,000 for a family of three) or 65 percent of the median family income for their county (as measured annually by the U.S. Department of Housing and Urban Development), whichever is higher. Impacted households also include those that have experienced unemployment or food insecurity or are eligible for Medicaid or child care subsidies. Communities are considered impacted if the median income is below 300 percent of poverty or below 65 percent of the median county income for a family of three, whichever is higher.

    The final rule lays out a wide range of allowable uses of SLFRF to help these households or communities: food aid, emergency rental assistance, other affordable housing investments, child care, cash assistance, and health services; services to address educational learning loss; workforce development; and more. The list in the final rule is not exhaustive; states and localities can fund other similar services.

  • “Disproportionately impacted” households are those with incomes below 185 percent of the federal poverty line ($40,600 for a family of three) or 40 percent of the median family income for the county, whichever is higher. These households also include participants in programs such as the Supplemental Nutrition Assistance Program, Temporary Assistance for Needy Families, or Supplemental Security Income, as well as people receiving services from tribal governments or living in a U.S. Territory. Communities are considered disproportionately impacted if their median income is below the higher of 185 percent of poverty or 40 percent of the county median family income for a family of three.

    The allowable services for disproportionately impacted households include all allowable services for impacted households, as well as funding for community health workers and primary care clinics, efforts to address neighborhood blight, lead remediation, efforts to address educational disparities, and more.

Under the final rule, for example:

  • A state can use SLFRF to support an affordable housing program targeted on households with incomes below 300 percent of poverty. Many communities have fully obligated their emergency rental assistance funding from the American Rescue Plan, but the SLFRF can support ongoing efforts to keep eviction rates down and more households stably housed.
  • A state can invest SLFRF to create green space in a community with median income below 185 percent of poverty.

Rule Also Increases State Flexibility in How to Use the Funds

While the final rule creates a clearer path for states to use federal aid to address economic inequities, it also broadens states’ ability to spend SLFRF to replace revenue losses suffered because of the pandemic. Importantly, this portion of a state’s SLFRF can be spent on any government service.

The American Rescue Plan says that states and localities can spend SLFRF in response to a loss of revenue. That’s important because they must balance their budgets each year; without federal aid, states and localities facing revenue shortfalls due to the pandemic-related decline in economic activity would have been forced to make painful cuts to core services such as education, health, or transportation.

But since this portion of the funds can be used for any government service, it also offers states substantial flexibility in using the funds. The final rule, moreover, expands this flexibility in two key ways.

  • Revising the formula states use to calculate their revenue loss. The final rule allows states and localities to determine the size of their revenue loss by comparing their actual revenue collections with their 2019 revenues adjusted upward by 5.2 percent annually. The adjustment in the Interim Final Rule was lower: 4.1 percent. (The 4.1 percent figure was based on data on state and local revenue growth from 2015 to 2018; 2019 data have more recently become available, so the 5.2 percent figure reflects the average revenue growth over 2016-2019.) The larger adjustment in the final rule will result in a higher calculated revenue loss in most states, which means they can use more of their SLFRF with the complete flexibility that the revenue loss provision offers.
  • Allowing states to use SLFRF as match for federal programs. The final rule defines SLFRF spent under the revenue loss provision as general fiscal aid and notes that general fiscal aid can be used as the state or local match in federal programs other than Medicaid. For example, a state could use part of its SLFRF for its portion of federally funded transportation projects. The interim final rule prohibited using SLFRF as a state or local match.

States are generally using their Fiscal Recovery Funds for constructive and useful purposes, and the new rules are unlikely to change that. Further, allowing states to use the SLFRF to match other federal purposes could help states invest in beneficial projects such as major new public transit projects. But the final rule’s added flexibility comes with a trade-off: states have more freedom to address their most pressing needs, but also more freedom to choose low-priority options.

SLFRF is an important source for states to help residents and communities meet basic needs. State policymakers should expand upon the many ways that states have used these funds to support an equitable pandemic recovery and use their increased flexibility in ways that further help those most harmed by the pandemic and its economic impacts.