Good Reasons Why States Haven’t Yet Spent All Coronavirus Relief Funds

Some wrongly argue that federal policymakers should “wait and see” before giving states more fiscal aid to help address their huge, recession-driven revenue shortfalls, in part because they haven’t spent all the aid they’ve received so far. States, however, have good reasons not to spend all of that aid just yet. And, in any case, they’ll need far more to address their extraordinary shortfalls and avoid further layoffs and other cuts that would hamper an economic recovery.

Business closures and lost income and jobs — including some 1.5 million furloughs and layoffs of state and local workers — have severely shrunk states’ sales and income tax revenues. All 39 states (plus the District of Columbia and Puerto Rico) that have released new revenue projections are reporting shortfalls, generally very large ones. Nationwide, we estimate, these shortfalls total about $615 billion over the next three fiscal years, not including the added costs of fighting COVID-19.

The federal aid to states thus far includes only about $70 billion to address these revenue losses. That’s far too little to help states avoid layoffs and impose school funding and other cuts that would harm families and communities while making the recession worse and delaying a recovery. States undoubtedly will spend all of that aid and still fall far short of meeting needs.

States, localities, tribal governments, and territories can also access the $150 billion Coronavirus Relief Fund (CRF), which is primarily intended to cover state and local costs of fighting COVID-19 and cannot be used to make up for revenue losses. Policymakers created the fund in the CARES Act of March, the Treasury Department sent about $110 billion of it to states in late April, and states must spend all the funds by December 30.

States haven’t yet spent much of this funding for good reasons that include the following:

• States will spend the CRF to fight COVID-19 in the coming months, as the law intended. As states prepare their budgets for the coming fiscal year, which starts July 1 in most states, they are planning how to best contain the virus and treat those infected. Many will spend relief funds on medical services and equipment, containment actions, testing and contact tracing, and other steps needed between now and December 30, as federal policymakers intended. With the virus’ trajectory still uncertain, states are being cautious about depleting the funds now. Further, some states are distributing aid to localities through reimbursements only; that is, localities must cover costs related to fighting COVID-19 and then seek reimbursement from the state. This approach slows the spending process and likely weakens the country’s COVID-19 response, since many cash-strapped local governments — especially the highest-poverty jurisdictions — will struggle to cover the upfront costs of fighting the pandemic.
• States can’t use the funds to cover revenue losses. The Treasury Department barred states from using the CRF to replace revenues lost due to the pandemic. States initially waited for Treasury’s guidance, hoping it would permit this use of the aid. And some continue to wait in the reasonable hope (given news reports suggesting support from the Administration and some Republicans) that the President and Congress will overturn Treasury’s decision and provide new aid to cover revenue losses.
• Treasury’s confusing and evolving guidance has slowed state actions. The CRF is a new grant program with no established rules and a strict requirement that states return funds that Treasury’s Inspector General deems that they’ve misspent. The guidance that states and localities have sought from Treasury has been confusing and inconsistent and, since late April, has come through irregular, unannounced updates to a Treasury FAQ document. Its April guidance opened the door to a wide range of spending beyond the costs related directly to fighting the virus, including payments to businesses and individuals hurt by the pandemic’s impact on the economy, as long as this spending was for new state programs. In early May, Treasury added new guidance letting states and localities use the CRF to cover payroll costs for public safety and public health workers, but not most other public workers. Then, on May 28, which was two months after the CARES Act’s enactment, Treasury added new guidance saying that states “should” send 45 percent of their allocation to local governments, though the act contains no such requirement.
• It takes time to thoughtfully spend a new, flexible grant program. States may use the CRF for many purposes at a time of numerous, urgent challenges. Understandably, states have established advisory groups and other processes to solicit input from stakeholders before deciding how to proceed. These processes may help them spend the aid more effectively, but they slow down its distribution. Other uncertainty, such as whether governors or legislatures have authority to spend the CRF — an ambiguity that the CARES Act and many state laws fail to settle — led to disputes and legal challenges, which legislators and governors needed to settle before they could spend the funding.

To be clear, states have begun spending their CRF allocations and increasingly agree on how to do so. In just the last week, for example, policymakers in Michigan and Kansas announced plans on spending substantial portions of the funds. And others in states including Alabama, Idaho, and New Hampshire have already appropriated a large share of the funds, even if some of these funds have not yet been disbursed. But because states still face huge budget shortfalls due to the pandemic, they desperately need more federal aid to avoid laying off more workers, cutting back on health care and other services, and taking other steps that would extend the harm to families and communities, and delay the economy’s recovery.