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Revisiting Principles for ARPA Planning in 2022

By Chris McIsaac, GovInvest Pension Thought Leader

The American Rescue Plan Act (ARPA) was the dominant topic among state and local finance officials throughout 2021 and is expected to remain top of mind in 2022.  Approved in March, this $1.9 trillion economic stimulus package allocated a historic amount of federal financial support to state and local governments to help fight and recover from the COVID-19 pandemic.  In particular, the $350 billion in State and Local Fiscal Recovery Funds will be used over the next five years in a multitude of ways— including helping replace lost revenue, supporting COVID-response efforts, providing premium pay for essential workers and making critical infrastructure investments in water, sewer and broadband.

On implementation, the vast majority of the funding remains to be spent.  This is due to program design—the legislative deadline for spending the money is 2026—and other complexities and ambiguities.   For one, the shear amount of ARPA money flowing into state and local government coffers was large and unexpected.  The $193 billion state portion of the funding represented more than 8% of total FY 2020 state expenditures. As a result, it’s taken time to prepare which has been challenging when final guidance from the Treasury Department around allowable expenditures and other aspects of the program remains in development.  Finance officials across the country spent the better part of 2021 trying to navigate these two factors—a huge influx of money and uncertainty on spending guidance.

With this topic likely to remain front and center in 2022, and more hours sure to be spent hammering out spending plan details, the New Year is a good time to revisit the American Rescue Plan Guiding Principles laid out by the Government Finance Officers Association (GFOA) following the bill’s passage.

“Temporary Nature of ARPA Funds. ARPA funds are non-recurring so their use should be applied primarily to non-recurring expenditures.”

This principle serves as a reminder that aligning the durations of spending programs and funding sources is an important consideration for maintaining budget sustainability. In the case of ARPA funds, the deadline for allocating the funds is 2024 while the actual spending must occur by 2026.  Policymakers need to craft multi-year plans for spending the ARPA funds in a manner that maximizes community benefits while avoiding the creation of structural budget deficits. For example, a critical infrastructure investment may be fully covered by ARPA funds in the near term but may have ongoing operating costs that will need to be covered through another funding source.  Budget officials advising policymakers on these decisions will benefit from long-term budget planning tools that convey the impact of ARPA spending on jurisdiction finances through 2026 and beyond.

“ARPA Scanning and Partnering Efforts. State and local jurisdictions should be aware of plans for ARPA funding throughout their communities.”

Local budget officials are rightly focused on creating plans for the dollars they directly control but awareness of how the State is planning to spend money can be an important consideration for prioritizing the local funding and potentially reveal opportunities for collaboration.  Many states at this point have taken steps toward allocating their share of ARPA funds and various organizations are compiling this information in easy to access online databases.  Some examples include the National Conference of State Legislatures (NCSL) database of legislative and executive branch allocation actions; a National Association of State Budget Officers (NASBO) collection of State Recovery Plan Performance Reports submitted to the Treasury Department; and a Council of State Governments (CSG)  database that presents ARPA utilization by state and funding category.

“Take Time and Careful Consideration. ARPA funds will be issued in two tranches to local governments. Throughout the years of outlays, and until the end of calendar year 2024, consider how the funds may be used to address rescue efforts and lead to recovery.”

The multi-tranche distribution of funds for most jurisdictions allows policymakers to both provide immediate support where it’s needed and develop a thoughtful multi-year spending plan.  There are residual benefits to taking the time to craft a carefully considered plan that can be realized beyond the expiration of the ARPA funds.  For example, the five-year perspective that’s necessary for effective ARPA planning could be incorporated into a jurisdiction’s regular budget process.  This can better inform policymakers on the potential impact of decisions on future budgets and even serve as a framework for managing long-term liabilities like pensions and OPEB.

Overall, finance professionals will continue to play a critical role in providing guidance to elected officials around ARPA fund allocations and spending.  With thoughtful and deliberate planning, these funds present a unique opportunity to deliver lasting benefits to communities.  Incorporating the GFOA principles from above is one way that finance officials can strengthen the decision-making process around ARPA planning and spending and avoid pitfalls that could create budget challenges in the future.

To learn more about how GovInvest can help your agency with long-term fiscal planning and funding policy development, click below to book time with our public finance experts.

About the Author: Chris McIsaac is an experienced public policy consultant specializing in state and local pension, tax and budget policy. Previously, he managed state and local engagements for the Public Sector Retirement Systems Project at the Pew Charitable Trusts in Washington DC, served as an advisor to two Arizona governors, and published research on topics including pensions, tax policy and healthcare for the Arizona Chamber of Commerce Foundation.