Critics of President Biden's plan to allocate $350 billion in federal aid to state and local governments have argued that this money is largely unnecessary due to the recovering economy as well as unspent millions "under the couch cushions." Yet the notion that subnational governments don't need additional support is a myth, premised on a highly selective interpretation of the data and a refusal to acknowledge the hollowing out of state and local government capacity over the last few decades, particularly in the areas of public health and education.
A first element of the myth is the idea that state and local governments aren't using the federal dollars that have already been allocated. The CARES Act's Coronavirus Relief Fund (CRF) provided subnational governments with $150 billion in aid for unanticipated COVID-related expenses. Among current critics of providing more aid, Kentucky Republican Congressman James Comer has argued that more money isn't needed now because "not all [the CARES Act] money's been spent." This overstates and misinterprets the extent of unspent federal money.
One reason is that the data on the CRF program collected and reported by the Treasury Department and the pandemic oversight commission not only lags actual spending, since it is reported only quarterly, but also is limited to costs incurred by state and local governments. "Incurred costs" captures spending that has already taken place but, importantly, does not include future spending that is already planned or the full extent of spending needs. Moreover, there has been confusion over what counts as "incurred costs," and the Treasury Department's guidelines on this have changed over time.
In a survey conducted by the Government Finance Officers Association, over 70 percent of CRF prime recipients reported that such restrictions were the largest barrier to the allocation of federal funds. And the process of allocating federal dollars itself results in data lag: In some states, political conflict between the legislature and the governor has slowed down decisions about allocating those funds.
In any case, federal data on unspent CRF money is hardly indicative of an absence of additional need.
Second, the myth relies on narrow assumptions about the appropriate indicators of fiscal need. While on average state and local revenues have fared better than initial expectations due to the combination of an economic rebound and extensive federal stimulus, revenues are only half of the equation. What's missing is a focus on the spending needs created and exacerbated by the pandemic that cannot be addressed even if revenues return to their pre-pandemic baseline.
State and local budgets account only for planned spending and do not capture the amount necessary to meet the full demand and needs of their respective communities. The number of people experiencing homelessness or at risk for eviction has increased, for example, but spending on emergency housing and relief programs is based on the number of people the programs can support, not on how many people actually need assistance. Yet even analyses by supporters of additional aid note that they cannot account for spending needed to "help people and businesses facing extreme hardship," ongoing costs tied to combating the disease itself or "the added costs of providing services effectively and safely during a pandemic."
Determining the full scope of spending needs is challenging, and hinges on subjective decisions around what constitutes a COVID-related expenditure and what should be prioritized. Yet few analyses consider whether the pre-COVID status quo for state and local governments was acceptable.
For years, governments have deferred maintenance on existing infrastructure and facilities and underinvested in an array of programs and services. While the pandemic placed unprecedented strains on state unemployment insurance systems, their pre-COVID baseline was unacceptable. State UI systems were riddled with administrative burdens and outdated technical infrastructures. In 2019, for example, only 9 percent of Mississippians who were eligible for UI actually received benefits.
Schools provide another example. According to Government Accountability Office estimates, in 2019 about 41 percent of school districts needed "to update or replace HVAC systems in at least half their schools." Although deferred maintenance is quantified and recorded in financial reports, the consequences of austerity have long been displaced onto already marginalized, predominantly minority communities. While COVID-19 has made a wider swath of society feel the effects of disinvestment, the crisis has exacerbated racial inequities, which is why the issue of spending and whose needs are not being met is so central.
The Great Recession should provide federal policymakers with a powerful lesson: Limited support for state and local governments slows economic recovery. But political pressure for fiscal austerity often re-emerges before the economy is out of the woods and before adequate stock is taken of state and local needs.
That pressure is greater when federal policymakers assume they know more than they do. As Federal Reserve Chairman Jerome Powell recently noted, despite improvements in revenue, policymakers in Washington "don't have a great picture" of state and local government expenses.
In the midst of an ongoing crisis, myths about money "hiding under couch cushions" are no basis for federal policy.
Governing's opinion columns reflect the views of their authors and not necessarily those of Governing's editors or management.
