This section provides a summary of states’ early plans for using SLFRF money. The analysis is based on information obtained from the initial recovery plans submitted by all state governments to the Treasury, covering the period from the program’s initiation through July 2021.20
States vary in total SLFRF allocated as of July 31, 2021. In aggregate, they had allocated 43 percent of their total funds. The eleven largest states had allocated less than the thirty-nine others (41 percent versus 46 percent). Fifteen states had not allocated SLFRF to any of the expenditure categories (other than administrative costs), while eight had allocated 80 percent or more. The median allocation was 34 percent.
Table 1 shows states’ initial plans for tapping SLFRF.21 For all states, the expenditure categories with the largest allocations were revenue replacement (31 percent); negative economic impacts (28 percent); water, sewer, and broadband infrastructure (17 percent); and services to disproportionately impacted communities (15 percent). The main differences between the allocations by the eleven largest states and the remainder were that the largest assigned more funds to revenue replacement (35 percent versus 26 percent) and services for disproportionally impacted communities (21 percent versus 8 percent). The others allocated a larger percentage to negative economic impacts (35 percent versus 21 percent).
The Alliance’s Truth and Integrity in State Budgeting reports in 2021 and in previous years have found that some states relied on one-time revenues and other impromptu actions to finance recurring costs and attain budgetary balance in the years before the pandemic.22 This paper examines how and whether the grades for large states in two of the five areas of evaluation in the studies—budget maneuvers and transparency—correspond to the initial allocation of SLFRF dollars and reporting about their intended use.
States that use SLFRF for one-time projects are less likely to incur a fiscal cliff than states that devote the dollars to maintaining or expanding services or to creating recurring programs. Because of the one-time nature of the projects, water, wastewater, and broadband infrastructure is one of the more fiscally sound expenditure categories. Seventeen states are using a portion of their SLFRF to fund water or wastewater projects, and eighteen earmarked the funds for broadband. Of the twenty-seven states that had allocated at least one-third of their SLFRF as of July 31, 2021, six devoted 30 percent or more of that money to infrastructure (table 2). States also used money in SLFRF categories other than infrastructure to pay for different types of capital projects, including highways, affordable housing, and construction or renovation of facilities such as hospitals, museums, emergency operation centers, and higher education facilities or schools.
Although such capital projects themselves are one-time spending, states must then pay to operate and maintain the infrastructure or facility. Financing those future needs will require drawing on existing or new revenue sources.
States are also using SLFRF as one-time funds to repay federal loans to their unemployment trust funds. COVID-19 and its related negative economic impacts have put significant stress on unemployment insurance trust funds, which the states and territories operate in partnership with the US government. As jobless numbers rose during the pandemic, many state governments drew down their trust fund reserves, and some borrowed from the federal unemployment trust fund via a mechanism known as a Title XII Advance.
If a state does not repay an advance after a specified period (twenty-two to thirty-four months after the date of the loan, depending on when it was taken), businesses there are subject to a higher federal unemployment tax rate. The rate rises each year until the advance is repaid in full.23 Congress temporarily suspended interest payments on such loans during the first part of the pandemic, but they were reinstated as of September 6, 2021.24
Fourteen states indicated that they plan to use a portion of the SLFRF money to rebuild their unemployment trust funds, either by repaying federal loans or replenishing the trust fund reserves. Of the states that had allocated at least one-third of their SLFRF as of July 31, 2021, five had assigned 30 percent or more of the funds for this purpose (table 2). Some states previously used funds available through the CARES Act this way.25 Using one-time SLFRF to repay federal unemployment trust loans is a budget practice that aligns with Volcker Alliance recommendations. Opponents of using SLFRF to refill unemployment trust funds argue that their balances will increase as the economy improves and joblessness falls.26 On the other hand, those advocating loan repayment say that it will prevent the imposition of a federal tax increase on businesses during the pandemic, allow states to avoid interest costs, and limit the use of SLFRF for recurring spending.27 Replenishing reserve funds can also help prepare for future needs.
States also can use SLFRF for premium pay, another one-time use. In the initial state recovery plans, thirteen states indicated that they planned to provide such supplemental compensation to workers who performed essential services during the COVID-19 emergency. These included frontline employees such as first responders, corrections staff, state police, National Guard, and personnel at health care facilities. States had allocated a total of about $500 million for this category as of July 2021; the individual state amount was generally 5 percent or less of its total allocated funds.
In contrast, the expenditure category that may have the greatest potential to lead to a fiscal cliff is revenue replacement, especially if the funds are used for ongoing purposes. Nineteen states reported that they planned to allocate funds to revenue replacement. Of twenty-seven states allocating at least one-third of their SLFRF as of July 31, 2021, twelve had assigned 30 percent or more to the category (table 2). The percentages ranged from 30 percent in Colorado and 33 percent in California to 100 percent in Pennsylvania and Wyoming.
Whether using SLFRF for revenue replacement will contribute to a budget shortfall when the money is no longer available will depend on how the funds are used. States vary in their plans. For example, Indiana intends to use its $1.45 billion in revenue replacement funds for one-time projects, including road and bridge infrastructure, transit capital spending, conservation and trails, and public safety equipment and training.28 Some states did not identify specific uses for revenue replacement allocations. For example, Connecticut allocated $1.75 billion to support balancing the state budget over two years,29 while Minnesota set aside $1.18 billion to provide government services through fiscal 2025.30
Spreading revenue replacement spending over multiple years could also reduce the magnitude of a fiscal cliff should it be reached.31 For example, a state receiving $1.5 billion in SLFRF and allocating it evenly over three years to cover recurring spending from the general fund would have a budget shortfall of $500 million in the fourth year, if that spending remained the same and no additional revenues were available. Alternatively, if the state allocated all its relief money to the general fund in year one, the shortfall would be $1.5 billion in the second year.