Federal Reserve Bank of Chicago
12/02/2021 | News release | Distributed by Public on 12/02/2021 09:42
CDPS Speaker Series: Lessons on Covid-19 Aid and Strengthening City Finances
The Community Development and Policy Studies (CDPS) group regularly invites knowledge leaders to share their work on topics relevant to low- and moderate-income communities. CDPS recently welcomed Amanda Kass to present her joint work with Phillip Rocco titled "Strengthening Local Government Finance: State and Federal Aid for a Crisis Era." Kass discussed how the pandemic has affected cities' finances and how the unprecedented levels of federal aid provided by Congress on its own may not be sufficient to enact transformative policies to close racial and economic disparities deepened by the pandemic. She further highlighted some reasons why the effectiveness of the aid will be difficult to evaluate, such as inconsistencies in the way cities report spending.
Fiscal crisis element of the pandemic
Kass began her presentation by discussing how the pandemic affected cities' fiscal needs by reducing revenue and increasing spending. At the beginning of the pandemic, many cities feared dramatic revenue losses-with some anticipating a 13% drop in FY2020 from FY2019. The actual declines, while substantial, were generally much smaller than feared and varied across cities. For example, within the Seventh Federal Reserve District, Kass said Milwaukee's general revenues remained steady, Chicago's general revenues declined by almost 7%, and Detroit's general revenues declined by almost 12%. Kass discussed how these revenue declines and fears of even larger declines contributed to substantial local public sector job losses. Because local governments employ nearly 10% of the U.S. workforce, these job losses can have an effect on the entire economy.
The pandemic also increased municipal fiscal stress by both creating and exacerbating expense needs. Kass cited examples of these needs, including addressing unhoused populations and the need to update ventilation systems in public buildings due to both deferred maintenance and the role of proper ventilation in preventing spread of the virus. Kass emphasized that even if cities were able to return to pre-pandemic revenue levels, it may not be enough to meet the increased expenses stemming from the pandemic.
Kass explained that increases in federal aid during economic downturns typically help cities pay for their increased fiscal needs. When the economy is stable or growing, cities typically raise more than three-quarters of their total revenue themselves, primarily through property taxes and fees, with the remainder coming from state and federal government transfers. Kass discussed how state and local fiscal rules like balanced budget requirements and limits on the amount of debt, taxes, and spending constrain the ability of both state governments to increase aid to cities during economic downturns and cities to increase revenues during downturns. This lack of flexibility means that the federal government typically plays an outsized role in helping stabilize cities' finances during downturns.
A portion of increased federal aid delivered during economic downturns is delivered to state and local governments via automatic stabilizers like unemployment insurance and Medicaid, which increase during downturns under existing laws without a need for Congress to authorize additional spending. The other portion is delivered via discretionary programs, like the Coronavirus Relief Fund (CRF) and Coronavirus Local Fiscal Recovery Fund (CLFRF), discussed below, which require Congress to enact new legislation to authorize the financial assistance.
Discretionary federal aid to cities in response to the pandemic
The pandemic created unprecedented economic disruptions, which perhaps helps explain the unprecedent response by Congress, which Kass discussed at length. For perspective, during the Great Recession, Congress provided cities and states with $280 billion in aid through the American Recovery and Reinvestment Act (ARRA) of 2009. As of this writing, Congress has authorized $500 billion in aid, under the CRF and CLFRF, to states, cities, counties, U.S. territories, tribal governments, and D.C., in response to the pandemic.
In March 2020, Congress passed the CARES Act, which included the CRF. The CRF provided $150 billion for state and local governments, tribal governments, D.C., and U.S. territories, with $7.4 billion going directly to cities. Cities with a population of at least 500,000 were able to receive money directly from the U.S. Department of the Treasury. CRF provided direct aid to 32 cities that met this threshold, including four cities in the Seventh Federal Reserve District: Chicago ($470 million), Detroit ($117 million), Indianapolis ($168 million), and Milwaukee ($103 million). Cities with populations of less than 500,000 received CRF money to the extent their state allocated a portion of its CRF funds to them.
Kass explained that the CARES Act, as amended, required that cities use CRF money to cover costs that were: 1) necessary expenses incurred due to the public health emergency with respect to Covid-19; 2) incurred between March 1, 2020, and December 30, 2021; and 3) not accounted for in their most recently approved budget. To ensure that governments adhered to these parameters, the CARES Act gave the U.S. Treasury Department the authority to audit governments' CRF spending and required a government to return any funds the Treasury determined were spent inappropriately. Kass shared that initially, some governments were hesitant to spend the CRF money due, in part, to this narrow set of permissible costs and a lack of clear guidance on interpreting the CARES Act requirements.
In March 2021, Congress passed the American Rescue Plan Act (ARPA). ARPA's Coronavirus State Fiscal Recovery Fund and Coronavirus Local Fiscal Recovery Fund (CLFRF) together provided over $350 billion in federal aid for governments in all 50 states, as well as territories, tribal governments, and D.C., with $45.57 billion going directly to cities. The CLFRF allocated direct aid to 1,167 cities that met its definition of "metropolitan cities," including allocations to Chicago ($1.89 billion), Milwaukee ($394 million), Indianapolis ($232 million), and Detroit ($826 million). A total of $6.3 billion of CLFRF funds was allocated to 141 cities within the Chicago Fed's Seventh District.
In addition to the $139 billion authorized through the CRF, Kass explained that ARPA allocated an additional $325.5 billion to state and local governments. These funds were disbursed directly to eligible cities. However, Kass argued that the most distinguishing feature of ARPA is that it grants state and local governments much more discretion regarding eligible costs. Permissible costs now include those resulting from the public health emergency, as well as those resulting from associated negative economic impacts. Premium pay for essential workers, revenue losses tied to Covid-19, and infrastructure investments for water, sewer, and broadband internet access are also eligible.
Evaluation challenges
Kass continued by explaining challenges associated with evaluating the effectiveness of the CARES Act and ARPA. She emphasized three key challenges: 1) the wide range of cities' spending priorities; 2) the lack of precise data on how the money was spent; 3) and differences in the timing and pace of spending across cities.
First, when determining whether a program worked, Kass emphasized that the intent of the program needs to be clear. With ARPA, there were several possible goals that might guide cities' spending priorities. The money could be used to respond to an emergency moment, meet unmet existing policy needs, make up for pandemic-related revenue loss, and/or deal with longstanding inequities. Second, data on spending lack specific details. For example, an interim report from the Treasury Department only captured the category in which the CRF spending occurred. These categories are very broad, which makes understanding specific details of spending more difficult. In addition, the interim report was released shortly after the CRF program began and only captured spending through June 2020.
Finally, Kass discussed differences in the timing and pace of spending across cities. These programs were created during an ongoing economic crisis and pandemic, so many cities had to "build the plane while flying it," Kass said. Many cities that had been operating with restricted revenue were suddenly receiving significant amounts of aid. Many lacked the infrastructure to disburse the money quickly. Cities are also using different approaches for determining how to use the funds. Lastly, cities' spending plans also change over time due to a variety of factors, including changing program rules and the changing nature of the pandemic.
For example, a study of 20 cities by the Brookings Institute found that of the $7.4 billion in aid allocated by ARPA, 82% had not been spent as of September 2021. Kass cautioned that this lack of spending does not mean that the money is not needed. Rather, many places need to establish the processes and supporting infrastructure to efficiently and effectively distribute an unprecedented amount of resources. Kass said that the pace of cities' spending varied based on their pre-pandemic conditions. Economically weaker cities may take more time to spend the aid. The Treasury Department also advised governments not to spend all the money right away due to the ongoing nature of the pandemic. Kass explained that as of September 1, 2021, Chicago has committed $0 of its CLFRF aid; Milwaukee has committed almost 10% of its original ARPA allocation; and Detroit has committed 100%. Kass shared that different cities used different processes to determine how to spend the money. For example, Detroit used a top-down approach, whereby the mayor released a proposal, accepted comments, and got feedback from a city council vote. Milwaukee had a council-driven process, whereby they requested proposals that were informed by mayoral priorities.
In conclusion, Kass emphasized that it will be a challenge to fully understand whether and how this unprecedented amount of aid has helped cities overcome both preexisting inequities and the challenges of the Covid-19 pandemic and that it is important not to jump to conclusions solely based on a slow pace of spending in many cities.