Did US States Get More Money Than They Needed for COVID-19 Relief?

Throughout the nation, states obtained large infusions of money from the federal authorities to assist them cope with the results of the COVID-19 pandemic; the newest infusion of cash comes from the American Rescue Plan Act of 2021, which was President Biden’s COVID-19 stimulus plan.

Raymond Scheppach, professor of public coverage on the College of Virginia’s Frank Batten Faculty of Management and Public Coverage, spoke to The Conversation earlier this week about whether or not the federal authorities gave the states more cash than they wanted. Scheppach is a state funds knowledgeable who ran the Nationwide Governors Affiliation for 28 years, labored within the Congressional Price range Workplace for seven years and is taken into account an authority on state and federal relations.

He says the flood of federal cash might have been a uncommon incidence in federal-state relations: an excessive amount of of a superb factor.

Q. What can states do with the newest infusion of cash from the federal authorities?

A. States will get $195.3 billion over the subsequent yr in extraordinarily versatile funds to be spent primarily on any well being care prices or to offset any adverse financial results associated to COVID-19.

As well as, states can make investments the funds to enhance ingesting water high quality, assist wastewater and stormwater therapy capability and increase broadband entry.

Provided that the affect of COVID-19 differed considerably by state, it seems that the drafters of the laws needed to cowl the entire direct well being and financial prices of the pandemic. However in conditions the place particular person states had much less want, they might use the extra funds for infrastructure, the place just about each state has substantial wants.

Q. Are there limits on how the cash could be spent?

A. The 2 main restrictions are that states couldn’t use the funds to decrease taxes or to make extraordinary deposits to pension funds. The pension restriction exists as a result of quite a few senators imagine states comparable to Illinois, Connecticut, New Jersey and Kentucky have been irresponsible in not setting apart sufficient cash to pay for even half of their future pension legal responsibility.

The one different restriction is that each one funds must be obligated or dedicated by Dec. 31, 2024, and spent by the final day of 2026. Throughout most previous financial downturns, states have typically assisted native authorities, however this isn’t essential this time because the laws additionally included $154.7 billion to different governments comparable to cities, counties, tribes and territories.

Total, the funds on this stimulus have been much more versatile than these within the American Restoration and Reinvestment Act of 2009, a stimulus invoice handed through the Nice Recession to restrict the financial contraction and assist states climate the financial downturn. Whereas substantial funds have been offered to states in that bundle, most had for use for state-administered federal packages comparable to freeway development and upkeep, housing weatherization for low-income people and households and the development wastewater therapy techniques.

Q. Did states obtain extra federal cash for pandemic restoration than they want?

A. To reply this query, you will need to look again during the last yr to see how a lot the COVID-19 pandemic affected state funds and to look ahead to see how quickly the economic system and thus state revenues will get well.

It seems that the pandemic-related financial downturn in states was fairly muted, confounding everybody’s expectation, together with mine.

First, revenues have held up surprisingly effectively. For instance, gross sales tax revenues really grew by 0.5% in fiscal yr 2020 and are on monitor to extend 2% in fiscal yr 2021. That is largely as a result of customers continued to buy, however did so on-line versus in malls. Most states now tax on-line gross sales. A couple of states rely closely on revenues from the extraction of oil and fuel, and that supply held up effectively as costs recovered a lot quicker than anticipated and manufacturing ranges have been maintained.

Most vital, revenue tax revenues have been additionally up 0.3% in fiscal yr 2020 and are on monitor to be up 2.8% in fiscal yr 2021. It’s because many middle- and higher-income people shifted from the workplace to working from house with little unemployment interruption.

On the spending facet, early motion by the federal authorities largely cushioned the standard explosion of Medicaid spending that occurs throughout an financial downturn. On March 18, 2020, the Households First Coronavirus Response Act was signed into regulation, and it included an improve of 6.2% within the share that the federal authorities paid to states for his or her Medicaid spending. This extra Medicaid cash from the federal authorities allowed states to make use of the 6.2% they’d initially budgeted for Medicaid for different wants, like schooling. One instance: For a small state like Connecticut, this might be over $550 million.

The opposite issue that’s vital to calculating whether or not the states acquired an excessive amount of cash is how a lot state revenues will rebound over the subsequent yr.

The pent-up demand for journey, leisure and consuming out in eating places means the U.S. economic system is estimated to have grown 8.6% throughout the second quarter of 2021 and 6.4% in 2021, relative to 2020. Customers have cash to spend because the financial savings fee was up considerably through the pandemic.

This all provides as much as a fast restoration and can shortly translate into comparable development in state gross sales tax and revenue tax revenues, the 2 largest sources of state revenues. Moreover, Medicaid enrollment will shrink as people discover jobs and get employer-paid well being care as soon as once more, additional decreasing state spending.

So, did states obtain an excessive amount of cash within the Biden rescue plan? The reply is unquestionably “sure,” provided that state revenues by no means declined very a lot, coupled with the federal authorities’s help in offsetting the spike in Medicaid, and the truth that the present restoration might be sturdy when it comes to state revenues all assist this conclusion.

Q. What are the financial challenges for states sooner or later?

A. Many states are rising their spending for fiscal yr 2022 by double-digit percentages, comparable to Vermont at 14.5%, Pennsylvania at 21.3% and North Carolina at 11.6%. A lot of those funds might be spent on elementary, secondary and better schooling, in addition to Medicaid.

As soon as the federal cash is all spent, many states could also be taking a look at a critical funds downside: not sufficient cash to assist the spending ranges they’ve assumed of their fiscal yr 2022 budgets. That may probably occur when the economic system slows and precise revenues fall wanting the degrees assumed of their budgets.

States can even have tough selections this yr concerning how a lot ought to go into present operations and the way a lot goes to long-run investments, like additional spreading broadband.

Spending all of the federal cash by the mandated finish date of Dec. 31, 2026, can also be tough, and there may be the potential threat that the federal authorities will take again any uncommitted funds. That might put stress on states to spend or lose the funding, which might result in some unhealthy, or not less than inefficient, selections. Rapidly solved issues might take priority over ones that could be extra critical, however take extra time to deal with.

For instance, a state may commit funds to wastewater therapy, the place it may be spent shortly, versus highways, the place the necessity is bigger, however the planning horizon is longer.