How to Manage Federal Funds to Ensure Sustainability

On March 12, President Biden signed the $1.9 trillion American Rescue Plan Act into law and now the Treasury Department is distributing approximately $350 billion in direct aid to state and local governments. In addition, the ARP also includes another $200 billion for school districts, higher education institutions, transit systems and airports, and funds for rental and homeowner assistance, small businesses, food aid, rural hospitals, vaccination and testing, and more.

For many state and local governments, the ARP allocation will be more than enough to balance the budget, reverse service cuts and avoid layoffs. At the same time, there is the risk of spending hastily, making structural budget problems worse and failing to properly track dollars. Here’s how government leaders can manage ARP funding effectively, spend it wisely and show voters results that endure.

Managing the Money 

Administering ARP funds will be a challenge even for the most sophisticated state and local governments. Ensuring that funds are spent with integrity, transparency and accountability is critical.  How can governments meet the expectations of taxpayers, auditors and others who want to be sure that ARP funds are not misused?

• Plan and implement compliance-driven processes. For governments that received CARES funds, review compliance management efforts to assess what worked or what might be improved. For new recipients, leverage practices related to eligibility determination, expense tracking and reporting. If your government doesn’t already have an Inspector General, appoint one for ARP.  
• Assess opportunities to leverage technology solutions. Market solutions for managing local grant and assistance programs are readily available.  Such programs provide integrated tracking of funds, program assessment, and web-based postings. 
• Minimize fraud, waste and abuse. Every government should assume that external funding programs are targets for fraud. Enterprise risk management programs should be updated to reflect new systems, processes, programs, governance and organizational structures, and internal controls must be re-designed to strengthen their resilience.

Ensuring Financial Sustainability

Although ARP funding is one time, if used wisely it can make state and local governments more fiscally sustainable for the long term. How can leaders take advantage of this opportunity?

• First and foremost, be careful not to create new programs or expand existing ones that commit your government to ongoing expenses after the ARP funds are exhausted. Calling spending “one-time” does not make it any easier to discontinue a popular program.
• Don’t automatically restore funding that was cut to balance the budget prior to the ARP. The sustainable way to fund new or expanded programs is by repurposing dollars within the base budget. This exercise will be easier for governments that have broken their budgets down into programs or services and know the cost and performance of each one.
• Replenish reserves, fund balances or “rainy day” funds used to offset pandemic revenue loss or extraordinary expenses. Treasury’s interim rule does not permit ARP funds to be put in reserves, but allowable expenses can free up general revenue.  Now is a good time to review reserve policies. Consider setting reserve requirements based on set risks, requiring that reserves be replenished within a set time, and dedicating “excess” revenues to reserves if they are not at required levels. 
• Build a solid forecast of baseline revenue and current service costs for at least the next 5 to 10 years. A good forecast is the first step in planning for fiscal sustainability beyond the ARP. 

Driving Economic Recovery 

One of the main purposes of ARP funding is to mitigate the economic impacts of the pandemic recession. How can state and local governments promote economic recovery and help their economies adapt to a post-COVID-19 world?

• Cultivate a technology-adept culture. Digital transformation, from our government systems to the skills we train for and the infrastructure in which we invest, is foundational to economic development. Prioritizing this effort will be a competitive advantage for communities that want to grow their economies.
• Expedite transformation of workforce development systems, linking UI systems to workforce development and linking workforce development to employer needs.
• Connect small businesses with the resources they need to re-open and adapt. Provide them assistance to help them capture their share of available relief funding.
• When planning, consider how neighboring jurisdictions are deploying their funds. Some of the most impactful ARP-funded initiatives will impact an entire region. A cross-jurisdictional task force could advance coordinated major economic recovery needs, as well as help avoid duplication.

Advancing Equity

The pandemic has exposed and exacerbated inequities in education, health, housing, etc., as well as in how people are served by their governments. How can communities use the recovery to become more equitable? 

• Engage underrepresented populations. Virtual meetings have boosted resident engagement, but only for those with the time and technology to access them. To reach underrepresented populations, co-design events with community organizations. Use vaccine and testing sites or food distribution events to reach those who might not otherwise tune in.   
• Target those most in need. Use data to ensure the hardest-hit people, businesses and neighborhoods receive the help they need to recover. Assistance programs that offer a fixed grant amount to anyone meeting minimum eligibility requirements, on a first-come, first-served basis, will fall short of the results that are possible with a more targeted approach.
• Bridge the digital divide. ARP allows for investment in broadband infrastructure, and governments have an opportunity to provide low-cost digital access to underserved residents, promote economic growth, making municipal services smarter and possibly develop a new revenue source. 
• Try participatory budgeting. Allocate a portion of ARP funds to underinvested neighborhoods for one-time economic recovery projects. Let residents propose and vote on projects – put the decision in their hands.

After filling the fiscal holes caused by the pandemic, state and local governments have a historic opportunity to make their communities more sustainable and equitable through the intentional and strategic deployment of dollars. A thoughtful approach to ARP spending, as outlined here, can positively shape our world for years to come.