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How to Develop an ARPA Financial Blueprint

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.

By Andrew Kleine
October 26, 2021

State and local governments have until the end of 2024 to obligate their ARPA Federal Relief Fund (SLFRF) allocations and until the end of 2026 to expend them. State and local officials may feel like the dollars are burning holes in their pockets, but they shouldn’t rush to spend the money. Before making big commitments, they would be wise to take the time they need for good planning. In a previous column, I recommended creating an ARPA Financial Blueprint to set the stage for using relief funds effectively—to achieve desired outcomes and ensure fiscal sustainability. This column explains the Blueprint in more detail.

At a high level, the Blueprint allocates available SLFRF funding into eligible categories:

  • Budget stabilization.
  • Public health response.
  • Immediate economic and human needs.
  • Infrastructure.
  • Premium pay.
  • Other new investments.

Below is a set of questions that the Blueprint should address.

What is your projected revenue loss using the formula provided by Treasury?

ARPA allows state and local governments to use SLFRF funding up to the amount of their pandemic-related revenue loss to fund general service provision. Treasury’s Interim Final Rule explains how to calculate revenue loss, and the formula is generous. Baseline revenue is actual revenue from the last full fiscal year before the pandemic, plus 4.1% growth each year. The difference between that baseline and actual revenues is available for revenue replacement, with more flexibility and fewer reporting requirements than other SLFRF funding.

The Blueprint should forecast revenue loss for the entire period of funding availability, enabling recipients to plan for its use. Many recipients will find that they can use these funds to “free up” general fund dollars for purposes off-limits to direct SLFRF spending, such as replenishing reserves, making up deferred pension contributions, and pre-paying debt service.

How much of the SLFRF allocation is needed to stabilize your finances?

In addition to revenue, the Blueprint would also forecast the cost of maintaining current service levels, so that state and local governments have an up-to-date picture of their long-term structural budget position. For some recipients, SLFRF funding alone will not be enough to replace lost revenue, and since SLFRF funding is one-time, it won’t cure structural budget deficits. For governments with structural challenges, the Blueprint should recommend steps to make progress toward fiscal balance and sustainability. This starts with planning to step down reliance on SLFRF funding for revenue replacement over the course of funding availability. 

What are all the sources of COVID-19 relief funding available to fund your priorities?

ARPA includes 183 funding streams. The Blueprint should map ARPA funding, as well as remaining funds from CARES and other COVID-19 relief sources, to the recipient’s needs, ensuring that state and local governments take full advantage of available funding and use it in the right sequence to maximize the most flexible funding for local priorities.

How will you avoid a fiscal cliff?

State and local governments will be pressured, and tempted, to use ARPA funds for new and expanded programming that creates required or expected spending beyond the availability of the funds—hence the concept of the ARPA fiscal “cliff.” Ongoing costs from ARPA initiatives could put additional burden on already strained budgets and even throw healthy budgets out of balance.

Many of the programs and projects funded by ARPA will be called “pilots,” implying that they are one-time. But what if they work? Where will the money come from to continue, much less scale them?

The Blueprint can help governments avoid an ARPA fiscal “cliff” by establishing guiding principles and plans for allocating SLFRF funding in a fiscally prudent way: to address immediate pandemic impacts, stabilize finances and invest remaining funds in true one-time projects with long-term benefits, such as regional broadband expansion, affordable housing or job training for displaced workers.

How can ARPA funds be used to improve your long-term fiscal health?

The Blueprint should identify opportunities to make room in the base budget for continuing successful ARPA-funded programs and projects. This includes reviewing the actions taken to balance the budget during the pandemic and “competing” restoration of funding against new initiatives.

It will also direct ARPA funding to generate new revenue and cost savings. Strategic investments in economic development, capital projects and IT can produce new revenue as well as operations and maintenance savings. In addition, Treasury will allow state and local governments to retain interest earned on their SLFRF allocations and make OPEB contributions under certain conditions. The Blueprint can help governments take full advantage of these and other flexibilities.

By starting with an ARPA Financial Blueprint, state and local governments can maximize the impact of their ARPA dollars while securing —and even improving—their fiscal future.

Author: Andrew Kleine is Senior Director – Government & Public Sector at EY-Parthenon. He is the author of City on the Line: How Baltimore Transformed Its Budget to Beat the Great Recession and Deliver Outcomes (Rowman & Littlefield, 2018) and has served as Baltimore’s budget director. His email is [email protected], and his Twitter handle is @awkleine. The views expressed by the author are not necessarily those of Ernst & Young LLP or other members of the global EY organization.

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