From Rescue to Resilience: How American Rescue Plan Funding Can Support Long-Term Fiscal Health

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

By Andrew Kleine
April 29, 2021

On March 12, 2021, President Biden signed the $1.9 trillion American Rescue Plan (ARP) into law, which included approximately $350 billion in direct aid to state and local governments.

For many governments, their ARP allocation will likely be more than enough to fill the fiscal holes caused by the pandemic, but it won’t last forever. Governments that rush to use the funds and do not take a strategic and holistic approach to spending could make structural budget problems worse. Rather, governments can use this opportunity to become more fiscally sustainable for the long term. How can leaders take advantage of this opportunity? Here are 10 ways:

1. First and foremost, be careful before creating new programs or expanding existing programs 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.
2. 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 can be by repurposing dollars within the base budget. Take a hard look at whether you can make reductions permanent. “Compete” restoration of the status quo against alternative uses of funding. How does each option compare in terms of helping achieve strategic goals? This exercise may be easier for governments that have broken down their budgets into programs or services and know the cost and performance of each one.
3. Replenish “rainy day” funds used to offset pandemic revenue loss or extraordinary expenses. Now is a good time to review reserve policies. Leading practices include: 1) setting reserve requirements based on a risk profile that accounts for revenue volatility, vulnerability to natural disasters, probability of infrastructure failures, etc.; 2) clearly spelling out the conditions under which reserves may be drawn upon; 3) requiring that reserves be replenished within a reasonable time period after they are used; and 4) dedicating “excess” revenues to reserves if they are not at required levels.
4. Build a solid forecast of baseline revenue and current service costs for at least the next five to ten years. Depending on Treasury Department guidance, this forecast may determine how much flexibility a government has in using its ARP allocation to fund day-to-day services. In addition, a good forecast is the first step in planning for fiscal sustainability beyond the ARP.
5. Deal with structural budget gaps before restoring or adding funding for existing or new programs. Be mindful of some fiscal and economic red flags that could affect your future budgets, such as the potential for commercial real estate to lose value, the dangers of stock market corrections, inflation risks and the income tax waiver on unemployment benefits in the ARP.
6. Review your revenue portfolio. The pandemic recession was especially hard on state and local governments that depend on economically sensitive revenues, such as sales and hotel taxes. Revenues that rely on commuters—such as parking fees, tolls and wage taxes—may be forever altered by remote work. State and local governments have an opportunity to make their mix of revenues more resilient.
7. Make smart capital investments. The ARP plainly allows for investment in broadband, sewer and water infrastructure, and it’s possible that other types of capital investments may also be eligible. Make such investments with the following considerations in mind:
   • Investing in projects already in the capital plan can reduce long-term debt service costs.
   • Capital investments can reduce long-term operating costs in other ways, too. Consider projects that reduce energy costs, automate inefficient business processes, use materials that are easier to maintain (such as for roadways), etc.
   • Many capital projects have ongoing operating and other life cycle costs that should be estimated and incorporated into financial plans.
8. Develop plans to increase the use of physical assets. For many state and local government functions, working remotely will be part of the new normal. This reality creates opportunities for governments to reduce space usage and, in turn, relinquish or repurpose physical spaces and real estate. Savings could come from ending expensive leases, selling or leasing excess properties, or converting space for other cost-saving or revenue-generating purposes.
9. Invest in projects and initiatives that promise a financial return, if permissible. These might include creating economic development plans that could increase future tax revenue, building a municipal composting facility with a profitable business plan or beefing up tax collection and enforcement.
10. Finally, before committing any ARP funding, agree on a fiscal blueprint that guides how the funding will be spent. The blueprint can assign available dollars to budget stabilization, public health response, immediate human and economic needs, restoring reductions and, if possible, bold investments.

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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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