Risks and Rewards: Examining the Benefits and Challenges Associated with the American Rescue Plan and How State and Local Governments Can Address Them
The Biden Administration’s $1.9 trillion American Rescue Plan (ARP) reignited the debate on how federal funding should be put to work to help our nation’s continued response to and recovery from the COVID-19 pandemic – minimum wage, direct payments to citizens, and other issues continue to be discussed. Earlier this afternoon, the House passed the Senate-approved version of the American Rescue Plan Act of 2021 (ARPA), sending the legislation to President Biden’s desk for signature which he is expected to do this Friday, March 12. If enacted, the ARPA will become one of the largest stimulus packages in US history.
During recent congressional debates, a critical sticking point was providing another round of relief funding directly to state and local governments. Under the ARPA, $350 billion will be made available to state and local government across the country to address unmet needs driven by the economic impacts of COVID-19. Many have analyzed the data which paints varying pictures of the current economic situation at the state and local level:
- A recent JP Morgan Report found that there was an average decline of 0.12 percent in state revenue in calendar year 2020, while 21 states saw positive revenue growth compared with 2019.
- Additionally, based on finance data from the US Census Bureau and recent unemployment projections from the Congressional Budget Office, the National League of Cities estimates —that cities will lose up to 21.6 percent of their revenue this year – representing up to $134 billion in losses this year alone and approximately $360 billion in losses over the next three years.
- Conversely, The Tax Policy Center forecast for state personal income tax revenue collections calls for 3.3 percent growth for fiscal year 2021, which is larger than the 2.4 percent projected growth estimated for fiscal year 2020. At the same time, median state-level forecasts for corporate income tax revenue collections showing less than 0.1 percent growth for fiscal year 2021.
While the depth and magnitude of the pandemic’s economic impact can be debated, state and local governments continue to balance budgets while facing continued economic recovery challenges because of COVID-19. Moreover, it can be argued that some of the longer-term impacts from the pandemic have yet to be determined. Thus, while the calls for data driven funding are warranted, a collective effort to support the economy as the pandemic continues seems necessary.
Administering ARPA Funds: Turning Current Risks into Long-term Rewards
Many jurisdictions remain focused on pandemic response efforts including testing, contact tracing, vaccination administration, healthcare, etc. Additionally, many are also navigating the changing and complex cost recovery operations associated with previously available funding from the Federal Emergency Management Agency (FEMA), the Emergency Rental Assistance Program (ERAP), the Coronavirus Relief Fund (CRF), and more. While the ARPA creates additional opportunities for state and local governments, the management and compliance requirements associated with it will also place additional burden on recipients of its funding.
At Hagerty, our experience has shown that there are both short- and long-term strategies necessary for the strategic use of ARPA funds. Some state and local governments are familiar with the fact that federal disaster programs are often reimbursable in nature – the state and local government expending their resources on the front-end to be reimbursed for eligible expenses after the fact. However, ARPA funding will be different in that it is a very large and flexible pot of money headed directly into the hands of governments nationwide. Therefore, to effectively administer this aid and help communities recover, state and local governments must have a strategic plan to expend these funds.
As governments consider their plans, we offer the following framework to address the unmet needs driven by the pandemic:
Throughout the pandemic, Hagerty has supported state and local governments in their response to and recovery from COVID-19. Based on this experience, we offer some deliberate solutions communities can implement with this additional federal funding.
Provide Equitable Access to the Digital World. If COVID-19 has taught us one thing, digital connectivity via the Internet is more important than ever. Careers, healthcare, education, and more all went virtual. This was all based on the assumption that internet connectivity exists for all; yet, unfortunately, that assumption is wrong. Populations all over the US cannot get regular access to the internet because it is either unaffordable or unavailable. Therefore, it is important to think of connectivity options to enable reliable internet access.
Foster Workforce Development. Helping our clients nationwide, we have certainly noticed the disparity in how the pandemic has impacted governments. For example, below we compare the economic diversification of some geographically similar states in comparison with GDP and projected revenue loss.
While each of these state’s possess diverse economies, we observe the states with a higher percentage of Gross Domestic Product (GDP) in the manufacturing space faring better throughout the pandemic. While surprising, given the in-person nature of the manufacturing industry, the resilience of that space has helped NC, OR and PA to either limiting loss or in two cases achieve growth in COVID-19. Thus, each state and local government should consider a similar analysis to determine the pandemic’s impact on their economy as well as how equitable development can occur through workforce training. Dedicated training to grow the workforce in resilient industries while fostering economic expansion will be critical for governments to withstand the impacts of a future pandemic event.
Provide Affordable Housing. Time and time again, we see housing being a critical component of any recovery following a disaster and this is no different. Last spring, we observed many governments quickly pivoting to address housing issues exacerbated by the pandemic. Many of these programs were established in support of disadvantaged, vulnerable populations, such as retrofitting homeless shelters for social distancing which caused space constraints across the country requiring new solutions as well as rental assistance programs to enable renters and landlords to sustain while they navigated the pandemic. Simultaneously, the rental market has seen mixed results and while there has been a surge in housing prices, home ownership will continue to be challenging going forward. To reach full recovery, state and local governments must be diligent to provide housing opportunities for all populations within their communities.
Develop an Incubator Mentality. In November 2020, Lake Research Partners conducted a study for Small Business Majority polling 500 US small, minority business owners (with oversamples of Black, Latino and Asian American/Pacific Islander) on how they navigated the first round of federal relief funding associated with the COVID-19 pandemic. According to this study, 18% of Black or Latinx businesses surveyed plan to close over the next 3 months. Thus, while February 2021 unemployment data is showing improvement, the cascading impact of COVID may still be working through the employment market.
To account for this attrition and support local entrepreneurs, small business incubators should be considered. Incubators are designed to help startup and small businesses grow and succeed by providing free or low-cost workspace, mentorship, expertise, access to investors, and in some cases, working capital in the form of a loan. According to a 2010 Senate Hearing, in 2005 alone, small business incubators assisted 27,000 start-up companies that provided full-time employment for over 100,000 Americans and generated $17 billion in revenue. To develop a sustainable long-term tax base, a thriving economy, and address future impacts in the labor market, small business incubators could be vital resources for more than 30 million businesses across the country.
Expending this additional federal funding will be no easy task for state and Local governments. Putting the $350 billion into context, it represents 101 times the FY 2021 Housing and Community Development’s Community Development Block Grant (CDBG) program funding level of $3.45 billion and with a three-year window to expend allocated funds. Jurisdictions need to think carefully about how to expend these funds with a data-driven approach being paramount to maximize the funding’s impact. Moreover, as new federal programs and policy changes continue to be announced almost daily, there are many factors and priorities to consider; however, planning for and organizing your cost recovery now will lead to more resilient outcomes for your community and its residents in the future.
Matt Hochstein is Hagerty’s Vice President of Client Services. He has nearly two decades of management consulting experience working with diverse clients across the emergency management, financial services, healthcare, and technology sectors.