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Strong budgeting practices will help governments manage coronavirus state and local fiscal recovery funds

Washington’s state and local governments will receive $7.120 billion from the coronavirus state and local fiscal recovery funds (part of the American Rescue Plan Act). (Posts on Treasury’s guidance for use of the funds are herehere, and here.) The state has already appropriated (assuming no gubernatorial vetoes) $3.162 billion of its $4.428 billion share. Counties and cities in Washington have decisions to make as well about how best to use this substantial influx of funds.

As Michael Goldberg of Washington State Wire noted in his report on Treasury’s guidance, “some state budget experts stressed the importance of using long-term fiscal analyses to structure their allocation decisions.” He quoted Adam Levin of Pew:

The American Rescue Plan Act represents historic investment in state and local governments—approximately $1,000 per American . . . The key to ensuring these resources yield returns is not just about the amount of funding – but how that money is spent. State and local leaders should take a long-term perspective on these new funds and analyze what their budgets will look like after this federal relief expires in 2024. Tools like multi-year revenue and expenditure forecasts and budget stress tests can help officials decide how to use this money today without inadvertently creating budget holes tomorrow.

Levin and Josh Goodman of Pew elaborated here. They also caution states against using the funds “to create new ongoing programs.” (Washington is using child care funding from the American Rescue Plan Act to begin a new child care program, even though the budget bill specifically says the state does not have the “fiscal capacity to make these investments.”)

Additionally, in March, Pew ran a series of articles on how “decision-makers can learn from recent events to make progress on structural reforms that will improve state fiscal health over the long run.” An overview of their recommendations is here.

Washington already has some of their recommendations in place. We have a dedicated rainy day fund (though legislators needlessly drained it this year). Regular deposits to the rainy day fund are mandated by the constitution, and a portion of any extraordinary revenue growth is automatically deposited as well (a way to help manage revenue volatility). With the four-year balanced budget requirement, Washington’s “multiyear budget plans can help ensure that this year’s budget decisions do not create future deficits.”

Pew also recommends that states perform budget stress tests, which “help policymakers estimate budget shortfalls that could result from adverse events, such as a new pandemic surge or a weakening job market” and can be used “to develop contingency plans for balancing their budgets if pessimistic scenarios materialize.” We have recommended that Washington begin using stress tests in the budget process.

Coronavirus state and local fiscal recovery funds must be used by Dec. 31, 2024. Treasury’s interim final rule notes that recipients should

adapt their plans as the recovery evolves. For example, a faster-than-expected economic recovery in 2021 could lead a recipient to dedicate more Fiscal Recovery Funds to longer-term investments starting in 2022. In contrast, a slower-than-expected economic recovery in 2021 could lead a recipient to use additional funds for near-term stimulus in 2022.

The Government Finance Officers Association (GFOA) adds that how jurisdictions use the money will affect their credit ratings:

The influx of funds will undoubtedly benefit state and local finances, and aid in the recovery from the budgetary, economic, and financial impacts of the pandemic. Rating agencies will evaluate a government’s use of the ARPA funds in formulating its credit opinion and, importantly, will consider your government’s level of reserves and structural budget balance, or efforts to return to structural balance, as part of their credit analysis.

As we’ve written, Washington has strong budget sustainability practices. Following those practices and continuing to improve them will help Washington manage the billions in federal relief funds.

This article was provided by the Washington Research Council.

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