• The Institute for Public Policy and Social Research’s May 18 Public Policy Forum provided a panel of experts an opportunity to exchange ideas on the use of $4.4 billion from the American Rescue Plan funding for local governments.
• The funding can be used both to backfill local government budgets that thus far have not benefited directly from federal COVID-relief funding and as a means of stimulating economic growth.
• The interim federal guidelines for the use of these funds provide some use restrictions, but they give local governments considerable latitude to program these dollars to meet local needs.

The U.S. Department of Treasury announced interim guidelines and began distributing federal American Rescue Plan Act (ARPA) funding for general-purpose local governments. On May 18, I participated in a panel to discuss the restrictions on and potential for uses of the $4.4 billion that will be distributed to Michigan. 

Michigan State University’s Institute for Public Policy and Social Research hosted the panel as part of its monthly Public Policy Forum lunches. The other panelists included: Dr. Eric Scorsone, Director, MSU Extension Center for Local Government Finance and Policy, Michigan State University; Dan Gilmartin, Executive Director, Michigan Municipal League; and Dr. Deidre Waterman, Mayor, City of Pontiac.

The March 2021 ARPA package is the fifth federal funding package adopted to help the nation get through the COVID-19 pandemic. The previous packages included:

1. The Corona Preparedness and Response Supplemental Appropriation Act (March 2020)
2. The Families First Act (March 2020)
3. The Coronavirus Aid, Relief, and Economic Security (CARES) Act (March 2020)
3b. Supplemental funding for the CARES Act Paycheck Protection Program (April 2020)
4. The COVID Relief Act (December 2020)

The ARPA is the first of the packages oriented toward government stimulus funding.  The other packages were often called stimulus packages, but the goal of the funding was stability. Funding from those packages provided state governments, public health agencies, hospitals, schools, small businesses, and families with funds to provide key services such as developing public health campaigns, keeping employees on the payroll, and adapt to social distancing. The ARPA funding is provided in the waning months of the pandemic with the intent of circulating funding to get the economy on the same, or better, growth path than it was on before the pandemic. 

This story is a little different for Michigan’s local governments. While the state government, health providers, and others benefited from the earlier rounds of funding, only Detroit and the largest county governments received CARES Act funding last year. The ARPA funding will both help stabilize local government budgets and stimulate the economy with public works and other funding. 

The interim guidelines provide for four general uses by local governments. The first use is designed to meet the stability goal. The funding can be used to backfill tax and fee revenues foregone because of the pandemic. Michigan’s 24 cities that levy an income tax experienced significant revenue declines because many non-residents that normally work in the cities stopped doing so when businesses shifted to remote work environments. 

The other three permissible uses are geared toward stimulus spending. Local governments may use the funding to invest in water, sewer, or broadband infrastructure. They may use the funding to boost local economies by distributing the funding to households, small businesses, and nonprofit organizations. And they may use the funding to pay bonuses to essential workers. 

They may NOT use the funding to pay debts, including the legacy costs of retired employees, or to make tax cuts. The political calculation of including this prohibition seems to be that paying for these items does not achieve the goal of circulating dollars to spur greater spending and employment.

The ARPA funding is temporary. It will come in two payments and must be spent by 2024. To use the funding for ongoing projects or employment would commit the local governments to future expenditures after the funding is exhausted. This would be especially troublesome in Michigan with a dysfunctional municipal finance system. 

Reflecting back to my participation on this panel, the key messages conveyed by participants were:

Lupher: The funding arrangement, especially the prohibitions on debt reduction, is akin to telling households that received federal installments of cash from the previous packages that they can only use the money to buy shiny new objects such as electronic equipment or vehicles. It would forbid families from paying down credit card debt or student loans. At the end of 2024, many Michigan local governments are going to have spent this funding and still operate in a challenging municipal finance system because of the annual financial demands arising from legacy debts – primarily pension and retiree healthcare benefits.

Gilmartin: Although the pandemic will soon be over (let’s hope), the financial effects on local government will be felt for some time into the future. Local government budget makers should ration part of the available funding for future, as-yet-unknown budget shortfalls.

When thinking beyond mending their budgets, local governments should think beyond the next project on their infrastructure list. This is a once-in-a-generation influx of funding and local governments should seek to leverage it with other neighboring or overlapping local governments to invest in transformational projects.

Scorsone: The interim guidelines are lenient enough that local governments can be creative with the purposes for which it is used. For instance, 10 percent of statutory state revenue sharing in FY2020 was funded with federal dollars. That counts as a loss of state funding that can be backfilled with ARPA dollars. 

Mayor Waterman: While the money is coming to local governments, they are merely stewards of the people. Pontiac is planning to collect public input on the use of the funding. She encourages other communities to do so as well. 

The IPPSR forum was the pregame analysis before local governments engage in a three-year process to put the new-found ARPA funding to its highest, best uses. For all of the misery endured over the past 15 months, the possibilities of investing in our communities with the ARPA funding are exciting. Time will tell how Michigan has invested in itself with these dollars.