The sudden decline in economic output following the Coronavirus Disease 2019 (COVID-19) outbreak has significantly altered the fiscal outlook for state and local governments. This report briefly summarizes the background, purpose, and allocation of general fiscal assistance provided to state and local governments during the COVID-19 crisis. Information on more targeted, policy-specific assistance during the COVID-19 outbreak can be found in other CRS products.

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act; P.L. 116-136), signed into law on March 27, 2020, created the Coronavirus Relief Fund (CRF), which provided $150 billion in direct assistance for state and local governments.

Table 1 provides total CRF allocations for the 50 states, and Table 2 provides allocations for the territories. A total of $149.5 billion was allocated to eligible governments as of February 4, 2021.¹ As of September 30, 2020, $78.4 billion in CRF payments had been awarded to projects by state, territorial, tribal, and local governments.² CRF award data by state and government type are provided in Table 3.

Background

A sizable share of economic output derives from state and local government activity. State and local governments spent $3.8 trillion in 2018, 19% of gross domestic product (GDP), with 55% of combined expenditures from state governments and 45% from local governments.³ These governments are generally required to balance their operating budgets every one or two years. For more on how economic shocks affect state and local government activity, see CRS Insight IN11258, State and Local Fiscal Conditions and Economic Shocks.

Available evidence suggests that the COVID-19 economic shock will have a notable impact on state and local budgets. Consumption declines following nonessential business closures and social distancing efforts are likely to produce a sharp drop in sales tax revenues (35% of state and local tax revenues in 2018). Spikes in unemployment and decreased firm profitability are expected to have a similar effect on individual and corporate income tax receipts (27% of tax revenues).⁴ Use of state and local spending programs is likely to increase, particularly for public welfare programs (19% of 2018 expenditures) as well as hospital and health expenses (8% of 2018 expenditures).

The CRF, established through Section 5001 of the CARES Act, offers a means of assistance for state and local governments. The CARES Act provided a total of $150 billion in federal fiscal support for state and local governments through the CRF, with eligibility dependent upon the location, level of government, and use of potential funds. A similar fund, the State Fiscal Stabilization Fund, was created during the 2007-2009 recession by the American Recovery and Reinvestment Act of 2009 (P.L. 111-5). The State Fiscal Stabilization Fund provided $54 billion to state and local governments, most of which was targeted to certain types of spending for education programs.⁵ Separately, Section 4003 of the CARES Act authorized use of Federal Reserve capacity to support up to $454 billion in debt issued by state governments, local governments, and eligible businesses.

Eligible Purposes

CRF payments received through the CARES Act allow state and local governments to make payments for programs that

(1) are necessary expenditures incurred due to the public health emergency with respect to Coronavirus Disease 2019 (COVID-19);

(2) were not accounted for in the budget most recently approved as of the date of enactment [March 27, 2020] of this section for the State or government; and

(3) were incurred during the period that begins on March 1, 2020 and ends on December 31, 2021.⁶

Per Section 5001(f) of the CARES Act, the Inspector General of the Department of the Treasury determines whether CRF payments are used for eligible purposes. Fund payments that are deemed for ineligible purposes are treated as a debt owed by the implementing government to Treasury.

As clarified in Treasury guidance, CRF payments may not be used to directly account for revenue shortfalls related to the COVID-19 outbreak.⁷ Such funds, however, may indirectly assist with revenue shortfalls in cases where expenses paid for by the CRF would otherwise widen the gap between government outlays and receipts. For example, if $3 billion in CRF assistance is sent to a government with revenues that are $10 billion lower than expected and $5 billion in new COVID-19-related expenses, that assistance will reduce the fiscal gap (from $15 billion to $12 billion) by the same amount regardless of whether it applies to revenues or spending. Only in cases where governments have revenue shortfalls and less related spending than the program provides are governments limited by the eligible purpose restrictions. For instance, in that same example but with no new COVID-19-related expenses, the government could not use CRF assistance despite its decrease in revenues.

Allocations Across States, Territories, and Tribal Areas

The CARES Act stipulates that the $150 billion provided to the CRF is allocated to governments in states, territories, and tribal areas as follows:⁸

• $139 billion is allocated for governments in the 50 states based on their populations (as measured by the U.S. Census Bureau in 2019), with no state receiving less than $1.25 billion.
• $8 billion is set aside for governments in tribal areas, with each tribal area's allocation based on its share of aggregate tribal expenditures in FY2019, as determined by the Secretary of the Treasury in consultation with the Secretary of the Interior.
• $3 billion is allocated to the territories of the District of Columbia (DC), Puerto Rico, U.S. Virgin Islands, Guam, Northern Mariana Islands, and American Samoa, with each territory receiving an amount based on its share of the total population across all territories, with populations determined by the Secretary of the Treasury.

Table 1 shows state allocations for CRF payments made through the CARES Act. Due to the $1.25 billion minimum allocation for states, every state with an allocation greater than the minimum amount receives a smaller allocation share (excluding amounts provided to tribal areas) than its share of the population. Most states with a minimum allocation amount, in contrast, have a larger allocation share than their population share. Treasury has allocated all amounts designated for nontribal governments.⁹

The CARES Act provided a total of $8 billion to be distributed to tribal governments through the CRF. The CARES Act further stipulated that fund allocations to individual tribal governments were to be based on increases in government expenditures from FY2019 to FY2020, through a process established by the Department of the Treasury and Department of the Interior.¹⁰ That process resulted in two rounds of payments.¹¹ The first round of payments distributed 60% of the tribal total, with allocations based on tribal population data. The second-round payments were distributed based on tribal employment and expenditure data after such data were provided. Treasury has provided all fund allocations to tribal governments except those designated for governments of Alaska Native Corporations, whose participation is the subject of ongoing litigation.¹²

Table 2 provides estimated CRF allocations made through the CARES Act to areas designated for fund purposes as territories, including the District of Columbia. Territory allocations are made in direct proportion to the relevant population estimate, with no minimum amount provided. Allocation shares for all territories except Puerto Rico are smaller than the state minimum amount. Treasury has allocated all amounts designated for territorial governments.¹³

Allocations to Governments Within States and Territories

CRF assistance is generally provided to state governments. Local governments serving a population of at least 500,000 (as measured in the most recent census data), however, may elect to receive assistance directly from Treasury. Such direct local assistance allocations reduce the allocation made to the state government (keeping the state allocation constant) and are equal to the product of

• the state or territory allocation amount;
• the percentage of the state or territory population attributed to the local government; and
• 45%.¹⁴

The CARES Act does not explicitly prevent local governments (regardless of their eligibility for direct assistance) from receiving CRF payments from state governments, so long as the funds are used for eligible purposes. State governments transferred $543 billion to local governments in 2018, or 27% of all local government revenues.

In many cases, populations are served by more than one local government that is eligible for direct assistance from the CRF (e.g., a city with a population of 700,000 located in a county with 200,000 other people, and thus with a county population of 900,000). Guidance from the Secretary of the Treasury clarified that in such cases, all overlapping governments are eligible for assistance. However, direct assistance payments to larger localities will be calculated using only their unique population, or will be reduced by any amounts also attributable to smaller localities receiving assistance (i.e., in the above example the county government only uses a population of 200,000 for its direct payment calculation).

Award Information

Table 3 shows the percentage of the total allocation that has been awarded to projects for each state and type of government as of September 30, 2020. Just over half of all CRF Funds ($78.4 billion, or 52%) have been awarded to projects. State and territorial governments ($62.9 billion, or 55%) have awarded a slightly higher percentage of their allocations to projects than local governments ($12.6 billion, 46%) and tribal governments ($2.9 billion, 36%), with the delayed and withheld transmission of funding one possible explanation for the lower tribal government total.¹⁵

There are several reasons why governments facing budgetary pressures may not have immediately incurred costs equal to their fund allocations. There is typically a lag between when new, unexpected funds are distributed to state and local governments (which in this case generally occurred in April 2020) and when that money can be spent, as state and local governments need time to plan and approve use of the new budget authority. A subsequent lag can occur between the issuance of such authority and when costs are incurred. Governments may also be responding to evolving federal guidance on eligible fund programs, with the latest Treasury update provided in August 2020.¹⁶ Following enactment of the CARES Act, there have been multiple proposals to expand the eligible uses of CRF payments, including two pieces of legislation that passed the House in 2020 (H.R. 6800 and H.R. 925, both of which were titled "The Heroes Act"), which may have also influenced state and local budgetary planning.