Background

Federal, state, and local government revenues generally increase when the economy is growing, as taxes are paid on increased economic output. During periods of economic contraction, revenues decrease while heightened demand for social safety net programs tends to put upward pressure on government spending. Therefore, net deficits generally increase in adverse economic conditions at all levels of government.

Unlike at the federal level, state and local governments must routinely balance their operating budgets, typically every one or two years. In severe economic recessions, state and local governments can thus face budget shortfalls that, absent outside intervention, would require a combination of tax increases and spending cuts to meet balanced budget requirements, which may exacerbate the time and intensity of negative economic shocks. While many states have "rainy day funds" designed to help close such funding gaps, in practice those funds have not been financed at levels to resolve fiscal issues brought about by severe recessions.¹

The sudden decline in economic output following the Coronavirus Disease 2019 (COVID-19) outbreak was unlike that of any U.S. economic shock since World War II. In the second quarter of 2020, real U.S. gross domestic product (GDP) fell at an annual rate of 31%, more than triple the drop recorded in any quarter going back to 1947.² While some sectors of the economy recovered quickly, for others the shock was longer lasting. Total service output, for instance, declined by 7.5% in calendar year 2020; before that, the largest decline in services since 1947 was 0.4% (in 2009).³

Forecasts of the economic decline's effect on state and local budgets projected significant short- and medium-term fiscal gaps. Projections made in 2020 by the Federation of Tax Administrators, Moody's Analytics, the Center on Budget and Policy Priorities, and Upjohn Institute generally projected cumulative state and local budget effects of $200-$300 billion per fiscal year, with significant variation in the intensity and duration of those effects depending on the scope, methodology, and release date of each forecast.⁴

In an effort to mitigate adverse fiscal consequences for these governments and the economic activity they support, Congress provided two rounds of general fiscal assistance to state and local governments during the COVID-19 crisis. The first round of general assistance provided a total of $150 billion through the Coronavirus Aid, Relief, and Economic Security Act (CARES Act; P.L. 116-136), which was signed into law in March 2020. The second round of assistance was enacted in the American Rescue Plan Act of 2021 (ARPA; P.L. 117-2), signed into law in March 2021, and delivered a total of $362 billion in general assistance payments. This report summarizes the methodology, allocations, and eligible uses of those payments.

CARES Act Assistance: the Coronavirus Relief Fund (CRF)

The Coronavirus Relief Fund (CRF), established through Section 5001 of the CARES Act (P.L. 116-136), offers 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.⁵ 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.⁶

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 ... [March 27, 2020] for the State or government; and

(3) were incurred during the period that begins on March 1, 2020, and ends on December 31, 2021.⁷

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 determined to be 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.⁸ 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 COVID-19-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 stipulated that the $150 billion provided through the CRF to governments in states, territories, and tribal areas was to be allocated as follows:

• $139 billion allocated for governments in the 50 states based on their populations (as estimated by the U.S. Census Bureau in 2019), with no state receiving less than $1.25 billion;
• $8 billion 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; and
• $3 billion 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.

Within States and Territories

CRF allocations were generally provided to state governments. Local governments serving a population of at least 500,000 (as measured in the most recent census data), however, could elect to receive assistance directly from Treasury. Such direct local assistance allocations reduced the allocation made to the state government (keeping the state allocation constant), and were 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%.⁹

The CARES Act does not explicitly prevent local governments (regardless of their eligibility for direct assistance) from receiving CRF payments from state governments, as long as the funds are used for eligible purposes. Transfers from state governments to local governments are a regular part of the modern U.S. system of federalism: state governments transferred $568 billion to local governments in 2019, which represented 27% of all local government revenues.¹⁰

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).

Allocations by State, Territory, and Government Type

Table 1 shows the allocations for CRF payments made through the CARES Act broken out by state and level of government. State governments in the 50 states received a total of $111.4 billion, with amounts ranging from the state minimum of $0.84 billion (Nevada; exclusive of local government payments) to $9.53 billion (California). State government amounts in 21 states were adjusted to meet the $1.25 billion small state minimum (inclusive of local government payments), with the remaining amounts provided to states based on their population share.

Table 1 also shows the $3 billion in CRF allocations to areas designated for fund purposes as territories, including the District of Columbia. Territory allocations were 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.¹¹

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.¹² That process resulted in two rounds of payments.¹³ 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, including amounts designated for governments of Alaska Native Corporations, which were withheld due to litigation until August 2021.¹⁴

Figure 1 shows the per capita allocations made to states, reflecting payments made to state, territorial, local, and tribal governments. Of the 21 states that received the $1.25 billion minimum amount for combined state and local payments, per capita assistance ranged from $391 (Utah) to $2,857 (Alaska). Of the 29 remaining states, 27 had per capita assistance under $500, with only the states with large populations served by tribal governments (Arizona and Oklahoma) receiving greater per capita assistance. Treasury has allocated all CRF amounts provided through the CARES Act.¹⁵

Figure 1. CRF Per Capita Allocations by State and Territory

Source: Pandemic Oversight, "Coronavirus Relief Fund," November 2021: and U.S. Census Bureau, "2020 Population and Housing State Projections," August 2021. CRS calculations. Notes: State populations drawn from 2020 Census estimates.

Recipient Use Data

Table 2 shows the percentage of the total allocation that has been disbursed (classified as "spent" or "to be spent") for each state and type of government as of September 30, 2021.¹⁶ Roughly 94% of CRF payments (or $141.1 billion) were disbursed across all prime (direct) recipient governments. State and local governments exhibited a nearly identical spend rate in that dataset (95% and 94%, respectively).¹⁷ While the total spending rate of tribal governments was slightly lower (86%), that total includes amounts only recently distributed to Alaska Native Corporations (in August 2021).¹⁸ When excluding amounts provided to Alaska Native Corporations, the tribal government spend rate (92%) is comparable to the state and local government total.

Figure 2 shows the percentage of allocations disbursed across CRF prime recipients in each state and territory as of September 30, 2021. Only 11 states and territories had cumulative disbursement rates of 89% or lower, while 6 states and territories had disbursement rates of greater than 99.5%. The statutory deadline to disburse CRF funds provided through the CARES Act is December 31, 2021.

Figure 2. CRF Percentage of Allocations Disbursed by State and Territory As of September 30, 2021

Source: Pandemic Oversight, "Coronavirus Relief Fund," November 2021. CRS calculations. Notes: Disbursed amounts represent payments categorized by PRAC as "spent" or "to be spent." Calculations include payments to tribal governments.

ARPA Assistance

Section 9901 of the American Rescue Plan Act of 2021 (ARPA; P.L. 117-2) provided a total of $362 billion in general federal payments to state, local, tribal, and territorial governments. ARPA assistance was provided through four channels:

• $220 billion provided to state, tribal, and territorial governments through the Coronavirus State Fiscal Recovery Fund (CSFRF);
• $130 billion provided to local governments through the Coronavirus Local Fiscal Recovery Fund (CLFRF);
• $10 billion provided to state governments through the Coronavirus Capital Projects Fund (CCPF); and
• $2 billion to certain local and tribal governments through the Local Assistance and Tribal Consistency Fund (LATCF).

Eligible Purposes

CSFRF and CLFRF

ARPA permits governments to use CSFRF and CLFRF payments for programs that

• respond to the COVID-19 public health emergency or its negative economic impacts, including assistance to households, small businesses, nonprofits, and impacted industries;
• provide grants to employers or premium pay to workers performing essential work during the COVID-19 public health emergency;
• provide for general government services to the extent of reductions in government revenues due to the COVID-19 public health emergency, relative to the most recent year prior to the emergency; and
• make necessary investments in water, sewer, or broadband infrastructure.¹⁹

Recipients may transfer funds to private nonprofit groups, special purpose units of state or local governments, public benefit corporations involved in the transportation of passengers or cargo, or their state government.

In May 2021, Treasury provided additional clarity on eligible uses of CSFRF and CLFRF payments through the publication of an Interim Final Rule.²⁰ The Interim Final Rule contained details on

• the types of programs considered to be responses to the public health emergency and its negative economic impacts, including programs that prevent the exacerbation of preexisting economic disparities in certain areas;
• the definition of essential work, and limitations on payments and grants provided to workers;
• the formula by which lost government revenue could be calculated in FY2020 through FY2024; and
• eligible water, sewer, and broadband infrastructure programs.

All payments are to remain available until December 31, 2024, with funded projects completed no later than December 31, 2026. Amounts not spent or used for ineligible purposes must be repaid to Treasury.

CCPF

ARPA provides for state, territory, and tribal government recipients of CCPF payments to use funds for "critical capital projects directly enabling work, education, and health monitoring, including remote options," in response to the COVID-19 public health emergency.²¹ Treasury released additional guidance on eligible uses in September 2021.²²

LATCF

ARPA directs LATCF payments to be made to "eligible revenue sharing counties and eligible Tribal governments"²³ for "any governmental purpose other than a lobbying activity."²⁴ Further guidance on eligible LATCF purposes has not yet been made available.

Allocations

CSFRF

ARPA provided a total of $219.8 billion through the CSFRF, distributed differently across state, territorial, and tribal governments:

• States and DC: $195.3 billion to the 50 states and the District of Columbia (DC), with
• $0.755 billion to DC (i.e., the difference between DC's allocation and the minimum allocation to the 50 states provided in the CARES Act);
• $25.5 billion distributed equally across state governments ($0.5 billion each);
• $169.045 billion distributed to states (and DC) in proportion to their seasonally adjusted unemployed population from October through December 2020, as measured by the Bureau of Labor Statistics; and
• adjustments to ensure that each state and DC receives a total of at least $1.25 billion from the CSFRF and Coronavirus Local Fiscal Recovery Fund (discussed below), a separate fund for local governments established in Section 9901;
• Tribal Governments: $20 billion provided for tribal governments, with
• $1 billion allocated equally across all tribal governments; and
• $19 billion allocated to all tribal governments through a process to be determined by the Secretary of the Treasury;
• Territories: $4.5 billion set aside for Puerto Rico, American Samoa, Guam, the Commonwealth of Northern Mariana Islands, and the U.S. Virgin Islands, with
• $2.25 billion allocated equally across the five territories ($0.45 billion each); and
• $2.25 billion allocated based on relative population.

ARPA provided Treasury with the discretion to make CSFRF payments to states in one or two tranches, based on state unemployment levels. Treasury released guidance specifying that payments will be made in one installment for states with unemployment levels at the time of Treasury certification that are more than two percentage points higher than February 2020 levels.²⁵ All other states are to receive payments in two installments, with second-tranche payments required to be made no later than 12 months after Treasury certifies the first round of payments.

Treasury's guidance also stated that payments to all territorial governments would be made in a single installment.²⁶ Payments to tribal governments are to be made in two installments, with the latter based on unemployment data.

Treasury has announced final CSFRF allocations to states and territories, and made first-tranche CSFRF payments to state and local governments in 2021.²⁷ Treasury has also developed a final allocation methodology for tribal governments, and provided further details on the tribal government payment process.²⁸

CLFRF

ARPA provided a total of $130.2 billion through the CLFRF, distributed differently across types of local government:

• Metropolitan Cities: $45.57 billion to governments of localities classified as "metropolitan cities" in the Community Development Block Grant (CDBG) program, with individual amounts provided pursuant to the FY2021 CDBG formula;
• Nonentitlements (NEUs): $19.53 billion to other units of general local government (as defined in 42 U.S.C. §5302(a)(5)) that represent areas classified as "nonentitlement communities" in the CDBG program and are county governments, with
• federal payments first made to states made proportionally to the state populations not residing in metropolitan cities; and
• individual amounts distributed by the state proportional to each local government's state population share; and
• Counties: $65.1 billion to county governments, with
• payments to counties classified as "urban counties" under the CDBG program equal to the greater of their projected allocation based on their population and the allocation they would have received if urban counties had been included in the $45.57 billion provided to "metropolitan cities"; and
• payments to all other counties made proportional to their state's population share.

Treasury released guidance specifying that all local governments will receive payments in two installments, with the first payment provided in 2021 and the second payment made no later than 12 months after the first payment.²⁹

Treasury published a final methodology for allocation payments to counties, metropolitan cities, and NEUs in May 2021, and made first-tranche payments directly to local recipients (for county and metropolitan city governments) and to state governments (for NEUs) later in 2021.³⁰ Many state government payments to NEUs have been made, while others remain outstanding as of November 29, 2021. The status of all NEU payments is publicly updated weekly.³¹

CCPF

ARPA provided a total of $10 billion through the CCPF, to be distributed as follows:

• $100 million each provided to the 50 states, DC, and Puerto Rico;
• a total of $100 million provided to other U.S. territories, divided evenly among the governments of the U.S. Virgin Islands, Guam, American Samoa, Northern Mariana Islands, Marshall Islands, Micronesia, and Palau;
• a total of $100 million provided to tribal governments, divided evenly among each government, with between $50,000 and $200,000 paid to Hawaii for Native Hawaiian assistance; and
• the remaining $4.6 billion allocated to the 50 states, DC, and Puerto Rico through the following formula:
• 50% allocated proportional to population share;
• 25% allocated proportional to the rural population share; and
• 25% allocated proportional to the population with household income below 150% of the national poverty line.³²

Treasury provided final allocations to all CCPF recipients in August 2021.³³

LATCF

Further guidance on the LATCF allocation methodology has not yet been made available.

Allocations by State, Territory, and Government Type

Table 3 shows the combined allocations made across states and types of government for the CSFRF, CCPF, and CLFRF. CSFRF payments do not include payments to tribal governments, as final allocation data have not yet been made available. Allocations to the 50 states through the CSFRF and CCPF range from $1.03 billion (Montana) to $27.56 billion (California). Combined local government payments through the CLFRF range from $0.18 billion (Wyoming) to $15.90 billion (California).

Figure 3 shows per capita payments from the CSFRF, CLFRF, and CCPF by state and territory. CSFRF allocations assume that tribal government payments will be made across states in equal proportion to tribal payments made in the CRF; actual allocation data have not yet been made available. Relative to the CRF money provided in the CARES Act, ARPA assistance is a bit more proportional to state population distributions. The highest concentration of large per capita payments can be found in Mountain West states (due largely to the $1.25 billion combined minimum for CSFRF and CLFRF payments to nontribal governments), while a higher concentration of low per capita payments is found in the Southeast.

Figure 3. ARPA General Per Capita Allocations by State and Territory Includes CSFRF, CLFRF, and CCPF Allocations

Source: U.S. Treasury and U.S. Census Bureau. CRS calculations. Notes: State populations drawn from 2020 Census estimates. Allocations include payments to tribal governments. CSFRF allocations assume that tribal government payments will be made across states in equal proportion to tribal payments made in the CRF; actual allocation data have not yet been made available. Allocations do not include those from the LATCF, for which allocation methodology is not yet available.

Recipient Use Data

Data on recipient use of the general assistance provided in ARPA are not yet available. Preliminary data from the CSFRF and CLFRF are expected to be released in early 2022;³⁴ a sampling of use from select governments was released by Treasury in October 2021.³⁵ CCPF and LATCF amounts have not yet been provided to recipient governments.