‘Curse of Riches’: States, Cities Now Must Divvy Up $513 Billion

America’s states and local governments are facing a problem as welcome as it is unprecedented: How to spend more than half-a-trillion dollars being sent down from Washington.

President Joe Biden’s rescue plan is set to provide at least $513 billion to states, local governments, territories, tribal governments, school districts and public transit systems to make up for the financial toll of the pandemic. Yet the scale of the aid is so vast that it will in many cases more than make up for any lost revenue, leaving officials weighing how to use the funds to stoke their states’ recoveries.

‘Curse of Riches’: States, Cities Now Must Divvy Up $513 Billion

In Florida, Republican Governor Ron DeSantis is proposing to send $1,000 checks to firefighters, paramedics and law enforcement officers. New York’s Metropolitan Transportation Authority, which warned that it would have to cut the city’s subway service as much as 40% and eliminate more than 9,000 jobs if it didn’t receive help, can now restart shelved construction projects. And California may be eligible for $26 billion, potentially adding to a $15 billion surplus that Governor Gavin Newsom wants to send back to small businesses and low-income residents.

“The thing that is harder than cutting budgets is giving away money,” said David Adkins, executive director of the Council of State Governments. “It’s the curse of riches. Everyone will be looking for something from state government because of this influx of money and there will be many mouths to feed.”

The dilemma reflects a surprising way that the recession has played out in the nation’s capitols and city halls. Bracing for what initially threatened to become a crippling fiscal crisis as much of the economy closed down, officials moved to rapidly cut spending. With Republicans last year balking at providing direct aid to plug budget shortfalls, states and localities eliminated more than 1.5 million jobs last spring, more than were lost in the years after the Great Recession.

Yet the hit was far less than feared. The more than $3 trillion of stimulus that Washington injected into the economy last year rescued businesses and sent stock prices surging just as many white collar Americans were able to work from home, softening the impact on wealthy residents who pay a big share of state taxes.

The result is that the new round of aid may be more than enough to close many states’ budget shortfalls. Illinois expects $7.5 billion of aid, more that twice the size of the gap the state had projected for the coming fiscal year. Nationwide, Moody’s Analytics has estimated that states and local governments needed about $61 billion in additional aid to cover shortfalls through 2022 caused by the pandemic, after taking into account federal aid received so far.

The outsize scope is promising to provide another jolt to the nation’s rebound and avoid a repeat of the years-long austerity that gripped the nation’s statehouses after the housing market crash over a decade ago.

The rules for how the funds will be released and how they can be used are still being finalized, and much will depend on how the U.S. Treasury Department crafts those guidelines.

But states and local governments are looking to use the $360 billion in direct aid to bring back employees or reverse pay cuts, provide rental assistance to low-income residents and bolster spending on things like Internet services, according to government documents and interviews with public officials. K-12 schools will receive another $122 billion under the law. Almost $200 billion will be allocated to state governments and Washington, D.C.

‘Curse of Riches’: States, Cities Now Must Divvy Up $513 Billion

The funds “will allow us to catch up on a lot of issues we pushed off to the side” due to the pandemic, said Elizabeth Kellar, director of public policy for the International City/County Management Association. “If we can use this money strategically, we can position our communities for a long-term recovery.”

The rescue was opposed by Republicans in Congress, who said it was too large, and Republican governors criticized how the law allocates the funds based on the states’ share of the unemployed. This week, Ohio sued the U.S. Treasury over a provision in the law that bars governments from using the aid to cover the cost of tax cuts, saying it illegally restricts the state’s power over its own fiscal policy.

Eryn Hurley, associate legislative director for the National Association of Counties, said U.S. Treasury officials are meeting with a variety of people as they develop the guidelines, and she expects them to move quickly to get the money out.

“They’re really trying to mobilize,” she said.

Under the legislation, governments have the latitude to use the funds to make up for revenue lost during the pandemic or address its “negative economic impacts,” which could include providing assistance to households, small businesses and nonprofits. The aid is expected to be released in two tranches, with the first required to be delivered by mid-May, according to ICMA.

That’s left officials racing to revamp spending plans. Houston Mayor Sylvester Turner is prioritizing using the funds to close his city’s budget shortfall, pay for a sixth class of police recruits and clean up illegal waste dumps. New Orleans wants to end furloughs affecting about 800 employees, the mayor’s press secretary LaTonya Norton said in an email.

Eric Biggart, director of special initiatives and constituent affairs at Salt Lake County, Utah, said the county is looking to utilize the aid to help under-served communities and restore service cuts made in 2020. The estimated aid of $225 million to the county is “in line with our needs,” he said.

While Republicans opposed the aid at the federal level, their fellow partisans in local government are unlikely to turn it away. Two Republican-led states -- Texas and Florida -- are among those that stand to receive the most aid, based on estimates of the allocations.

DeSantis wants to use some of the money to give $1,000 payments to law enforcers, EMTs and firefighters, his office said this week. Florida is estimated to receive as much as $10 billion. Yet DeSantis said that still short-changes Florida because the allocations are based on a state’s share of the unemployed, penalizing states like his that reopened their economies quickly.

“We’re getting the short end of the stick, make no mistake about it,” he said at a press conference March 16. “But we’ll make the best of what we have and I think we’ll be able to get a lot done for the people of Florida.”

©2021 Bloomberg L.P.

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