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August 24, 2022

How Governments Can Steer Clear of a Post-ARPA Fiscal Cliff

More than a year into the American Rescue Plan Act of 2021 (ARPA), state and local governments are eyeing a historic opportunity to address ambitious goals for their communities. But how can they safeguard against a financial hole when the funding expires?
Posted by Carol Matthieu

Signed into law on March 11, 2021, the American Rescue Plan Act of 2021 (ARPA) established a “once in a generation” pipeline of funding for state and local governments. A key segment of the pipeline funnels $350 billion in direct aid, known as the State and Local Fiscal Recovery Fund (SLFRF), to help municipalities replace lost revenue; respond to the impacts of the COVID-19 pandemic; provide premium pay for essential workers; and invest in water, sewer and broadband infrastructure. 

With wise stewardship of these dollars, governments have unprecedented opportunities to transform public services and public service delivery. Some municipalities are already using federal funds to launch transformational projects in areas like housing, infrastructure and technology that will have lasting effects on their communities. 

However, when the money runs out, many could be faced with the challenge of paying for programs and services funded by the temporary recovery dollars – a financial hole known as the “fiscal cliff.” These governments will need to think creatively to ensure the use of these funds goes beyond supporting recovery and leads to securing long-term fiscal resiliency and sustainable operational performance. 

With this in mind, what can governments do to successfully manage this short-term financial windfall and avoid a financial hole in the future? Here are three key takeaways to consider: 

1. Take a 360° view to understand funding streams and how budgets will look after the relief expires.

Many funding streams are available through the ARPA. Therefore, it’s critical for government leaders to keep track of different revenue sources and craft strategies for allocating short-lived funds for future benefit – all while keeping in compliance with changing rules and requirements.

Municipalities should stay abreast of state-level ARPA efforts, especially those that have local impacts, such as infrastructure, changes to state funding resources and legislative requirements. They should avoid the temptation to focus on new and expanded programming that requires spending beyond the availability of the funds.

Instead, municipalities that build a strong fiscal forecast and follow guiding principles for prudent allocation of recovery funds will have a solid roadmap to guide them long after the money runs out.

2. Take the opportunity to understand what ARPA allows before committing any funding.

The SLFRF gives substantial flexibility to municipalities for meeting local needs within the eligible-use categories. However, to maximize the impact of recovery dollars, governments should have a good understanding of all available federal, state and other funding sources in parallel with their own recovery goals. This will ensure that the funds are used only where needed.

If funds remain after meeting short-term needs allowable under the act – such as funding public health response, providing temporary economic assistance and stabilizing finances – governments should turn to their fiscal forecast to decide how much can be used for sustainably restoring budget reductions beyond ARPA. 

3. Take a long-term approach to determining the best path forward and engage citizens along the way.

Municipalities have until the end of 2024 to obligate their fund allocations and until the end of 2026 to spend them, which means that they do not have to make quick decisions. They will have some time to decide how to use the funds for the long term.

In part, this should involve seeking citizen input on what they feel are important initiatives to pursue for the betterment of their communities.

Insight gained through citizen surveys, online communication forums and town halls can help leaders make impactful decisions about targeting funds toward strategic, long-term projects that provide benefits over many years. 

The sudden infusion of federal funds is certainly a welcome relief for state and local governments, some of which are still digging out from the weight of the pandemic. For many, the recovery dollars could be transformational. For others, the magnitude of funding is causing some uncertainty as they feel the pressure to spend the money in a strategic and resourceful manner. 

However, governments should view this as a generational opportunity to address their community’s specific needs with the most beneficial solutions. Clearly, government leaders will need to think strategically about how best to use their recovery funds. By aligning the funding with the long-term needs of their communities, they will be well positioned to maximize the impact of their ARPA dollars while securing their financial future and improving the lives of their citizens.

Detailed information on the ARPA and SLFRF can be found at the following sites:

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