State policymakers are developing and employing a range of strategies to take full advantage of flexible federal pandemic funding ahead of upcoming deadlines. Lawmakers in Vermont and Mississippi, for example, have identified key policy priorities for their remaining allocations. Counterparts in Massachusetts, meanwhile, want to use their funds to replace revenues lost because of the COVID-19 pandemic—one of the allowable uses of this funding stream.
For the past three years, states have managed a massive influx of federal aid with much of the flexible funding coming through the American Rescue Plan’s State and Local Fiscal Recovery Fund (SLFRF). When enacting the legislation in 2021, lawmakers intended this $195 billion pot of funding for states to help address the health and economic consequences of the pandemic. The funding, which contributed to strong state fiscal outlooks, has brought challenges as well. Some recipients have expressed concern about fully using the funds. State policymakers have spent significant effort in recent budget cycles obligating and spending pandemic funding, while seeking to avoid one-time uses for the funding that could create a fiscal cliff when the money runs out.
They now face an impending deadline and the possibility that the federal government could claw back unused funds: States must obligate remaining SLFRF funds by Dec. 31, 2024. And the deadline to expend those funds is two years later, Dec. 31, 2026.
Making use of every available federal dollar can be challenging for states. The process of allocating and expending federal funds requires executive or legislative authorization, coordination among state agencies, compliance with state processes and regulations, and accurate accounting of what funding is left on the table. The balance of unobligated funds can be difficult to track. For instance, funds that were previously obligated to a project can be back in play if the project is abandoned or funds from other sources are used in their place. Some processes for authorizing and expending funds can require months of planning and approval, creating pressure around spending funds before the deadline. Additionally, given the nature of state legislative sessions—many are not year-round or operate on a biennial basis—garnering any required legislative approval can be impractical.
Recognizing these challenges, the U.S. Department of the Treasury, which has overseen implementation of SLFRF funds, has worked to clarify and add flexibility around using those funds. Most recently, the agency provided updated guidance related to its 2023 Obligation Interim Final Rule. The updates included a clearer definition of “obligation” of SLFRF funds and provided additional flexibility for recipients. Specifically, Treasury clarified that the aid can support personnel costs incurred after 2024 as long as the specific positions were created before the obligation deadline and funds are spent before December 2026. Additionally, the agency clarified that when a state agency awards funds to a subrecipient (for instance a nonprofit), those funds are considered obligated, and subrecipients have until the December 2026 deadline to spend them.
With the upcoming deadline and updated guidance in mind, some SLFRF recipients have found ways to address budget cycle and other administrative challenges to fully spend funds and prevent the risk of clawbacks. Vermont, Mississippi, and Massachusetts provide examples of how state policymakers are handling unobligated funds in advance of this deadline.
The Vermont Legislature identified three high-priority policy areas and included language in the state’s budget bill to automatically assign unobligated SLFRF funds to those areas. These are: 1) the Department of Public Safety Division of Emergency Management to pay for both the Federal Emergency Management Agency match and municipal support for hazard mitigation; 2) the Agency of Administration to fund administrative costs; and 3) the Vermont Housing and Conservation Board and the Agency of Housing and Community Development to provide support for affordable housing and a grant to the Vermont Housing Finance Agency for various homebuyer programs.
The measure also stated that any additional unexpended funds will revert to the joint fiscal committee of the state general assembly to be redirected toward existing programs supported by Vermont’s State Fiscal Recovery Fund.
Notably, Vermont was also able to leverage American Rescue Plan funds to address costs associated with natural disasters, one of the allowable uses of SLFRF funds. The state experienced multiple flooding events in 2023 and used federal pandemic funding to help pay for the state share of the municipal FEMA match to address costs associated with those disasters.
Mississippi policymakers identified transportation maintenance projects as a priority on which to focus the rest of the state’s unobligated SLFRF funds. In the spring, the Legislature passed a bill directing the state fiscal officer to conduct an inventory of unobligated SLFRF funds by agency and for all unobligated funds to be transferred to the state Department of Transportation to fund shovel-ready projects that could be under contract and obligated by Nov. 1, 2024. Deferred infrastructure maintenance is a significant cost for many states, and this approach could allow Mississippi to use the leftover one-time federal funds to chip away at this known need, rather than return them to the federal government.
The Massachusetts Legislature chose to handle remaining unobligated SLFRF funds differently. Instead of identifying specific projects or programs to fund with unobligated funds, lawmakers elected to treat those funds as revenue replacement. Under SLFRF rules, states can use a certain portion of the funds to replace state tax revenue that was lost during the peak of the pandemic. The revenue replacement option allows states to obligate funds more expediently and with fewer reporting requirements than other spending options. According to recent Treasury data, state SLFRF recipients have obligated just over $73 billion of their funds via revenue replacement.
By choosing revenue replacement as a solution for the unobligated funds, Massachusetts is ensuring that the federal funds will not be returned to the federal government. At the same time, the strategy frees up state dollars that can now be saved, invested, or used without concern for the December deadline. However, with such an approach, policymakers should take appropriate steps to ensure that those state funds are treated as nonrecurring revenue and are not directed at programs and activities that will require ongoing support.
These examples of legislative actions in advance of the SLFRF obligation deadline demonstrate just some of the ways that states are meeting the challenge of using their remaining federal aid. As the cutoff approaches, states are seeking to balance spending the remaining funds with maintaining structural fiscal stability, all while supporting state policy priorities.
Rebecca Thiess is a manager and Laura Pontari is an associate manager working on The Pew Charitable Trusts’ managing fiscal risks project.