Some New York local governments are soliciting input from residents as they decide how to spend billions in pandemic emergency dollars earmarked in March under the $2.1 trillion federal American Rescue Plan (ARP).
It’s a chance to shore up local government finances.
The ARP allocated more than $23 billion to New York, with set-asides to the state ($12.7 billion), 43 cities ($6 billion), 62 counties ($3.9 billion) and nearly every town and village ($774 million). Specific allocations for each of New York’s cities and counties are posted on the U.S. Treasury site. While the state got all its money up front, local governments get theirs in two equal tranches: the first they have or will soon receive; the second arrives next spring. Recipients have until December 2024 to obligate the funds.
Nationally, a total of $350 billion was allocated to states and localities under the ARP. It was primarily intended to fill anticipated budget gaps arising from pandemic-induced revenue loss. But the dip in receipts was unexpectedly modest and short-lived. That’s why the Wall Street Journal suggested this week that unspent allocations to states and localities be redirected to offset the cost of a pending federal infrastructure bill.
That’s not likely to happen. So, New York localities should seize this opportunity. They may not be particularly cash-strapped today, but dark clouds loom on the horizon. New Yorkers are arguably the most-heavily taxed Americans. Yet jurisdictions throughout the state face gaping long-term deficits because they’ve also encumbered future tax revenue by promising unsustainably generous retiree health benefits (aka OPEB) to employees—and set aside no funds to pay for it. A recent study estimated Empire State residents owe an average of $16,000 each as their share of the OPEB liabilities already incurred by every level of government in New York.
ARP funds can be used to address such liabilities and to curb future borrowing needs, however doing so requires localities to negotiate the unhelpful and byzantine Treasury Department interim final guidance issued in May, which explicitly prohibits the backfilling of pension or rainy-day funds. And it circumscribes spending on pay-go infrastructure projects.
But considerable discretion remains. A Treasury FAQ clarifies that funding OPEB is an eligible use of funds. Water, sewer and broadband pay-go infrastructure projects are permitted. And, importantly, to the extent that a jurisdiction identifies a revenue loss in 2020 or subsequent years (via a calculation formula laid out in the IFR), the dollars required to cover that loss can be used broadly for “provision of government services” to include, for example, any type of pay-go infrastructure projects.
At minimum, localities must avoid using this windfall to incur recurring expenses—such as new public employee hires—that must be funded by local revenue sources once the ARP funds are exhausted. That would put them in worse shape than they’re in today.