MSU Extension Center for Local Government Finance & Policy

The Michigan State University Extension Center for Local Government Finance and Policy began tracking planning and spending of American Rescue Plan (ARPA) State and Local Fiscal Recovery Funds (SLFRF) at the state and local level in late 2021. State data is made publicly available from the U.S. Treasury on a quarterly and annual basis depending on awardee, as well as via university databases and discussions with local government representatives via the Center’s long-standing Government Fiscal Sustainability Workgroup. Analysis of project planning and spending obligations are provided here.

As of March 31, 2023, approximately $1.9 billion, or about 42 percent, has been obligated out of the $4.4 billion dispersed among over 1,700 local Michigan units. Most dollars have been obligated to projects in the category of revenue replacement (58 percent of funds obligated) and negative economic impacts (24 percent of funds obligated). Fund use designation by category differed greatly between larger Michigan units receiving awards more than $10 million (awarded a total of $3.4 billion) and smaller units (total award of $1 billion). Large local units have only allocated about a third of their funds, with 42 percent and 35 percent of obligated funds going to projects in the categories of revenue replacement and negative economic impacts, respectively. By contrast, Michigan’s numerous and diverse small local governments have already allocated 60 percent of their SLFRF awards, of which 94 percent have been allocated to revenue replacement.

The evolution of federal aid programs can play a significant role into how funds are used. In the case of the SLFRF, the emergency nature and novelty of the program and uncertainty about spending constraints early on led to significant caution among local governments in how they chose to utilize funds in the first year of the program. Initially, program funds were used sparingly for immediate issues directly related to the pandemic such as PPE, COVID-appropriate facilities adjustments, and premium pay for essential workers. As a result, as of December 31, 2021, only $218 million (8 percent) of the $3.4 billion allocated to the 64 largest local governments had been obligated. Just over 3 percent of the funds had been spent. Most obligated funds fell into the less stringent revenue replacement category (35 percent of total obligations), followed by negative economic impacts (18 percent), public health (14 percent), and administration and other (12 percent).  As the rules and regulations became clearer in Treasury’s Final Rule and subsequent program adjustments (such as the flexibility in spending expanded by Congress at the start of 2023), the 64 larger local governments began allocating funds to more varied projects with greater speed and confidence. Smaller local governments, facing their own capacity and planning issues, focused allocations on revenue replacement spending.

As of the end of March 2022, 656 Michigan local governments reported a total of 1,328 unique projects with total obligations of $755 million, accounting for just over 17 percent of Michigan’s $4.4 billion SLFRF to local governments. One year later, in Treasury’s April 2023 Project and Expenditure data release, 1,220 units reported 3,787 individual projects, accounting for 42 percent of the total award (with 1 year remaining to obligate funds). Funds obligated as of early 2022 included 72 percent to revenue replacement, 11 percent to negative economic Impacts, and less than 5 percent each to the remaining expenditure categories of admin, public sector capacity, infrastructure, public health, and premium pay. One year later, funds obligated include 58 percent to revenue replacement, 24 percent to negative economic impacts, and less than 5 percent to each of the remaining categories. These are significant shifts, largely due to local units assigning funds into revenue replacement while larger units (with substantially greater award amounts that are not matched to demonstrated revenue losses) know some of their funds must be allocated elsewhere, due to caps on how much money can be allocated in the relatively less stringent revenue replacement category.

This focus on revenue replacement for all local government types, regardless of size, reflects the need for greater spending flexibility in the design of federal aid, if the goal is to truly get the money “out the door” as quickly as possible. Once flexibility was confirmed in the Treasury’s Final Rule, and later in the ARPA Flex legislation at year end of 2022, remaining funds were obligated at a faster pace. This is especially obvious in the obligation patterns of the 64 large local governments, each with awards exceeding $10 million. These units went from 8 percent obligated (3 percent spent) at year end 2021 to 16 percent obligated (8 percent spent) as of the end of the second quarter of 2022, to 30 percent obligated (18 percent spent) as of the end of the first quarter 2023. Projects reported in another expenditure category than revenue replacement increased as time went on.

Small local governments often face additional challenges. Many small cities and towns have neither the labor or capacity to manage large-scale aid like the SLFRF program when spending requirements are complicated and stringent, require cooperation from surrounding local governments and organizations to form a plan. As a result, almost all projects from the smaller localities are in revenue replacement. These trends highlight the importance of spending flexibility with widespread aid programs such as the SLFRF if they are to repair and rejuvenate communities at pace in the wake of a national economic shock such as the global pandemic.