$26 Billion in Fiscal Relief Funding to the State. The American Rescue Plan (ARP) included $350 billion in funding to state and local governments for fiscal recovery. The funds will be distributed to states, tribes, and territories based on a formula that considers the state’s share of the nation’s unemployment. We estimate California’s state government will receive about $26 billion of this total, although this number will change slightly depending on the specific unemployment estimates used in the calculation. (In addition, we also expect California will receive $550 million in capital project funds to enable work, education, and health monitoring in response to the public health emergency.)
$16 Billion in Fiscal Relief Funding to Local Governments. Cities and counties will receive fiscal recovery funds based on a set of formulas that considers the jurisdiction’s population, among other factors. The federal government will distribute funds directly to all counties and cities with populations greater than 50,000. For cities with population less than 50,000, the state will need to allocate the funds using a formula provided by the federal government. Current estimates suggest that California counties will receive $7.7 billion and California cities will receive $8.4 billion.
Funds Must Be Used for Specific Purposes. Both the state and local governments can only use the funds for specific purposes. They are: (1) to respond to the public health emergency or negative economic impacts associated with the emergency; (2) to support essential work; (3) to backfill a reduction in revenue that has occurred since 2018-19; or (4) for water, sewer, or broadband infrastructure. State and local governments have until December 31, 2024 to use the funds.
Restrictions on Use of Funds. There are two restrictions on the use of the fiscal recovery funds. First, state and local governments are prohibited from using the funds to make supplemental pension payments. Second, the state cannot use the funds to directly or indirectly offset a reduction in the net tax revenue of the state through a change in law, regulation, or administrative interpretation. (This restriction does not apply to local governments.) This prohibition would apply from March 3, 2021 to the last date on which the state expends the funds.
We expect the U.S. Department of Treasury (Treasury) to release guidance in the coming weeks with more specifics on how the federal administration interprets the statutory language in the ARP. That guidance will be important to our understanding of how the state can spend the funds—for example, what purposes will be allowable or prohibited—and how some of the specific restrictions will work. Below, we provide some initial answers to some commonly asked questions about the fiscal recovery funds, although these answers are all subject to change based on the Treasury guidance.
How Will the Funds Affect the State’s Budget Condition? The state is not expected to experience a reduction in General Fund revenue in 2020-21 or 2021-22 compared to 2018-19 (the baseline revenue year in the ARP). Specifically, General Fund revenues (excluding constitutional reserve deposits) were $143 billion in 2018-19, while comparable revenues for 2020-21 and 2021-22 currently are estimated to be $158 billion and $161 billion, respectively. However, some special funds have experienced revenue losses relative to 2018-19, including, for example, the State Parks and Recreation Fund and Greenhouse Gas Reduction Fund. In some cases, the General Fund has provided support to backfill these loses. We are waiting to see whether the Treasury guidance will allow the state to use fiscal relief funds to backfill special fund revenue losses.
How Will the Money Be Allocated? Federal funds anticipated at the time of budget enactment are appropriated just like any other state revenue source. This means the Legislature will need to approve a plan for spending these funds in the 2021-22 Budget Act. Because the funds are available until 2024, the Legislature need not allocate all of them in the 2021-22 budget.
What Kinds of Tax Reductions Are Prohibited? The statutory language appears to prohibit any kind of tax reduction—direct or indirect—if the state accepts all of the fiscal relief funds. (Otherwise, the federal government will reduce the state’s share of relief funds by the amount of the tax reduction.) For example, a strict interpretation of the statute could mean the state would not be able to reduce taxes using General Fund dollars without forgoing an equal amount of federal recovery funds. However, the restrictiveness of this language will depend on the interpretation of Treasury. We will know more once the guidance is released.
When Will We Know More? The ARP sets a statutory deadline of 60 days for the funds to be distributed to state and local governments. As such, we expect Treasury to release guidance in the coming weeks.