Fiscal Perspectives

A Framework for Allocating Federal Recovery Funds

May 4, 2021

Gabe Gabriel Petek
Legislative Analyst

In the coming months, the Legislature will face important decisions over how to use California’s share of the state fiscal recovery funds included in the American Rescue Plan (ARP). Estimated at approximately $26 billion, the recovery funds should go a long way toward covering the state’s direct and indirect costs arising from the coronavirus disease 2019 (COVID-19) pandemic. Moreover, beyond a relatively broad set of pandemic-related parameters, the ARP likely provides states with considerable flexibility over how to allocate the funds, presenting the Legislature with a unique opportunity. In this post, we lay out some guiding principles for the Legislature to consider as it formulates a plan for using the fiscal recovery funds.

First among our suggested principles is a recommendation that the Legislature take the time to define its goals and develop a plan for allocating the federal funds. This principle underpins our guidance because in addition to being of a once-in-a-generation magnitude, the ARP does not require the state to spend the federal resources immediately. In light of this, and given that the federal government already has provided substantial assistance to individuals, businesses, and local governments, we recommend not allocating all of the recovery funds this year. Furthermore, robust revenue trends in recent months point to a potentially sizeable state budget surplus—independent of the federal funds. As we highlighted in our recent report, the state’s present fiscal trajectory puts it on a course to exceed the constitutional state appropriations limit (SAL). We recommend a deliberative approach so that the Legislature may consider how any contemplated allocation of the federal recovery funds would interact with the anticipated budget surplus in a SAL-constrained environment.

A strategic approach similarly applies to our other guiding principles—identify gaps and maximize longer-term benefits—which are less process-oriented and more substantive policy-related suggestions. On this front, the source of funding for the Legislature’s priorities will be a critical consideration given the SAL limitations as well as those related to the federal funds. For instance, if the Legislature wished to allocate additional funding for housing and homelessness, the state surplus could be used to purchase land and buildings, but likely could not be used to provide services and supports (due to SAL constraints). In this scenario, the Legislature could use federal funds to provide those services and supports over the next few years. Yet, given that they are a one-time resource, we would recommend against using the federal funds to support ongoing services absent a plan for alternative funding in the future.

The federal recovery funds combined with the state budget surplus offer the Legislature a historic opportunity to advance its policy agenda. Doing so in a fiscally sustainable way, however, will require navigating, as a new dimension to the budget process, how the surplus, the SAL, and the federal funds interact.

Define Goals and Invest in Planning

  • Identify Significant Challenges. The federal assistance provided under the ARP is unprecedented. The magnitude of the federal package represents a unique opportunity for the state to take significant steps towards addressing various longstanding challenges that the pandemic has served to magnify. Some policy initiatives that involve upfront infusions of resources or entail costs large enough to be prohibitive in normal times become feasible in light of the federal resources. For example, the Legislature could use a portion of the funds to incentivize employer participation in reforming how the state’s unemployment insurance benefit program is financed. Other potential examples include child care, homelessness, housing affordability, student achievement gaps, and broadband access, among others.

  • Develop a Plan. Given the significant direct assistance already provided by the federal government to individuals, businesses, and local governments, we recommend the Legislature take time to develop a plan for the allocation of the fiscal recovery funds. Importantly, we note that there is no requirement for the state to allocate all of its recovery funds as part of this year’s budget process. Under the ARP, the state has until the end of 2024 to expend the funding, which gives the Legislature some time to define its vision for how to use a portion of the funds to address long-standing challenges. We recommend taking the time to develop a plan with measurable goals and objectives for using the funding. This also would allow the Legislature to consider how the state’s plan would interact with future potential federal action (such as the Biden Administration’s infrastructure proposal).

  • Other Considerations. To the extent possible, we recommend determining if there are any lessons learned from previous one-time budget allocations. For instance, in 2019‑20, the state provided funding for child care facilities, but implementation was delayed. The associated trailer legislation relied on the Superintendent of Public Instruction (SPI) to determine several details of the program, such as which providers were eligible for funding and the appropriate amount of these grants. While the SPI was determining these details, funding was rescinded in 2020‑21 in light of the pandemic. To ensure programs are more quickly and effectively implemented, the Legislature may want to consider determining and including additional program details in legislation. We also recommend considering what resources might be needed to allocate resources effectively. For example, if the Legislature wishes to continue the Homekey Program, do state or local housing agencies need additional staff to distribute and oversee the funding to ensure it is used effectively?

Identify Gaps

  • Gaps in Federal Assistance. The federal assistance provided in the ARP (and previous actions) was wide ranging, however, there still are some individuals and entities that could benefit from assistance. In particular, undocumented immigrants remain ineligible for federal stimulus payments and certain local governments—specifically special districts—did not receive any direct assistance. We recommend considering whether these individuals and entities that have been impacted by the pandemic, but not included in recent federal assistance, would benefit from assistance using the state’s fiscal relief funds.

  • Disparities. The pandemic has had notably disparate health and economic consequences. These inequities—many of which predated the pandemic—warrant considering targeting assistance to Californians more acutely affected by job losses and other potential long-term consequences of the pandemic. Throughout the pandemic, job losses have been concentrated among younger, less educated workers, who are disproportionately people of color. Rates of infection and death from COVID-19 also have been disproportionate among different groups in California. For instance, while Latinos make up about 40 percent of Californians, they represent 55 percent of COVID-19 cases in the state.

Maximize Longer-Term Benefits

To maximize the longer-term benefits of this funding, we recommend the Legislature consider using a portion to prepare for inevitable future challenges. In addition to addressing preexisting challenges discussed above, below we lay out some specific examples of pandemic-specific issues we think are worth considering.

  • Mitigate “Cliff” of Federal Assistance. The federal government has provided significant assistance to individuals and businesses through rental assistance, expanded unemployment insurance benefits, and the paycheck protection program. At least some of this assistance likely will expire by the fall. We suggest the Legislature use a portion of the federal fiscal relief funds to phase out assistance to individuals and businesses that still might have a diminished ability to find work or operate due to continued public health concerns and the pace of the economic recovery. Similarly, there may be local government agencies—like transit agencies—for which long-term changes are likely due to the pandemic. Using some of the federal fiscal relief funds to help those agencies adjust may be worth considering.

  • Prepare for Service Needs as California Reopens. As public health-related restrictions abate and people resume normal daily activities, there may be a significant increase in demand for certain services. For example, although California Work Opportunity and Responsibility to Kids enrollment currently is at historic lows, the state still could see considerable increases in caseload once other types of federal assistance ends.

  • Plan for Possible Long-Term Pandemic Impacts. While vaccine distribution continues, public health concerns may continue for a variety of reasons including the unwelcome possibility of COVID-19 becoming a seasonal disease like the flu. The state likely will need to continue to conduct vaccine outreach and education, monitor for variants, and prepare for possible future stress on health care and hospital systems. Planning in advance for these possible needs—as well as others—will help the state respond more effectively in the long term to emerging public health needs.