States' use of ARP flexible funds should prioritize a robust and equitable pandemic recovery

Joo Ning Lim
Feb 14, 2022
Many states, along with Washington, D.C., and Puerto Rico, have used their federal Fiscal Recovery Funds (FRF) to respond to the pandemic and address long-standing barriers and inequities. However, too much has gone for things unrelated to responding to the pandemic or building for a more equitable recovery, according to a report by the Center on Budget and Policy Priorities (CBPP). 

CBPP offers the following recommendations for states to make the most of the remaining fiscal recovery funds:  
  • States should prioritize investments that strategically address systemic racial and economic inequities and support an equitable recovery. 
  • Given that more states are now experiencing a stronger budget outlook, policymakers should spend their remaining funds in ways that directly meet ARP goals, rather than replacing state revenues.  
  • Fiscal Recovery Funds should not be used to replenish states’ unemployment insurance trust funds or offset tax cuts, as these policies do not directly contribute to pandemic relief or support communities that continue to be harmed by the pandemic’s economic impacts. 

How have states used these ARP dollars? 

Fiscal Recovery Funds (FRF) are one of the ways the American Rescue Plan provided additional resources to states and localities to address health and economic impacts caused by the COVID-19 pandemic. The U.S. Treasury Department explicitly encourages states to focus on those most affected by the pandemic and to respond to long-standing structural inequities.  

While most states have made significant progress in spending these recovery funds, they still must make important decisions for the remaining $87 billion.  

CBPP argues that federal funds should prioritize investments that address gaps in basic services and supports to families and communities. These investments should also prioritize low-income people and Black, Indigenous, and people of color (BIPOC) communities — those who were hardest hit by the pandemic — in order to work towards a more just and equitable recovery.  

As of late December, 2021, 42 states along with Washington, D.C., and Puerto Rico, have collectively allocated 56 percent, or $111 billion, of the $198 billion FRF provided to them. This funding was distributed to states based on their share of unemployed people and the minimum allotment of $500 million per state. Four states – California, Indiana, Maine, and Montana – have spent all of their fiscal recovery resources.   

CBPP’s analysis provides a breakdown of states’ allocations by category and summarizes three main buckets of states’ spending. They find that while some states have taken this opportunity to respond to the pandemic’s effects and make positive steps forward, unfortunately, a significant portion of allocated funds have failed to meet these priorities.   

  • Directly addressing long-standing racial and economic inequities that were worsened by the pandemic. Many states have used FRF to meet the intended goals of the American Rescue Plan: to help those who were disproportionately affected by the pandemic and address racial and economic inequities. Some examples are expansion of public health services and investments in affordable housing, food assistance, immigrant aid, and education. New Jersey and Connecticut supported students affected by the pandemic, while states like Washington and Illinois expanded services and provided financial support to immigrants. Some states have made transformative investments to address long-standing inequities. States like California, Maryland, Colorado, and Illinois reformed and expanded state services to address gaps and barriers faced by many low-income and BIPOC communities. California invested $540 million to expand behavioral health and youth mental health services, while Maryland made a groundbreaking investment in education with a focus on addressing racial and economic disparities in its Blueprint for Education Reform initiative. Investments in other states include supporting policing alternatives, expanding mental health support, investing in child care, and raising salaries for workers at behavioral health facilities – who are disproportionately low-income and BIPOC. These investments directly address the harmful impacts of the pandemic and take states one step further towards a more robust and equitable recovery.   
  • Replacing state revenues that fell below projected levels due to the pandemic and recession. One of the FRF’s stated purposes is to replace lost state revenues to avoid cuts in state-funded services and support state economies. Minnesota is one of several states using a significant share of its FRF funds for this purpose. While replacing lost revenue is a straightforward way to support state services and economies, it was more urgent at the initial uncertain stages of the pandemic. In Minnesota, actual state revenue loss was much less than initially anticipated. Entering the 2022 budget season, many states are in stronger financial situations and may no longer need revenue replacement. Instead states should prioritize spending their remaining FRF dollars on addressing pandemic-induced hardships and building a stronger and more equitable recovery.  
  • Unrelated expenditures that do not meet the goals of the American Rescue Plan. Some states have used FRF funds for expenditures that do not contribute to pandemic relief or an equitable recovery. Seventeen states have used these funds to refill their unemployment insurance (UI) trust funds. These efforts benefit employers, as normally states refill their trust funds over time through increased employer UI taxes. In contrast, only a few states made improvements to their UI systems to benefit workers, such as by extending the eligibility period for workers to receive benefits or modernizing information systems to increase the number of qualifying applicants. Most states already have effective systems to replenish their UI trust funds; using FRF for this purpose does not directly address structural inequities or improve unemployment services for workers. A handful of states have used FRF allocations for infrastructure projects unrelated to the pandemic like highway construction or transportation projects, including Florida, Colorado, Louisiana, and Washington; Alabama used $400 million of its FRF allocation to build two new prisons. Such expenditures fail to respond directly to the harmful effects of the pandemic and take resources away from states’ ability to invest in equitable policies. 
As Minnesota enters the 2022 Legislative Session, policymakers must make important decisions on how to spend the state’s remaining $1.2 billion in flexible American Rescue Plan (ARP) funds ($250 million of which they already agreed should go to frontline workers), along with the historic surplus projected in the November 2021 Budget and Economic Forecast. As a state, we have a tremendous opportunity to make transformative investments that ease the challenges and harm Minnesotans, their families, and their communities continue to endure, and seriously address racial and economic inequities exacerbated by the pandemic.