Waning Federal Aid and 2024 State Budgets

As state Governors propose their fiscal 2024 and 2024–2025 budgets, we are starting to see how waning Federal aid may become problematic.

As state Governor’s propose their fiscal 2024 and 2024–2025 budgets, we are starting to see how waning Federal aid may become problematic if not properly planned for. Whether it’s the end of the public health emergency (PHE) or a multi-dimensional crisis facing public schools, work is needed.

The March 2021 American Rescue Plan Act (ARPA) provided $350 billion in State and Local Fiscal Recovery Funds for states, localities, tribal nations, and territories. Of that amount, $195 billion was provided to states through Fiscal Recovery Funds (FRF). The distribution of FRFs was based on each state’s share of unemployed and a minimum allotment of $500 million per state. States have until the end of 2024 to fully “obligate” or allocate their FRFs and until 2026 to complete their spending.

The full impact of ARPA on state budgets and economies may not be fully realized for some time. However, the initial allocation and spending of ARPA funds have already provided significant support to states and their residents as they continue to navigate the ongoing impacts of the COVID-19 pandemic.

Pandemic Related Federal Aid to State and Local Governments

According to the Committee for a Responsible Federal Budget (CRFB), about $885 billion of direct aid has been allocated to state and local governments through various pandemic relief efforts. They include:

• $525 billion from the American Rescue Plan
• $500 billion in grants to state and local governments
• $100 billion from a higher Medicaid matching rate
• More than $200 billion for public schools, and
• Over $70 billion for transit

From 2012 to 2020, the average quarterly disbursement of Federal aid to state and local governments was $535 billion. Looking after that period when pandemic related aid was disbursed, the average nearly doubles to $1 trillion per quarter. However, disbursements have been uneven, with large spikes in quarters when (Coronavirus Aid, Relief, and Economic Security) CARES and ARPA money was disbursed.

Compared to the pre-2020 trend, state and local governments have received an additional $3.5 trillion in Federal aid.

How States Have Allocated Their ARPA Funds

States have until December 31, 2024, to obligate their ARPA funds and until December 31, 2026, to spend them. There have been several analysis done of how these funds are being allocated, but here is a an overview of major categories:

• Public health initiatives: Early on, many states allocated ARPA funds to expand COVID-19 testing and improve vaccination efforts. Funds have also been used to address mental health, substance abuse, and other health issues.
• Economic relief: Aid for local economic recovery and assistance for individuals and businesses impacted by the pandemic.
• Infrastructure: Allocating ARPA funds to invest in infrastructure projects, including broadband expansion, water and sewer system upgrades, and transportation improvements.
• Education: Support for K-12 education, including efforts to address learning loss and provide resources for students and educators.
• Other purposes: States have also allocated ARPA funds for a variety of other purposes, including affordable housing, public safety, and environmental initiatives.

According to an analysis by the National Conference of State Legislatures (NCSL), here is how ARPA funds have been allocated:

Federal Aid and Connecticut’s Higher Education Appropriations

In addition to direct aid to states, ARPA included the Higher Education Emergency Relief Fund III (HEERF III) and provided $40 billion in support to institutions of higher education. Areas of focus have been addressing pandemic-related enrollment declines, supporting specific programs or initiatives, and to address equity gaps.

Last week in Connecticut, University of Connecticut (UConn) students and staff rallied at the state Capitol in protest of the state’s budget. The Governor’s budget proposes $887 million to UConn, UConn Health, and the system’s four regional campuses over the biennium budget (including $100 million in ARPA aid).

While the budget increases baseline state funding by $23 million, the appropriation is nearly $200 million less than the last budget when temporary aid put the allocation over $1 billion. In this budget the state combines UConn and UConn Health into a single budgeted agency with one block grant from its General Fund to emphasize a “one UConn” policy — however, this single block grant is new and will likely reduce transparency since outside observers no longer see the allocation between health and higher education.

Tough Budget Times Ahead

In the face of waning federal aid, states have several challenges and must find ways to balance budgets in out years. This can be particularly challenging for states unevenly affected by the pandemic and its economic downturn. In addition, states may need to make tough choices about where to cut spending.

Waning Federal aid will likely have a significant impact on state budgets in the future, particularly in areas such as education and healthcare.

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