December 2, 2022

DS Duke

Global Business In World

New U.S. Treasury final rule supports state and local spending for an equitable economic recovery

8 min read

The U.S. Department of the Treasury last week released its final rule for the $350 billion in State and Local Fiscal Relief Funds (SLFRF) provided by the American Rescue Plan Act (ARPA). This rule provides clarity to states and localities, including tribal and territorial governments, on what they can do with the substantial federal resources made available to them through the ARPA. The rule also encourages state and local governments to spend the fiscal relief rapidly and directly, prioritizing economic recovery and equity.

This final rule replaces the interim final rule that has been in place since May 2021, and in this final guidance from Treasury, three new elements stand out. First, the rule expands governments’ ability to use the funds to hire and retain public-sector employees. Second, the rule provides new options to assist low-income workers and families dealing with the economic impact of COVID. Finally, the rule recognizes “the disproportionate impact of the pandemic on people of color,” and adds additional uses for ARPA funds to address inequities exacerbated by the pandemic.

The $350 billion, passed as part of the American Rescue Plan signed into law by President Biden in March 2021, is designed to help state and local governments mitigate the public health and economic impact of COVID. More than $200 billion has already been distributed, with the rest being disbursed starting in May of this year. Recipient governments can use the funds for many purposes, so long as they fall under one of these broad categories:

  • Fighting the pandemic
  • Addressing the economic impacts of the COVID pandemic
  • Replacing lost revenue for state and local governments
  • Providing premium pay for essential workers
  • Strengthening water, sewer, and broadband infrastructure

The final rule was developed after reviewing hundreds of public comments, including comments from EPI. While it does not go into effect until April 1, Treasury has indicated that state and local governments can begin using the new rules immediately if they choose. Note: Rulemaking is a regular part of the implementation of major legislation. Rules provide greater specificity and set the parameters under which recipients of funds can use them (see this useful primer here). Treasury can seek repayment of funds spent in a manner inconsistent with the final rule.

Restoring public-sector capacity

The final rule greatly expands the ability of state and local governments to hire and retain public-sector employees. Public employment has not only declined abruptly since the beginning of the pandemic, it has also never fully recovered from the huge job cuts following the Great Recession more than a decade ago. Women and Black workers are typically hit hardest by public-sector jobs cuts, contributing to the ongoing gaps in wages and employment.

The interim final rule only allowed recipient governments to hire staff in order to achieve the same employment levels they had in February 2020. However, as we noted above, many state and local governments still had employment shortfalls in February 2020 relative to pre-Great Recession trends. To reach truly adequate levels of staffing—particularly when COVID mitigation places huge additional demands on schools and public agencies—EPI recommended that Treasury allow governments to use ARPA funds to hire at a level 5-10% above the pre-COVID baseline. The final rule does this, allowing recipients to increase payrolls to 7.5% above the pre-pandemic level. It also allows the use of ARPA funds to offer retention incentives and other forms of extra compensation to keep employees from moving to different jobs, which is important as we are in one of the most fluid job markets we’ve ever seen.

There are still 900,000 fewer public-sector jobs compared with before the pandemic. Nearly two-thirds of the job losses are in state and local governments—and that number is only worsening. It may seem beside the point to allow governments to exceed pre-pandemic levels when they are so far below, but this is where flexibility can be helpful. In the final rule, a new standard allowance of $10 million further supports smaller local governments to calculate revenue loss and spend this amount on government services. If a state government, for example, isn’t able or willing to restore public-sector jobs and services, now cities and counties have the chance to use ARPA funds to cover the gaps in public services. The devastation of the pandemic has shown all too clearly that the public sector needs to be strengthened, and the new rule will help.

More options to help low-income workers and their families

COVID has been especially hard for those who were in dangerous situations prior to the pandemic. Low-income workers are less likely to have been vaccinated, are more likely (even if vaccinated) to have to stop working to care for someone else with COVID, and often work in dangerous occupations that increase their risk of becoming ill.

Direct economic assistance to low-income workers is a simple and effective way to support them through the ongoing economic shocks of the pandemic. The final rule expands options already available to policymakers. For example, they are now allowed to use ARPA funds for financial services to the “unbanked and underbanked,” which will make it easier to help those without regular access to our financial system.

The rule also expands the ability of governments to help low-income families with health insurance costs. While the interim final rule only allowed the use of ARPA funds to help with the costs of COVID treatment, the final rule allows for funds to be used for health insurance deductibles, co-pays, or premiums of impacted households, even if those costs were not directly related to COVID.

Strengthening water, sewer, and broadband infrastructure, and ensuring equitable access to those jobs

Additionally, the final rule expands eligible uses for investments in water and sewer infrastructure, including lead remediation and water quality testing projects needed in schools and child care facilities. The range of eligible stormwater management projects has grown, which will help communities address the increasing stress on water and sewer infrastructure caused by long-standing underinvestment and the impacts of climate change.

The final rule also further broadens and clarifies eligibility for broadband infrastructure investments and continues the interim final rule’s recommendation that contracts for major projects incorporate project labor agreements (PLAs), community benefit agreements, local hire provisions, or prevailing wage standards to ensure public spending helps create equitable access to quality jobs. State and local governments need to set strong labor standards to ensure that water, sewer, and broadband infrastructure projects funded by ARPA dollars provide good jobs at good wages. Worker power is an important part of safely exiting the pandemic.

Undoing the pandemic’s disproportionate impact on people of color

The pandemic has only heightened existing racial inequities. Black women make 11% to 27% less than white men in essential jobs like education, medicine, and child care, and Black and Hispanic workers are less likely to be able to telework. While the 2020 CARES Act and related legislation helped mitigate the worst economic impacts of the pandemic, racial gaps in wages and employment are stubbornly persistent, with Black workers more likely to lose their jobs and less likely to return to work, as the economy has ebbed and flowed.

The final rule has expanded the allowed uses of funds to help households and communities disproportionately impacted by the pandemic. A key area is housing. As Harvard’s Joint Center for Housing Studies has shown, Black and Hispanic renters face a greater threat of eviction during the pandemic, with the risk especially greater among older renters of color.

The most recent Census data show that 11% of all renters are not at all confident in their ability to pay rent. That number increases to 16% of Black renters and 17% of Hispanic renters. The final rule expands allowed uses of ARPA funds to increase rental assistance, relocate families to neighborhoods with higher economic opportunity, and improve vacant and abandoned properties to create more affordable housing.

The rule also confirms the interim final rule’s protections for those experiencing housing insecurity during the pandemic. More programs will be allowed like the one in Kansas City, for instance, which used ARPA funds to provide legal counsel to all tenants facing eviction. Secure housing leads to better health, educational, and employment outcomes, and state and local governments should make it a high priority as we continue to struggle with the Omicron variant.

Eliminating obstacles to premium pay for essential workers

The final rule also expands allowed uses of premium pay (often called hazard pay) for essential workers. Premium pay gives policymakers an option to address a four-decade pattern of increasing income inequality that is leaving Black and Brown workers further behind. Workers of color are far more likely to be employed in the front-line occupations that are eligible for premium pay. Those working in jobs where they are exposed to COVID-19 every day are more at risk of contracting the virus and spreading it to their families and loved ones.

State and local governments may have been hesitant to provide premium pay because they were not sure who was eligible to receive it, but the final rule should dispel that uncertainty. There is a list of occupations eligible for premium pay, covering health care, food service, education, logistics, and other parts of our economy that we all discovered were truly essential these past two years. The steps needed to determine if eligible workers perform “essential work” are easy to understand and leave little room for error.

Additionally, the final rule clarifies that recipients of premium pay should be earning at or less than 150% of their state or county’s average annual wage and should be non-exempt employees under the Fair Labor Standards Act. Premium pay to eligible workers not meeting those requirements will require written justification to the Treasury Department.

So far, only a few states have considered premium pay for essential workers. More should, and local governments ought to do so as well.

State and local governments should use fiscal relief funds to boost the recovery

The final rule should eliminate any remaining uncertainty on the part of state, territorial, tribal, and local governments about what are and are not allowed uses of ARPA funds. Now is the time to spend those funds. Almost half the dollars allocated to states in 2021 remain unspent, and the rest of the $350 billion will be coming soon. By leaving ARPA dollars unspent, state and local governments will not help end the pandemic, will not strengthen their states’ economies, and will not help address inequities.

Policymakers should engage community groups, workers, and families in need, and start getting these funds to the people and places where they’ll have the greatest impact.

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