What You Can (and Cannot) Do with ARP Funding

by | May 17, 2021

This is the first in a two-part series unpacking the details of the significant federal recovery packages for communities. See the second piece on the Endless Frontiers Act here.

By Brad Whitehead

Sometimes regulatory rulemaking is not like watching paint dry

On May 10, the United States Treasury Department issued Interim Final Rules on how local governments can use their share of the recently enacted American Rescue Plan (ARP). Except for lobbyists and C-SPAN aficionados, such rulemaking is usually of little general interest. But this time around, the Treasury guidance is capturing the attention of pretty much anyone with even a passing interest in public policy.

The reason? Big money – with supposedly great flexibility – is on the table. Called the Coronavirus State and Local Government Fiscal Recovery Funds (FRFs), this part of the ARP provides $350 billion to state, county, local governments, and tribal lands across the country in two tranches over two years. In Greater Cleveland, $1.1 billion will be coming our way, with another $331 million flowing to Greater Akron, $167 million to Greater Canton, and $214 million to the Mahoning Valley. The City of Cleveland is the big winner: It will receive $512 million. To put that in perspective, that is over 28% of the city’s $1.8 billion annual operating budget. That is a whole lot of recovery.

Unlike many other parts of the ARP and the CARES Act before it, this legislation was less prescriptive about where and how the money must be used. The statute itself spells out four broad goals:

  • Respond to public health needs and economic damage from the pandemic, including support to households, small businesses, and nonprofits as well as aid to impacted industries
  • Provide premium pay for essential workers
  • Replace lost government revenue and the services that were cut back
  • Invest in necessary water, sewer, and broadband infrastructure

The ARP also explicitly forbids state governments from using the FRFs to offset tax cuts or shore up pension funds.

These seemingly broad parameters have had elected officials salivating and interest groups lining up their wish lists for months.

Treasury guidelines are both narrow and broad depending on the issue

So what do the 151 pages of Treasury guidance say, and what are the implications for Northeast Ohio leaders? A document of that size is clearly full of nuance and detail, but from my perch as an inclusion-oriented economic developer I had seven main take-aways:

  1. The guidance takes a narrower definition of recovery than many had hoped. When the ARP first passed, many civic leaders fervently hoped this part of the statute would form the local foundation for President Biden’s “Build Back Better” agenda with “Recovery” interpreted very broadly so that resources could be used to generate the next wave of innovation and economic growth, especially for legacy cities such as Cleveland and Akron. Others saw promise in revitalizing commercial districts, tackling long-needed infrastructure projects, enhancing public parks, and building new industries. Instead, Treasury has interpreted the ARP primarily as a response to the pandemic. As the guidance itself points out,

    “While the COVID-19 public health emergency affected many aspects of American life, eligible uses under this category must be in response to the disease itself or the harmful consequences of the economic disruptions resulting from or exacerbated by the COVID-19 public health emergency.”

    That is pretty darn explicit. Support to small business is a good example of this narrow definition. Similar to the two iterations of the earlier CARES Act, financial aid is to be provided only to businesses whose revenues have been directly reduced due to the pandemic. The FRFs are about saving businesses at risk of closure, not building the next generation of business or industry. That is great news for the 70% of small businesses, many of them on Main streets and in neighborhoods, who report that the pandemic has had a negative impact on their performance, but it’s disappointing for those seeking to seed a broader transformation and a next wave of business and industry creation.

  2. That said, the FRFs provide governments much greater flexibility for low-income and disadvantaged populations – this is potentially a major step forward for economic inclusion. The Treasury guidance spells out at great length how low-income and disadvantaged populations have been disproportionately hurt by the pandemic. Importantly, the guidance then greatly broadens the ways funds can be used for initiatives focused on helping these groups get back on their feet and prosper. Treasury does this in a couple of steps. First, they single out Qualified Census Tracts (QCTs), which are places where low income and disadvantaged populations are concentrated. Then they note that, by virtue of living in QCTs, people who live in such places have been adversely affected by the pandemic and automatically qualify for a broader set of supports.

    “In assessing whether a household or population experienced economic harm as a result of the pandemic, a recipient may presume that a household or population that…is low- or moderate-income experienced negative economic impacts resulting from the pandemic.”

    They go on to enumerate an expanded set of eligible fund uses including housing, education, behavioral health services, job training and more.

    “In recognition of the disproportionate negative impacts on certain communities and populations…Treasury will presume that certain types of services…are eligible uses when provided in a QCT, to families and individuals living in QCTs, or when these services are provided by Tribal governments.”

    Treasury also offers additional flexibility for recipients to support traditionally disadvantaged businesses without having to show a direct connection to the pandemic. Collectively this increased flexibility is a huge deal for economic inclusion. Local leaders take note. If ever there was a moment to kick inclusive growth plans into high gear, this is it.

  3. Treasury guidance also provides significant flexibility around people-centered initiatives. While the guidance generally takes a narrow view of which businesses and industries can be served, it provides much more flexibility in how governments can design and bundle investments in people – especially for those living in Qualified Census Tracts. Beyond the provisions for essential worker premium pay, the rules permit a score of other vital and high-return “wrap-around” services. Among these are job training, digital literacy assistance, internet access, cost of living assistance, behavioral health services, career navigation, and more. Local workforce experts have been calling for such support for years, and research by the Fund for Our Economic Future and others has demonstrated its efficacy. This guidance should be a strong call for the various workforce partnerships around the region to seize the moment and either start or scale sector-based, integrated plans to get people into jobs that promise family-sustaining wages.
  4. Infrastructure spending is restricted, but exciting opportunities exist to tackle large, pernicious challenges. The FRFs limit local government infrastructure spending to broadband, water, and sewer. Therefore, hopes for infrastructure investments in other areas will have to wait for the potential American Jobs Plan, scheduled for later this year. But for these three issues, the guidelines clearly link the pandemic to the inequities of the digital divide and water quality, and they authorize governments to think expansively.

    “The Interim Final Rule provides these governments with wide latitude to identify investments…that are of the highest priority for their own communities, which may include improvements on privately-owned infrastructure.”

    The guidance specifically lists lead abatement as a covered use for funds. What wonderful news for Northeast Ohio, where digital divide, lead and sewer issues are among our greatest challenges. We are lucky to have strong public-private partnerships addressing each of them. This funding presents an opportunity to accelerate progress by years.

Treasury encourages governments to be collaborative, strategic and transparent

In addition to the “what” of FRF spending, the Treasury guidance also addresses the “how” in several important ways:

  1. Treasury encourages governments not to commit to second-year funding prematurely. As noted, the FRFs flow in two equal tranches. The first round gets released in late May of this year and the second a year later. The Interim Final Rules specifically urge governments not to overcommit early to second-year funding. Instead, it suggests they see how needs evolve over the course of 2021.

    “Treasury believes it will be appropriate for a majority of recipients to adapt their plans as the recovery evolves.”

    This is wise as a general rule, but it feels especially important in Cleveland, where we will elect a new mayor this November. Mayor Jackson and City Council may be tempted to lock in spending now to burnish a legacy, but they have a larger calling to keep powder dry for the next administration. It is fine to discuss and tee up possibilities, but let the next mayor and council decide how to spend the second $255 million tranche and potentially connect it to other ARP funding flows, state money and subsequent stimulus bills.

  2. Governments are also permitted to work through partners. The FRFs explicitly allow local governments to disburse funding with and through nonprofit partners. Northeast Ohio benefits from a rich array of effective organizations and collaborations that can be leveraged for their expertise, capacity, and potential additional funding. Local leaders receiving funding should not resemble jackals at the kill; instead, the FRFs represent a golden opportunity to unleash the collective power of our neighborhoods, civic intermediaries, foundations, and business groups. To mix metaphors, the role of our local government leaders is to serve as orchestra conductors, not first violinists.
  3. The Treasury guidance is not yet clear on whether money can be deployed sustainably, but governments should act this way. A lingering question is whether the FRFs will be a massive, but temporary, shot in the arm or a sustainable source of support to systemic issues. The more than $1.8 billion dollars flowing into Northeast Ohio could be expended as grants and stipends. Such spending would provide a big boost to the economy in the near term. Many civic leaders, however, are pushing for more sustainable approaches that involve the use of revolving loan funds, evergreen funds, and income share agreements in addition to grants. Under such arrangements, dollars would go out on generous terms but then be repaid so that they can be recycled to the next wave of individuals, organizations, or businesses. Hopefully, Treasury will clarify in the coming weeks how funds can be deployed. The fact that the guidelines already permit loan funding for some uses (e.g., business support) suggests Treasury will be receptive to sustainable funding models in other areas such as job training or infrastructure. Here in Northeast Ohio, we know that our challenges require us to be in it for the long haul, so our government leaders should deploy their FRF allocation with the long term in mind.

Setting the stage for even more

Few elected officials will see the magnitude of flexible funding of the FRFs in their careers. How they go about setting priorities and organizing resource deployment will say much about who they are as leaders. The best among them will recognize that a premium must be placed on engagement, inclusion, racial equity, transparency, and financial sustainability. Importantly, the FRFs are but one portion of the larger ARP. As a community, we also can vie for the $5 billion of funds flowing through the state, as well as the many competitive grants that comprise the rest of the $1.9 trillion in the statute. Later this year will potentially come the American Jobs Plan and the American Family Plan. Let us build some good practices now around this piece of the puzzle so that we prosper on an even larger scale in the phase ahead. The very future of our cities and counties may depend upon it.