State and local governments have until December 31, 2024, to “obligate” the State and Local Fiscal Recovery Funds (SLFRF) they received as part of 2021’s American Rescue Plan Act. Community partners and other stakeholders are concerned that some recipient governments will not obligate their full allotment of funds, perhaps through misunderstandings of the rules. With time running short, it is imperative that advocates take steps to encourage governments in their area to make certain they have obligated the funds correctly.

State and Local Fiscal Recovery Funds have helped fuel today’s strong economy

State and local governments received $350 billion in funding through SLFRF. Unlike most federal money, which is routed to cities and counties through state agencies or the state legislature, the funds were given directly to every state and local government. The rules put out by the U.S. Treasury Department gave those governments great flexibility to make spending choices that met their particular needs.

The result has been myriad instances of innovative, equity-enhancing uses of SLFRF—from providing premium pay for frontline workers to building community-run grocery stores in food deserts to protecting tenants from unjust evictions with the right to counsel. These investments have helped boost our economy: Whereas it took nearly a decade to restore levels of public services following the Great Recession, state and local governments have already fully recovered the jobs lost during the pandemic.

The looming obligation deadline and what it means

State and local governments will be “required to return to Treasury any SLFRF funds that have not been obligated by the obligation deadline of December, 31, 2024,” according to Treasury’s rules. They have until December 31, 2026, to spend their allocated SLFRF.

In conversations with advocates, community organizations, labor unions, stakeholders, and policymakers, there are widespread concerns that many recipient governments will not make this obligation deadline, either because they may not realize the full meaning of “obligation” or because they will not act quickly enough.

Obligation means “an order placed for property and services and entering into contracts, subawards, and similar transactions that require payment.” That is to say, obligating funds requires taking specific steps to ensure the money is used as intended, and that those decisions are memorialized in a contract or subaward or some other documented fashion. Passing a budget that allocates SLFRF to a specific purpose—on its own—is insufficient to constitute obligation.

Treasury recently clarified the kind of activities that count as obligation.1 In addition to signing contracts, the following are examples of how else funds might be obligated:

• Interagency agreements that meet certain requirements can be considered obligations similar to a contract or subaward.
• Personnel whose salary is paid under an eligible use of SLFRF (for example, state employees overseeing affordable housing projects) will have their full salaries and benefits through December 31, 2026, treated as obligated, so long as the position was first filled before the obligation deadline.
• Money allocated for reporting and compliance, and other related costs of administering SLFRF, will be considered obligated if they comply with certain requirements.
• Additionally, if a government properly obligates funds and then finds after 2024 that they cannot use those funds for that purpose, they may choose to reclassify that money to other projects obligated before the deadline.

These important clarifications are intended to provide additional flexibility to recipient governments. However, there are still concerns that state and local governments may mistakenly believe that they have obligated funds when they have not according to these rules.

The most likely way this could happen is a government considering itself to have obligated the funds by passing a budget that allocates the money to a specific purpose. Budgeting, on its own, is not obligating though, and if the government does nothing further, they will be required to return the money in 2025.

The public compliance reports also show other instances where governments may not have accurately obligated funds:

• Water, sewer, and broadband projects are allowable uses of SLFRF. It is extremely rare for the costs of such a project to be in even thousands. If a government, therefore, reports obligating (say) $500,000 for an infrastructure project, it is entirely possible that the actual contract they sign to build the project will be somewhat over or under that number. If it is under that originally obligated dollar amount, the difference will need to be re-obligated before December 31.
• Some spending projects have appeared in compliance reports since the end of 2021 as budgeted, but no funds have been obligated or spent yet. This may reflect projects that made sense in 2021 but are no longer needed, in which case those funds must be obligated for another project.
• There may also be situations where a third party has been slated to receive SLFRF to carry out a project on the recipient government’s behalf, but is no longer able to take on the associated work. It is important that such instances be identified so that the funds may be re-obligated.

Advocates should ask pointed questions and press their case

Those examples are necessarily vague and open-ended, because the public reports on SLFRF obligations and expenditures simply do not provide enough information to allow outside observers to tell the difference between properly obligated funds and problematic cases. Moreover, the public data on SLFRF usage lags by as much as 15 months, depending on the size of the government and how fast the Treasury Department can make reports publicly available. 

It’s also possible that the recipient government might not know what they have or have not obligated, irrespective of the timeliness of its reports. Last month, for example, Connecticut legislators found that they were unable to get accurate information from the state’s budget director on the amount of SLFRF remaining, who replied “I just don’t know.” The time is fast approaching when that answer may cost state and local governments millions or even billions of dollars.

As such, it is important for advocates to ask questions of their state and local elected officials, and for policymakers to take an active interest in the details of SLFRF spending. It’s quite possible that complete answers may not be available right away, but it’s important to be persistent and continue advocating for equitable uses of SLFRF.

There are many important uses for SLFRF. In addition to water, sewer, and broadband spending mentioned above, governments can use these funds to offer hiring and retention bonuses to fill vacancies in public employee ranks. They can and should raise public-sector wages. One-third of state and local government workers are paid less than $20 an hour, and 15% are paid less than $15 an hour. While the public sector has smaller Black-white and Hispanic-white pay gaps than the private sector, Black and Hispanic employees are still disproportionately represented among the lowest-paid jobs, which also employ a disproportionate share of women workers.

These recovery funds can also build affordable housing, rebuild public health departments, and support ongoing COVID vaccination efforts. If governments are worried about missing the obligation deadline while trying to implement overly complex projects, they can follow the lead of cities like St. Louis, which used $5 million in SLFRF for a pilot program for universal basic income for 9,300 poor families. An analysis of the program shows that 80% of the recipients were Black and 71% were women, suggesting that the program not only helped recipients secure essential needs but also likely helped combat pervasive racial and gender wealth gaps.

President Biden and Congress made the right choice in giving state and local governments maximum flexibility in the American Rescue Plan Act. It is a model that the federal government should use in future crises. Advocates, policymakers, and other stakeholders need to do their part to help this flexible model be successful by making sure every recipient government makes use of the funds it has received.

Note

1. The new clarifications about obligation are found in section 17 of the FAQ document linked here, beginning on page 94.