On March 13, the U.S. Treasury Department released data and an interactive dashboard showing how state and local governments have been using the $350 billion in State and Local Fiscal Recovery Funds (SLFRF) appropriated by the American Rescue Plan Act (ARPA). These funds have fueled transformative investments and contributed to a strong recovery from the pandemic recession, and state and local governments should use their remaining SLFRF allocations to rebuild the public sector and support working families.

SLFRF spending by state and larger local governments (cities and counties with a population over 250,000) totaled just over $114 billion by December 31, 2022, an increase of $13 billion in the final quarter of the year. Six states—South Carolina, Oklahoma, Missouri, Tennessee, South Dakota, and Mississippi—have spent less than 10% of their funding. All six have Republican governors and Republican majorities in their legislatures.

One of SLFRF’s main purposes was to allow states to restore their public-sector capacities quickly. There were 376,000 fewer public-sector workers in February 2023 than three years earlier. States should be using their SLFRF dollars to fill open positions and retain experienced employees by increasing the compensation of public-sector workers, one-third of whom are paid less than $20 an hour.

Evidence suggests states that have chosen to invest larger shares of their SLFRF dollars are having greater success in recruiting and retaining state employees in a highly competitive job market. As seen below, states that have spent less than 30% of their SLFRF allocation have seen their state government workforces recover more slowly compared with those that have spent over 30%. States, therefore, have an excellent opportunity to spend their recovery funds in rebuilding the public sector and restoring public services.

The deadline to obligate SLFRF dollars is nearing

While state and local governments have until December 31, 2026, to spend SLFRF dollars, they have to obligate the money—designate it for specific uses—by December 31, 2024. Even though that is still 21 months away, most states will adjourn their 2023 legislative sessions within the next three months, and many states have shorter legislative sessions in even-numbered years. As such, most states have less than 21 months, and some already have less than a year.

While states have spent only 41.8% of their SLFRF allocation, they have obligated 55.4%, meaning the average state is likely on track to obligate its full allocation by the end of 2024. However, Tennessee and Mississippi have obligated less than 10% of their funds, and Missouri, South Carolina, and Idaho have obligated less than 20%. Alabama was on this list as of December 31, but made budgeting decisions on their remaining funds on March 16, though Alabama’s record of SLFRF spending is far from ideal.

State policymakers must not lose sight of the 2024 deadline and take steps now to ensure they can make full use of their fiscal recovery funds.

Local governments must act

It’s not just states that need to make decisions on SLFRF dollars. Local governments (cities and counties with populations over 250,000) have only spent 32.3% of their SLFRF allocations. The variation among cities and counties is even more worrisome. Of the 1,872 cities and counties in the report, 1,040 (56%) have spent less than 25% of their allocation, spending only $6 billion of the total $49 billion they were allocated.

Moreover, cities and counties have only obligated 45.2% of their recovery funds, and this figure hides a more serious problem. Our analysis shows a “tale of two cities” when it comes to obligating funds: a relatively small number have made all their SLFRF spending decisions, while almost 60% of cities and counties have obligated less than half their allocation. The relatively small number of local governments that have made all their spending decisions has pushed the average share of funds obligated to 45.2%, but the median figure is just 40.8%.

In addition, local governments are far more likely than states to spend their money on revenue replacement—making up for lost government revenues during the pandemic—rather than using the funds for equity-enhancing uses in areas such as housing, clean water, public health, or premium pay for essential workers. Revenue replacement is one of the allowed uses of SLFRF dollars, to be sure, but part of what makes SLFRF so important is that it gives cities and counties the chance to make transformative investments they would not have been able to under normal circumstances. Meanwhile, revenue replacement primarily covers services and investments the local government was already going to make.

Revenue replacement accounts for $19.8 billion (62%) of the $32 billion cities and counties have spent, compared with 45% of spending at the state level. Almost one in eight local governments have only spent funds on revenue replacement so far.

Reports from EARN groups around the country strongly suggest that many local governments are treating SLFRF dollars as de facto rainy-day funds. Local governments, though, have a vital role to play in using these funds as intended—to support working families. Through investments in affordable housing, water and sewer infrastructure, and enactment of policies like paid sick leave, local governments can have a significant impact on the lives of their residents. This is especially true in cases where state policymakers have been unwilling to make such investments.

Both state and local governments should seize the opportunity provided by unspent SLFRF dollars. The federal government responded to the pandemic emergency by spending at the scale of the problem. It is now up to SLFRF recipients to use the funds to build upon ARPA’s successes of the past two years.