State and Local Governments Harness Federal Funding

Many unemployed workers received greater-than-normal unemployment benefits in 2020. The money for those benefits was part of the massive fiscal policy response from the federal government, which Bill Dupor and Fernando Martin explain. Much of that fiscal effort was funneled through state and local governments.

By Bill Dupor and Fernando M. Martin

Early in the pandemic, economists and policymakers recognized the need for a quick and large government response.See St. Louis Fed President James Bullard’s “Expected U.S. Macroeconomic Performance during the Pandemic Adjustment Period,” On the Economy blog, March 23, 2020; and Fernando M. Martin’s two-part series, “Economic Realities and Consequences of the COVID-19 Pandemic,” Economic Synopses, March 30, 2020. And, unlike the federal response to the 2007-09 recession, this federal response was indeed quick: Congress passed four measures in March and April 2020, with a total budget impact of $2.4 trillion, much of which was spent within the fiscal year.The U.S. government’s fiscal year begins Oct. 1 and ends Sept. 30 of the subsequent year; it is designated by the year in which it ends. Budget figures are taken from the Congressional Budget Office. See also Fernando M. Martin’s “Financing the U.S. Response to COVID-19,” On the Economy blog, Dec. 1, 2020. The largest of these measures was the CARES Act. The following table provides a summary.

Federal Money Flows to State and Local Governments

The CARES Act provided over $300 billion to federal agencies, much of which flowed through state and local governments. Funding to combat COVID-19 came in the form of several specific federal grants-in-aid to state and local governments. For example, $150 billion went directly to state and local governments for COVID-19-related expenses through the Coronavirus Relief Fund.See the U.S. Treasury Department’s “The CARES Act Provides Assistance for State, Local, and Tribal Governments.” States directed federal funding through their own distribution systems, administering (among other programs) expanded unemployment benefits and using additional Medicaid financial assistance (as shown in the table).

Although the CARES Act provided state and local governments with aid to combat COVID-19, there was no general aid to patch state and local government revenue shortfalls caused by the recession.A December 2020 study estimated the combined shortfalls in state and local government revenues would equal $300 billion from April 2020 through June 2021. That same month, the federal government enacted an additional $900 billion fiscal package; it did not include general purpose aid for state and local governments. In the second quarter of 2020, combined state and local government taxes for property, sales and gross receipts, and income taxes fell by 16.5% relative to the same quarter of 2019.

State and Local Coffers Saw Initial Boost

The increase in grants-in-aid from the federal government actually boosted total receipts. Combined with a slowdown in their expenditures, state and local governments saw net savings during the second quarter of 2020. (See the figure below.) Note, however, that these savings may not be sufficient to cover expected losses in the remainder of the current fiscal year (which ends in June 2021 in most jurisdictions). In addition, the fiscal burden of the pandemic has varied greatly across states and municipalities.

The CARES Act also authorized the Federal Reserve and the U.S. Treasury to establish a Municipal Liquidity Facility, among the other so-called 13(3) facilities. It allowed large municipal authorities and governments of states and larger cities to borrow directly from the Fed. Unlike the Paycheck Protection Program, however, the act required that these loans be repaid. In the end, there was very little borrowing at this facility, although some have argued that the program’s existence helped stabilize private municipal markets.See testimony by Kent Hiteshew, a Federal Reserve official, before the Congressional Oversight Commission, “Municipal Liquidity Facility,” Sept. 17, 2020. For a more general overview, see Fernando M. Martin’s “The Impact of the Fed’s Response to COVID-19 So Far,” On the Economy blog, June 16, 2020.

State and local governments closed 2020 facing an uncertain financial outlook. The course of the virus (with its associated monetary costs and impact on tax receipts) and the extent of additional federal support will play key roles in 2021. Given the large footprint these governments and the programs they administer have on the economy, this evolving situation merits continued close monitoring.

Notes and References

1. See St. Louis Fed President James Bullard’s “Expected U.S. Macroeconomic Performance during the Pandemic Adjustment Period,” On the Economy blog, March 23, 2020; and Fernando M. Martin’s two-part series, “Economic Realities and Consequences of the COVID-19 Pandemic,” Economic Synopses, March 30, 2020.
2. The U.S. government’s fiscal year begins Oct. 1 and ends Sept. 30 of the subsequent year; it is designated by the year in which it ends. Budget figures are taken from the Congressional Budget Office. See also Fernando M. Martin’s “Financing the U.S. Response to COVID-19,” On the Economy blog, Dec. 1, 2020.
3. See the U.S. Treasury Department’s “The CARES Act Provides Assistance for State, Local, and Tribal Governments.”
4. A December 2020 study estimated that the combined shortfalls in state and local government revenues would equal $300 billion from April 2020 through June 2021. That same month, the federal government enacted an additional $900 billion fiscal package; it did not include general purpose aid for state and local governments.
5. See testimony by Kent Hiteshew, a Federal Reserve official, before the Congressional Oversight Commission, “Municipal Liquidity Facility,” Sept. 17, 2020. For a more general overview, see Fernando M. Martin’s “The Impact of the Fed’s Response to COVID-19 So Far,” On the Economy blog, June 16, 2020.

Related Resources

• On the Economy: How Quickly Does Fiscal Policy Get Implemented?
• Economic Synopses: Possible Fiscal Policies for Rare, Unanticipated, and Severe Viral Outbreaks
• Regional Economist: How COVID-19 Has Affected the Municipal Bond Market