Why are States Flush With Cash Slow to Spend?

Written By: John Foulkes, Senior Legislative Policy Analyst and Jordan Rodell, Legislative Issue Manager


The COVID-19-triggered economic downturn caused a rare bipartisan response from Congress. Not one, not two, but three massive federal aid initiatives were passed to mitigate the crushing financial impact the disease was having on the nation. The Coronavirus Aid, Relief, and Economic Security Act (CARES) of 2020, the American Rescue Plan Act (ARPA) of 2021, and the Infrastructure Investment and Jobs Act (IIJA) injected over a trillion dollars into the economy, propping up state budgets, healthcare systems and targeted investments in the transportation, broadband, and clean energy sectors. Each measure contained spending deadlines to encourage states to act quickly and spend. In many cases, states did—at least initially. The Coronavirus Relief Fund (CRF), the section of CARES that provided state governments flexible funding, has almost been completely allocated and spent. But that was only after a deadline extension. Other relief measures have similarly required their deadlines to be extended.

Despite the initial large-scale devastation of state and local economies, states were not spending quickly. By the time the federal government passed the IIJA, billions of dollars from previous programs had yet to be used. 

Is This a Learned Behavior? The Long History of Leading Economic Bailouts 

A few of the states' reluctance to spend federal dollars can be reasonably attributed to learned behavior. The federal government has a long history of bailing states out when disasters occur, unintentionally encouraging leaders at state capitols to think twice about spending their own resources, knowing that more funds may be coming down the pipeline. In fact, as federal disaster funds are readily available in the case of a catastrophe, most states do not prioritize setting aside money for disaster responses. Even states prone to natural disasters, like California, Texas, Oklahoma, Florida, New York, or Louisiana, have not passed major legislation committing considerable amounts of money to disaster preparedness. Rather, the preparation focuses on creating steps or plans should a disaster strike. 

Looking back at the last major economic crisis, the 2007-08 recession, the federal government stepped in to rescue banks—and states—by ensuring confidence in the financial sector. Congress passed the Emergency Economic Stabilization Act of 2008. The act created the Troubled Asset Relief Program (TARP), which authorized the U.S. Department of the Treasury to buy up to $700 billion in toxic assets from companies, which could then replenish their balance sheets with secure assets. Under the American Recovery and Reinvestment Act of 2009, Congress appropriated $145 billion to help states fill their budget gaps. The stimulus also provided additional payments for highways and other infrastructure, as well as education and programs oriented toward individuals affected by the recession.

It is also important to note that once federal funding does dry up, states could be left holding financial responsibility for the programs federal dollars started, thus leading to further hesitation within state capitols to spend. Many lawmakers are at odds with each other when it comes to expanding government assistance programs or providing tax relief due to being stuck with the tab once federal funding does end. However, given the historical problem the COVID-19 pandemic presented, why were states not quicker to provide needed resources to their communities?

Delay Now, Spend Federal Dollars Later

The CARES Act provided a lot of money with few limitations; ARPA provided more money with a few more strings; IIJA still provided more money and more strings. States that waited to spend initial appropriations achieved the added flexibility of using those stimulus funds to support infrastructure and other capital projects. 

For example, Oklahoma Governor Kevin Stitt (R) called for a special session starting on June 13, after the regular session adjourned, to address the unspent funds leftover from ARPA. Having been left out of budget discussions, Stitt vetoed many budget items while calling on lawmakers to do more to address the rising inflation. The Governor is asking Legislature to cut income tax rates and eliminate the state's grocery tax. But whether lawmakers will consider his calls remains uncertain.

Similarly, South Carolina has been slow to allocate its share of ARPA's Fiscal Recovery Funds (FRF), which were created to address the COVID-19 pandemic's effect on the states' economies and public health systems. The FRF program provides state governments tremendous flexibility, and South Carolina has purportedly waited to allocate the funding in order to place the federal dollars within its 2022 budget cycle. Governor Henry McMaster's (R) 2022-2023 Executive budget recommendation accordingly highlighted the administration's recommendation for ARPA and IIJA allocations. 

Furthermore, ARPA provided broadband funding that states could access immediately. ARPA's Capital Projects Fund (CPF) contains $10 billion for broadband expansion. States must complete a Treasury Department planning process by September 24 to receive their share of this funding. But as of April, only 24 states have confirmed plans to use CPF funding for broadband expansion. According to The Pew Charitable Trusts, "state legislatures are choosing not to use CPF for broadband because they are waiting on other, potentially larger pots of federal money that may be months away rather than seizing this important opportunity now." The "larger pot" is the $65 billion Broadband, Equity, Access, and Deployment (BEAD) Program within the IIJA. 

Since the CPF was also authorized to be used to support a state's recovery from the COVID-19 public health emergency, states were able to pass on the opportunity to expand broadband and divert this funding for COVID-related needs. Those states are now waiting on the BEAD program funding to hit their state coffers. States that waited to use their COVID-related stimulus funding have, in a way, benefitted, as those statehouses now hold a greater ability to fund both infrastructure wish list items and needed expenses. In the case of other programs, states could use ARPA funds to supplement IIJA projects or cover expenses that IIJA funds would not.

The Bureaucratic Rulings That Setback Stimulus Spending

Though state legislators are certainly apprehensive in doling out finite COVID-related stimulus dollars, they are not entirely to blame for the delay in dispersing much-needed funding to their jurisdictions. Part of this problem stems from many state capitals waiting for spending guidelines from the U.S. Treasury Department. For example, though ARPA was signed by President Biden on March 11, 2021, the Treasury did not release interim regulatory rulings for the Act's SFRF funding until May, with the final rulings being released in January 2022. Similarly, the interim ruling for the CARES Act's CRF funding was released in May 2021, two months after President Trump's signing, with the final ruling being provided in January 2022. When Treasury guidelines were finally released, states reported that the guidance was "incomplete and conflicting." Many states, such as Indiana, did not spend their CRF funding until their plans were reviewed and approved by the Treasury Department to avoid the potential for future recriminations. As a result, Indiana did not appropriate the bulk of its CRF funding until October 2020. 

Certain states did not have the bureaucratic infrastructure to disperse the funds as quickly as the federal government preferred. Alabama, for example, planned to use CRF funding to create an online learning program in the state. However, the program was discontinued when state officials learned they would not be able to carry out the program in time for the CRF spending deadlines. Legislators and state officials also expressed concerns that the proliferation of federal funding will worsen already concerning inflation. 

The difference in program requirements for CARES and ARPA, compared to IIJA, also caused delays. CARES and ARPA funding placed broad requirements on the use of their stimulus funds. Requirements to access IIJA funds were relatively more stringent and, in some cases, will take several years to complete. 

Infrastructure Funding Reporting and Engagement Service

This multi-year spending marathon is a uniquely complicated problem, and any organization hoping to track or leverage the federal funds will be met with a challenging and substantial undertaking. Competing priorities in the states and the deluge of funds, programs, and information surmises to create a muddled image of what is happening on the ground. Let Stateside help you track and leverage infrastructure funding opportunities through our expertly guided tools and services.