How Texas Can Leverage Federal Funds Under New ARPA Rules

Last March, Congress passed the American Rescue Plan Act of 2021 (ARPA), a $1.9 trillion dollar stimulus bill to expedite recovery from the economic impact of the COVID-19 pandemic. The U.S. Department of Treasury issued its Final Rule regarding the use of the Coronavirus State and Local Fiscal Recovery Funds (SLFRF) established by ARPA last week. The Final Rule expands flexibility on the use of these funds and offers clarification on the issuance of new debt.

How Texas Appropriated Fiscal Recovery Funds

Texas state and local governments were allocated a total of $26.3 billion from the SLFRF – $15.8 billion to the state and $10.5 billion to local governments. Through the passage of Senate Bill 8 (87-3), the Legislature appropriated $12.8 billion from the state’s fiscal recovery fund, with more than half of the funding going to replenish the Unemployment Compensation Fund. Other notable items included: $306.5 million for emergency infrastructure and resilience projects, $226.2 million for IT and cybersecurity projects, and $150 million for Next Generation 9-1-1 upgrades. A full rundown of SB 8 can be found here.

The Legislature took a conservative budget approach in appropriating these funds by retaining a balance of $3 billion in the state fiscal recovery fund for future use. The expanded flexibility and the $3 billion balance supports the state’s position to address obligations and liabilities next legislative session, or sooner should an emergency necessitate state action. But the Final Rule may disqualify $425 million in state fiscal recovery funds appropriated by the Legislature in SB 8. 

What Has Changed

Under SB 8, $325 million was appropriated for university construction to be financed through the issuance of bonds but the Final Rule states funds cannot be used for the issuance of new debt. SB 8 also placed $100 million into a Trust Fund for the benefit of the Bob Bullock State History Museum, which may violate the spirit of the Final Rule which requires funds to be expended from state accounts by December 31, 2026. 

If the U.S. Treasury finds these appropriations to be in violation of the Final Rule, Texas will likely expend General Revenue funds on these items rather than state fiscal recovery funds, and the $425 million in state fiscal recovery funds will then be redeposited into the state fiscal recovery fund, increasing the fund balance to $3.4 billion. 

How Texas Can Leverage Available Funds Under the New Rule

A few items the Legislature could consider addressing with the remaining funds in the state fiscal recovery fund are: supporting public health officials with the recent surge in COVID-19 cases, addressing the swelling of court docket backlogs, and modernizing information technology across state government.

Local governments in Texas are the big winners from the expanded flexibility authorized in the issued Final Rule which allows local governments to use up to $10 million on government services without justifying their loss of revenue due to the pandemic as previously required by the Interim Final Rule. The Final Rule also expands eligible broadband and water projects. Specifically, local governments interested in expanding broadband access may do so in identified areas of need. Previously, broadband projects were limited to areas that did not exhibit the current federal broadband speed of 25/3Mbps. 

Local governments in Texas are recipients of $10.5 billion in Local Fiscal Recovery Funds, of which 50 percent is expected to arrive in early summer of this year. Local governments should consider using some of these funds to meet matching requirements established in the recently signed Infrastructure Investment and Jobs Act. For example, federal broadband infrastructure funding dispersed by the state requires a 25 percent match from subgrantees and local fiscal recovery funds are an authorized matching source. 

Conclusion

The COVID-19 pandemic upended the global economy, and Texas was not spared. Unemployment hit record levels in mid-2020 and the economy fell into a rapid downturn. The Dallas Fed described the impact as as having a “greater resemblance to a natural disaster than a typical recission.” Federal recovery funds helped soften the blow and speed up recovery, getting people back to work and business back on track. But we still have more to do before we are able to return to pre-pandemic levels. 

While the Final Rule may disqualify certain appropriations made by the Texas Legislature last year, state leaders have significant opportunities to invest federal recovery funds in ways that address long-term issues without creating unsustainable fiscal commitments. 

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