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Congress is headed toward a fourth COVID-19 relief package – and arguably the first one directly addressing state and local governments’ pandemic-induced fiscal crisis. As it designs this package, it should keep in mind a three-part framework.
In the Great Recession, federal policymakers debated which alliteration should guide their stimulus efforts: Should it be timely, targeted, and temporary or substantial, speedy, and sustained? In the end, a combination of these methods won out plus a third, piecemeal approach that was “opportunistic, extended, and under the radar.”
Today, at the risk of continuing the alliterative trend, Congress should make state and local government aid in the new COVID relief bill: fast, flexible, and formula-driven.
First, it will have to decide the right amount to spend. House Speaker Nancy Pelosi (D-CA) says states and localities need $1 trillion to counter the fiscal burden of the pandemic. These governments are facing revenue losses on the order of 20 percent just as record breaking unemployment is straining Medicaid, Unemployment Insurance, and other programs.
The nation’s governors and mayors each say they need about $500 billion. Past experience suggests states will need $650 billion while local governments will require more on top of that. But, realistically, Congress may end up allocating a total of about $500 billion — halfway between Pelosi’s $1 trillion and McConnell’s zero.
How should lawmakers think about directing that aid?
“Fast” suggests COVID fiscal relief should build on programs that already exist. In its 2009 Recovery Act cost estimate, the Congressional Budget Office flagged speed as an issue in delivering that relief. Creating new programs takes time as seen with, well, loans.
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) scored well on “fast” by increasing funding for K-12 education, higher education, and transit based on existing formulas. Virtually any existing formula-based federal grant program could be similarly “dialed up” in the next legislation.
Alternatively, payments could be population-based as under the CARES Act’s $150 billion Coronavirus Relief Fund. Tying relief to population may not precisely target the neediest places, but it is fast both in getting through Congress and getting funds out the door ($139.6 billion was spent by the end of April).
“Flexible” means states should be able to direct funds to where they’re most needed. The most flexible kind of relief would take the form of General Revenue Sharing as occurred in the 1970s and 1980s. However, that program labored under an overly complex allocation formula and was never very popular in Congress.
The next best thing may be what the CARES Act’s predecessor —the Families First Coronavirus Response Act – and the 2009 Recovery Act did by upping the federal matching rate for Medicaid by 6.2 percentage points. The Recovery Act also made payments retroactive to October 2008.
Further boosting Medicaid reimbursement would direct relief to a part of states’ budgets expected to grow because of COVID. And, because Medicaid is states’ single largest budget item (including the already-substantial federal contribution), this also frees up state funds for other uses as long as states agree not to cut eligibility and other standards. Block grants for K-12 or higher education could achieve the same purpose.
“Formula-driven” means state and local aid should be tied to local economic conditions. For example, it could turn off when state or national unemployment rates fall to some threshold level over a specified period of time. The Recovery Act also included an incremental Medicaid boost based on local unemployment rates.
Tying fiscal aid to economic conditions would ensure that aid does not expire too quickly, as it did in the Great Recession. It would also address so-called “moral hazard” concerns, or worries that jurisdictions would deliberately underfund their pensions or rely on unstable revenue sources to qualify for future assistance. Using easily observed, difficult to change characteristics – such as unemployment rates or prior year revenues– is a well known remedy to such incentive problems.
It’s understandable that many are focused on the politics of state and local fiscal relief. But it’s time for action. The three Fs – fast, flexible, formula-driven – provide a valuable framework for moving forward consistent with long-standing federalist principles.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.
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