State, Local Governments Hanging on to $100 Billion in Unspent COVID Relief Funds

There was a lot of wasteful spending in the so-called "American Rescue Plan." But nowhere was the $2 trillion in federal funds less needed than in bailing out state and local governments to the tune of $350 billion.

Last October, the Cato Institute published a study showing that fully 45% of that $350 billion had gone unspent. And the reason, said Cato, was that the states didn't need the cash in the first place.

“The new GAO study confirms that the ARPA spending was not needed,” Chris Edwards, chair of fiscal studies at the Cato Institute, told Reason. “By the fall of 2020, it was clear that the states were in good fiscal shape and not facing Armageddon as many policymakers were claiming. They did not need federal handouts.”

Today, $100 billion of the $350 billion appropriated for pandemic aid to state and local governments is still unspent. Much of that $100 billion hasn't even been designated for a specific program or use. And local governments have until 2026 to spend it. 

The politicians can't even find a way to creatively waste the money. To their credit, they tried.

Among other travesties:

• A National Bureau of Economic Research working paper found that "aid distributed to state and local governments had cost taxpayers about $855,000 per job saved," according to Reason.
• “Many states are fiscally mismanaged, and federal bailouts enable them to avoid much-needed discipline," wrote David Ditch and Richard Stern of the Heritage Foundation.
• State tax revenue in the first quarter of 2023 was up 25% over the first quarter of 2020, the last quarter before the pandemic hit. 
• Illinois and several other states used much of their share of the state and local government slush fund to fix their government employee pension system. Other states and localities went on spectacularly wasteful spending sprees, like spending pandemic relief funds on golf courses hard hit by the pandemic.

Reason.com:

According to reports submitted to the Treasury Department and reviewed by Reason, Union County, New Jersey, has committed $929,000 of its federal COVID funds to a pair of county-owned golf courses: Galloping Hill and Ash Brook. That spending will help the courses cover "costs associated with increased use" as a result of "an increase in play at county golf courses due to the COVID-19 pandemic.

"Rather than use COVID funds to backfill golf course losses, cities would be better served by selling them," says Marc Joffe, a senior fellow at the Reason Foundation. "Land in California is quite valuable, and a private entity could probably put the land to better uses and would pay for the privilege of doing so."

The "American Rescue Plan" was sold as money to states and local governments to help them save jobs and recover from the pandemic's economic costs. It did no such thing. Instead, the aid to state and local governments became a "Community Chest" from which politicians funded their pet projects and fixed holes in their budgets.

Is there any way to "claw back" some of that $100 billion? There are several bills before Congress that would try to get some of that cash back. In the budget deal last year between Biden and former Speaker Mike McCarthy, the president agreed to "repurpose" $30 billion in COVID relief funds. It's a good start, but that $100 billion is from just one line item in the ARP.

There are plenty more unspent relief funds that can be tapped and either used to lower the federal deficit or spent somewhere it's actually needed. But don't hold your breath. Democrats are adamantly opposed to the idea and have blocked all efforts to claw it back.