Stimulus for States and Localities - $100B in New Funds and Future Prospects

Published: December 28, 2020

Administration TransitionArchitecture Engineering and ConstructionCoronavirus (COVID-19) PandemicEducation (Higher)Education (Primary/Secondary)Information TechnologyProfessional ServicesTransportation

President Trump signed into a law a new $900 billion round of stimulus funding with significant impact on the state, local, and education (SLED) market.

Analyst's Takes

  • The more than $100 billion in SLED stimulus included in the latest package--especially the portion for K-12 education--should not be dismissed as inconsequential.
  • Chances for new, unrestricted fiscal aid to the SLED sector are dim.
  • Robust SLED revenue recovery and steep employment reductions have reduced the need for unrestricted fiscal aid.
  • Additional SLED stimulus will be discussed after the Biden inauguration.

President Trump signed into a law a new $900 billion round of stimulus funding with significant impact on the state, local, and education (SLED) market.  First, it extends the deadline for SLED entities to spend various stimulus funds through 2021.  Second, it provides some supplemental infusions to previous rounds of funding as follow:

  • $54 billion for K-12 schools; this supplements the $12.9 billion in funding allocated as part of the CARES Act.
  • $23 billion for colleges and universities, including $1.7 billion set aside for minority-serving institutions and roughly $1 billion for for-profit colleges; this supplements the $14.25 billion in funding allocated as part of the CARES Act.
  • $4 billion in discretionary funds to the Governor’s Emergency Education Relief Fund, including $2.7 billion for private schools; this supplements the $2.9 billion in funding allocated as part of the CARES Act.
  • $14 billion for transit systems and $2 billion for bus systems; this supplements the $22.5 billion in funding allocated as part of the CARES Act.
  • $10 billion for highways (roads and bridges); this supplements the $13.6 billion added to the Highway Trust Fund as part of the October, 2020, extension of the Fixing America’s Surface Transportation (FAST) Act, which runs through federal fiscal year (FFY) 2021.

NOTE: All CARES Act funding figures above exclude allocations to territories and tribal governments.  All new funds will be allocated using the usual formulas for these programs or as modified by the CARES Act.

While this funding does not include general fiscal relief, it nearly triples the CARES Act support for K-12 education and shores up critical parts of the market that are not funded by state and local general revenues.  Transit systems are reliant upon fares from ridership, which was declining before the pandemic and is down as much as 70% since the outbreak.  Highway funds are collected from gas taxes which have declined due to remote work arrangements and reduced tourism travel.  However, some states have been raising gas taxes.  Federal aid for these parts of the SLED market is particularly vital.

As this is written, direct fiscal relief for states and localities is off the table.  However, the Biden administration has promised to make another run at it after the inauguration.  $160 billion in such aid was floated as part of recent discussions but failed to make the final bill.  It is likely that some figure in the $100 billion to $300 billion range will be floated again at some point in the near future, but it must overcome staunch opposition in the Republican senate.  If Democrats fail to win one or both of the U.S. Senate seats in January’s special election in Georgia, it seems unlikely that they would have any hope to push state and local aid through without support from Republican senators such as Marco Rubio (FL) or Josh Hawley (MO).  A more likely option would be to allow use of whatever remains of the $150 billion in CARES Act aid to states and localities to be used for general fiscal relief.  It has been restricted to COVID-19 response expenditures thus far.  Senate majority leader Mitch McConnell (R-KY) has remained somewhat open to potential future transportation and infrastructure stimulus.

The larger question remains as to how desperately the states and localities need this type of aid.  Many states were not hit as hard by COVID-19-related revenue downturns as they had originally expected.  The National Association of State Budget Officials (NASBO) is expecting 2021 general fund spending to decline to -1.1%, down from the post-Great Recession peak growth rate of 5.5% (2019).  Compare this to the Obama-era recession when spending declined from a peak growth rate of 9.4% (2007) to -5.7% (2010).  If states and localities did not require massive, unrestricted cash infusions at that time, it’s hard to see how they could need them now.

Also, consider that SLED employment is down 1.3 million workers—many in education support roles—to its lowest employment level since 2001.  If these workers aren’t rehired too rapidly (or are funded by new/recovering revenues raised from localized sources), then federal aid will be unnecessary.  This will leave government contractors to potentially provide the services and solutions to augment the remaining workforce in the interim.

However, with the Biden administration warning that the worst of the pandemic is yet to come, future mitigation efforts might create new revenue impacts for the SLED sector that could justify additional stimulus responses.