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Report: Governments posting strong surpluses, still spending pandemic funds

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(The Center Square) – The federal government’s faucet of flowing pandemic money is slowing, but an analysis by an economist with the Federal Reserve Bank of St. Louis shows state and local governments aren’t missing the money.

“In addition to past federal aid bolstering expenditures and savings, a healthy U.S. economy has contributed to state and local governments’ robust fiscal position through greater revenue from income taxes and sales taxes,” Bill Dupor, an economist at the Federal Reserve Bank of St. Louis, wrote in a recent “On The Economy Blog.”

Dupor noted the first four federal relief acts increased spending and decreased revenue. It resulted in a deficit of $2.4 trillion. The federal government’s response to the pandemic is comparable to Franklin D. Roosevelt’s New Deal during the Great Depression, Dupor wrote.

The funds were allocated to state and local governments for a wide range of response efforts. The American Rescue Plan Act sent $362 billion to state and local governments for fiscal recovery efforts.

Dupor reviewed the annual total fund balance of state governments, comprised of rainy-day funds and the general fund ending balance, from 2003 to 2023.

“Total balances as a percentage of expenditures were roughly in the 10% to 15% range during the years immediately preceding the pandemic,” Dupor wrote. “This value increased dramatically during the pandemic, peaking at 38% in 2022. It then fell to 34% in 2023 and is expected to decline further to 23% in 2024, a projection based on states’ enacted budgets. Thus, states as a whole retain a strong surplus.”

Dupor also reviewed the trend of state and local government expenditures from 2003 to 2023. State and local government expenditures are approximately 9% above the trend as of the third quarter of 2023.

“Such high expenditures into 2023 may appear surprising, given that federal COVID-19 aid was part of legislation enacted two or more years previously,” Dupor wrote. “For example, the most recent COVID-19-related fiscal injection, the American Rescue Plan, was signed into law in March 2021, with additional federal support for state and local governments through the November 2021 Infrastructure Investment and Jobs Act. However, as is often the case with discretionary federal fiscal assistance, spending can occur over a prolonged period.”

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