Fed guidance limits ARPA use for revenue replacement

Boston Statehouse

Massachusetts State House

BOSTON (SHNS) – State budget managers can probably use about $1.5 billion of the incoming American Rescue Plan Act funding to replace revenue the state lost in 2020 due to the pandemic but will not be able to use it to replenish the state’s rainy day fund, a Massachusetts Taxpayers Foundation analyst said last week.

One of the four primary buckets of allowable uses of the ARPA money being sent to states and local governments is revenue replacement, but until the U.S. Treasury issued its guidance on how ARPA funds can and cannot be used it was unclear just how much of the roughly $5.3 billion in state fiscal relief headed for Massachusetts could be used to, essentially, help balance the budget.

“You could come up with some pretty reasonable scenarios in which your ability to use revenue replacement was essentially nil, and you can come up with scenarios in which you could use almost the entire award for revenue replacement. So that’s why this guidance was so key,” Doug Howgate, the executive vice president of the Massachusetts Taxpayers Foundation, said.

And the Treasury’s guidance, though it also presents a few “hiccups” for budget overseers, also “allows for probably some pretty significant revenue replacement” for Massachusetts, Howgate told the House Committee on Federal Stimulus and Census Oversight on Friday.

“Using tax revenue, which is going to be the bulk of how revenue replacement is calculated, you can come up with a ballpark, and my estimate for the first calculation of revenue replacement is it will probably allow us to use about call it $1.3 to $1.6 billion in revenue replacement in this first time period,” he said as he presented a slide that estimated about $1.563 billion in allowed revenue replacement in calendar year 2020.

The Treasury guidance calls for revenue replacement to be calculated by comparing actual collected revenue to “an alternative representing what could have been expected to occur in the absence of the pandemic.”

Howgate explained that a state’s allowed revenue replacement could be calculated by starting with actual fiscal year 2019 collections (the last full fiscal year before the pandemic) and increasing them by the 4.1 percent annual growth rate prescribed in the Treasury guidance. The difference between what a state could have collected under the 4.1 percent annual growth scenario and what the state actually collected is the amount of ARPA money that can be used for revenue replacement.

But states cannot just run the calculation once — the Treasury guidelines require state and local governments to calculate their allowed revenue replacement once upon receiving the ARPA money, then again on Jan. 1 of 2022, 2023 and 2024.

“It’s going to make planning this money somewhat challenging because we’re not going to know exactly how much revenue replacement we can bring to bear until later on in the process,” Howgate said. “I think that was intentional, probably, to make sure that states are a little deliberate in how they’re using this money.”

Zeroing in on the first calculation for Massachusetts could take some time and cooperation between the Legislature, governor’s office and the comptroller’s office, he said. For one thing, revenue replacement is done on a calendar year basis and Massachusetts doesn’t typically do financial reporting on a calendar year basis.

Lawmakers will also have to be mindful of the restrictions on revenue replacement when they wrap up the accounting on fiscal year 2021 and put a fiscal year 2022 budget into place, Howgate told them.

“There was some feeling before that maybe we could fund some spending with the stabilization fund and then rebuild it with federal resources. You can’t do that,” he said, highlighting one of the “hiccups” in the Treasury rules. “So the order of operations of how we use these resources to balance the budget, it really matters because once that money’s out of the stabilization fund these fiscal recovery funds cannot be used to replenish that.”

Administration officials and legislative leaders have said they would like to limit draws against the state’s stabilization fund, which has a balance of $3.52 billion before accounting for potential spending from that fund of up to $1.7 billion this budget year. Gov. Charlie Baker proposed a withdrawal of up to $1.6 billion from the fund in fiscal 2022, the House passed a budget that proposes pulling $1.875 billion from the fund, and the Senate on Tuesday will begin debating a fiscal 2022 budget that would draw up to $1.55 billion from the fund.

The months-long and ongoing pattern of state tax collections obliterating expectations could also help limit what is actually taken out of the rainy day fund and provide lawmakers with a source of funds to start to build the reserve account’s balance back up. Through 10 months of fiscal 2021, state government has collected $26.449 billion in tax revenue, up $3.405 billion or 14.8 percent over the same period in fiscal 2020 and $1.83 billion or 7.4 percent over the Department of Revenue’s expectations.

Through May 14, DOR had collected $1.190 billion from taxpayers — about 63 percent of the $1.893 billion the agency expects to bring in by the end of this month.

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