Local Government Finance: Preparing for the End of ARPA

It’s been a tough few months if you work in government at any level.  Let me further depress you with another concerning deadline that arrives at the end of next year:  December 31, 2026.  That’s when states and localities are required to have spent all of their funds that were provided via the American Rescue Plan Act (ARPA) COVID-19 relief packages.

The coming of this deadline is not the scary part, and using a deadline of this sort is a hallmark of well-run programs.  And, even more importantly, the funds were a real lifeline for local governments at a time of unprecedented crisis. (Here’s an excellent tracker on ARPA spending.) The challenge is this:  many municipalities used ARPA funds for “revenue replacement” (i.e. to fund regular government operations) and have not developed new tools or mechanisms to replace this expiring Federal revenue source. By the end of 2026, many observers are now projecting a potential local government funding crisis, especially for poorer, more rural, and lower capacity regions.

These budget fears may be premature and overblown—I certainly hope so.  But, state and local governments should be preparing now.  As noted in a new piece from the excellent Spotlight PA, Pennsylvania offers a potential model.  Governor Josh Shapiro’s current budget proposal includes a small increase in funding ($10m) for the Department of Community and Economic Development (PA DCED) to assist municipalities who may face such economic distress. If approved, the funding will be deployed in the state’s Act 47 program, which provides specialized support to localities facing severe economic distress.  (I’ve previously written about Act 47 here). This is a small, but important, down payment, and offers a potential tool to help communities before their fiscal situations become untenable. More states should consider this type of smart early intervention.