In the nearly 12 months since the American Rescue Plan Act (ARPA) was signed into law, there has been an abundance of discussion about the “once in a generation” opportunity the $1.85 trillion in overall spending and $350 billion in state and local fiscal recovery funds (SLFRF) present to advance an equitable fiscal recovery.

However, the pace of state and local spending has been much slower than anticipated.

As 2021 neared its end, states had only budgeted or allocated about half of the dollars. The slow start is not necessarily a bad thing.  The Treasury Department released final, authoritative guidance on how localities could spend the dollars in January – nine months after the law passed. More importantly, many governments had to align ARPA spending decisions within existing annual budget and appropriations processes. Additionally, speed in local spending usually means adhering to the status quo, sending funds to traditional projects with predictable outcomes. This presents a potential issue because transformation requires city governments to do what they haven’t done before, which takes more time.

Here are two reasons ARPA’s second year holds the promise of innovation and new ways of spending that could support underserved communities.

First, to greatly simplify 400 pages of regulatory language, the long-awaited final Treasury guidance on SLFRF in many ways enables greater flexibility for governments allocating funds in a few noteworthy areas. The SLFRF final rule introduces a new “standard allowance” of $10 million for revenue loss replacement. Revenue loss replacement is a very flexible spending category that allows governments to use the funds for a wide range of government services, with streamlined reporting requirements.

Some cities are reporting equity and place-based outcomes related to their revenue loss replacement spending. For example, Philadelphia, which is devoting its entire $1.4 billion city and county allocation of SLFRF funds to revenue replacement, has made an explicit commitment to reporting on the indicators of well-being for their residents—including the vulnerable—with an equity lens.

The final rule also expands the range of households and communities that are presumed to be “impacted” and “disproportionately impacted” by the pandemic. This enables cities and other ARPA recipients of SLFRF funds to spend on services to those households without additional analysis. Further, the final rule provides a broader set of uses available for these communities as part of COVID-19 public health and economic response, including making affordable housing, childcare, early learning, and services to address learning loss during the pandemic eligible in all impacted communities and making certain community development and neighborhood revitalization activities eligible for disproportionately impacted communities.

Under the final rule, communities can now provide premium pay to an expanded universe of workers, a number far greater than under previous SLFRF guidance, without written justification.  More working men and women, including laundry workers, dental providers, and election workers, are able to receive premium pay than under the previous version of the rule.

The final rule also significantly broadens the kinds of broadband and water and sewer projects that can be funded with ARPA funds, including a broad range of lead remediation and stormwater management projects.

Second, even before the final rule simplified and expanded options for states and localities, several communities chose innovative projects or processes for ARPA dollars. With these examples to inspire them and the new certainty about what’s possible with ARPA, mayors and others can do what they do so well: learn from other cities and adapt bold ideas to local circumstances.

Here are some noteworthy early examples of ARPA-funded projects, based on reports filed with the Treasury department. These three examples are especially promising because they show how cities are pairing ARPA funds with other sources of funds, or engaging non-profit partners, to position projects to scale and continue after ARPA ends.

Cleveland, Ohio

Cleveland has a strategy to coordinate public and private spending in low-to-moderate income neighborhoods that have endured historic disinvestment and have disproportionately suffered from COVID-19. As noted in Cleveland’s Recovery Plan Report, public-private partnerships in the city have focused on a specific project or investment in a small geographical area or market sector. By contrast, the city’s fiscal recovery fund allocation will be used to seed partnerships that drive private-sector partners to invest in markets and products that they do not currently serve, in a way that will survive after the 2026 deadline for spending SLFRF funds. In this way, the city can drive persistent, ongoing investment in a post-COVID-19 economic recovery and fund multi-year, equity-informed neighborhood/corridor transformation strategies.

Macon-Bibb County, Georgia

Leaders in Macon-Bibb County, Georgia, have leveraged their ARPA funds in concert with matching grant funding from the Knight Foundation. They created a revolving loan fund for residents who want to rehabilitate local buildings and turn them into income-producing commercial rental properties. The fund is part of a larger strategy that will also provide $18 million of funding to expand affordable housing, food deserts and address blight.

Baltimore, Maryland

The city of Baltimore is engaging local nonprofit organizations early in its ARPA spending decisions, enabling them to shape spending priorities. The city has created an online application process through which city agencies and nonprofits can propose projects to be funded through ARPA’s SLFRF, engaging nonprofits as meaningful partners in shaping the overall allocation strategy.

Based on the new guidance and other examples emerging in cities, there are a few opportunities for reflection as cities start to expand and implement their ambitions for ARP funding.

• As noted above, revenue replacement is a popular and flexible choice for these funds. But cities using funds to plug budget deficits should also take this time to examine their revenue and fiscal base and identify whether any reforms are needed to emerge stronger in 2024 when ARPA sunsets. This review is particularly important if they entered COVID facing multi-year revenue downturns or imbalances. Equity must be a guiding value for cities rethinking their revenue base.
• The examples seen in Cleveland and Macon-Bibb show that an implementation strategy must be part of a wider recovery plan –in concert with strategies to leverage other federal funds (including monies from the infrastructure bill) and that bring parallel avenues of private or social investment. Blending funds from many sources will increase the chances that projects seeded with ARPA dollars will scale and persist in the future.
• Cities should fully leverage nonprofits as partners in their strategy, engaging nonprofits to help shape that strategy and playing expanded roles in service delivery and impact measurement.

ARPA challenges local governments and others who care about equity in place to develop meaningful frameworks to measure how the funding will impact equity in cities. While this is an incredible effort, if executed successfully, it creates the opportunity to learn, adjust and address historical inequities.

Lourdes Germán is a Senior Advisor to the Kresge Foundation’s Social Investment Practice, American Cities Program and Detroit Program. She also serves on the faculty at the Harvard University Graduate School of Design, and is Executive Director of the Public Finance Initiative.

Jennifer Bradley is a Senior Fellow at The Kresge Foundation. Jennifer supports the American Cities Program at Kresge through convenings and thought leadership.