Where did those pandemic recovery dollars go?

In some places, the money is nearly gone while other governments haven't even touched their stash. And $606 million is totally unaccounted for.

Photo by Jakayla Toney on Unsplash

Happy Finance Friday, readers! A new report this week by the Government Accountability Office (GAO) looks at what we know so far about how the $350 billion in pandemic recovery funding is being used by states and localities. The headline item is that 7% of governments (more than 2,100 localities) have yet to submit any of their required annual reports since receiving their first round of funds in 2021. Twice as many governments have missed this year’s deadline to submit their spending report.

But there’s a lot more to this than meets the eye. In this week’s newsletter, I’ll highlight four key takeaways from the GAO report and what they reveal about state and local governments’ staffing challenges and spending priorities.

The accounting – and accountability – fears are coming true

A total of 30,678 local governments are required to submit annual project and expenditure reports to the Treasury Department describing how they are using their recovery funds. The GAO found that 14% of those recipients did not submit this year’s report as of April 30 — and half of those governments also did not submit a report in the first reporting cycle (in 2022).

That means that nearly $606 million in combined federal funding went out the door in 2021 and has yet to be accounted for. While this lack of clarity is certainly concerning, that amount represents less than 1% of the $350 billion in recovery funds.

The bigger issue is that the radio silence is precisely what many people were worried would happen when the federal government took the unprecedented step of directly sending cash to every single local government in the country. It’s well documented that states and (especially) localities have capacity challenges and, in many cases, it’s leading to late reporting on even routine stuff like the Annual Comprehensive Financial Report.

Many small towns have never dealt with this level of federal funding — in some cases, equal to 75% of their operating budget — and accounting for how the money is spent is a big administrative lift. Because of this, some localities have even declined funding. According to the GAO report, as of March 31, 2023, some $145 million in funds had yet to be requested by a combination of counties, metropolitan cities, and Tribes.

“A lot of [small towns] only have one or two full-time staff,” Marc Nicole, deputy secretary at the Maryland Department of Budget and Management, told me in 2021. “They and the elected officials have to make a decision about whether they have the capacity to deal with that.”

A soft approach to enforcement

Treasury Department officials are well aware of this skittishness and therefore are approaching it delicately. 

So far, officials have sent out warning notices to only about two-thirds of these late localities and are working with others who are experiencing technical issues with submitting the reports or who have limited administrative resources. 

But reading between the lines, it’s pretty clear that federal officials don’t want to scare local governments off. In a separate section of the GAO report that talks about why Treasury isn’t disclosing who is out of compliance: