Tucked into the $1.9 trillion American Rescue Plan is a controversial $350 billion block grant to state and local governments, called the State and Local Fiscal Recovery Fund. The state and local funds were lambasted as unnecessary and wasteful by groups like Committee for a Responsible Budget, though they were strongly supported by the US Conference of Mayors and National Association of Counties. 

In the end, what came down from Congress was a somewhat restrictive block grant, with less flexibility on eligible uses than would be desired by local government leaders looking for new ways to “build back better”. There are, nonetheless, some creative ways that local governments could use these funds to provide new or expanded services and grow the public’s asset position.

The past year has demonstrated several ways that both government and market disinvestment made poorer communities more susceptible to the negative impacts of the pandemic, not just with higher positivity and death rates, but with the associated economic impacts. Giving disinvested neighborhoods the resources to rebuild from the pandemic and to withstand future crises requires real public investment.

We have seen the result of reliance on private enterprise for the provision of basic needs: many market actors jumped ship in the face of the past year’s inclement weather. As opposed to private enterprise, local governments, with additional resources from the federal government and with their charge to serve the public, should step in to meet these needs, and build their asset position in the process.

Commercial Real Estate: Groceries and Pharmacies

Earlier this year, the grocery chain Kroger announced that it would be closing two stores in Seattle due to low demand and a newly instated hazard pay rule in the city. And in December of last year, Sav-A-Lot closed its doors in one of the poorest neighborhoods in Chicago, leaving the neighborhood without a full grocer for miles. 

The market has determined that operating these stores is not worth the financial risk. Fortunately, local governments are in a better position to absorb that risk, partly thanks to a federal government that is willing to provide support when it is needed, but also thanks to a stricter mandate of service to the public that compels governments to act. That is to say, it is not just that governments can take on these risks, but also that governments must provide these services.

When a grocer determines that the aggregate demand in a neighborhood is not high enough to support a store and the store is then closed, the result is that the poor must travel further to acquire groceries, meaning they must spend even more time and money compared to their neighbors in more prosperous areas, exacerbating inequality. These closure events also create disinvestment feedback loops. While more affluent residents can move to areas where groceries are more plentiful, poorer residents are left behind. When the next grocer examines the neighborhood in a market study, demand will have fallen even further, leaving no market incentive to open a store. 

The eligible uses for state and local aid from ARP are not precisely tailored to this type of project, but it could fall under a number of statutory rules. For example, the funds may be spent on “Loans or grants [to small businesses or nonprofits to support] payroll and benefits costs, costs to retain employees, mortgage, rent, or utilities costs, and other operating costs.” An enterprising local government could establish a municipal corporation or quasi-governmental entity to operate the stores, and award it funding to acquire real estate and facilities, and reopen closed groceries and pharmacies. 

On the vanguard of solving this problem is not the Democratic machine cities of the midwest, nor those on the progressive west coast, but small, conservative towns in rural Kansas. Following the much-hyped 2018 opening of one municipal grocery store in Baldwin, Florida, a similar project in St. John, Kansas preceded a smattering of municipal grocery projects that have peppered the heartland.

Chicago and Seattle, for example, could form public benefit corporations charged with the elimination of food and pharmacy deserts, acquire the buildings, re-hire laid off workers, and operate public groceries that will not skip town at the first sign of distress.

Residential Real Estate: Apartment Buildings

In addition to groceries and pharmacies, the market also regularly fails to meet people’s housing needs. Governments already provide housing services to the poor, typically either through public housing or through projects funded with the Low-Income Housing Tax Credit. While Section 9 public housing projects are owned and operated by local housing authorities, most Section 8 housing and LIHTC housing is owned and operated by private entities, both for-profits and non-profits. 

What local governments in the United States lack is a framework for providing social housing—that is, publicly owned homes that are mixed-income, and not reliant on a continuous stream of federal subsidy. Mixed-income properties, where higher-income tenants effectively cross-subsidize below market rents, already exist as LIHTC projects, it’s just that these projects are wholly owned by private enterprise. Instead, local governments should operate these types of buildings, but put them on the public’s balance sheet.

To do this, local governments must acquire properties, rehab them, and rent them out—this costs money. Luckily, the Treasury Department’s guidance on ARP’s state and local funds provides incredible flexibility for local governments around the provision of housing:

“Eligible services include: … Affordable housing development to increase supply of affordable and high-quality living units.”

This is uniquely broad latitude, even for an ostensibly progressive Democratic administration. Acquisition and development costs typically require a hodge-podge of federal funding streams, including Community Development Block Grants, Tax-Exempt Bonds, and LIHTCS—all with their own set of rules to follow. With ARP funding, the Treasury has given governments the ability to freely grant the funds for development costs, such as the acquisition of property. Similar to retail, we have also witnessed over the past year the difficulties with distributing residential real estate risk across a large number of owners, many of whom have had severe difficulty weathering the impacts. A public entity, like a municipal housing trust, has far more direct access to administrative and financial resources that smooth those downside risks. Plus, the public will be far better off with an owner dedicated to the public welfare.

Interpreting and Implementing

In the American Rescue Plan Act itself, there are three eligible use categories for these funds that could facilitate these these types of public projects:

(A) to respond to the public health emergency with respect to the Coronavirus Disease 2019 (COVID–19) or its negative economic impacts, including assistance to households, small businesses, and nonprofits, or aid to impacted industries such as tourism, travel, and hospitality;

(B) to respond to workers performing essential work during the COVID–19 public health emergency by providing premium pay to eligible workers of the State, territory, or Tribal government that are performing such essential work, or by providing grants to eligible employers that have eligible workers who perform essential work;

(C) for the provision of government services to the extent of the reduction in revenue of such State, territory, or Tribal government due to the COVID–19 public health emergency relative to revenues collected in the most recent full fiscal year of the State, territory, or Tribal government prior to the emergency;

The Treasury Department has also issued guidance on the use of these funds, with some restrictions, but also with some broad latitudes, not found in the statute. With projects like these, the devil is in the details, and getting approval from the Treasury could require some finesse. But aid packages like ARP are relatively rare, and local governments should take full advantage of the opportunity to expand public ownership and public options for basic human services.