The next big challenge for governments: Overseeing billions more in federal aid

After years of federal spending reductions and tax revenue constraints, state and local governments are now dealing with an issue few would have expected at the beginning of the pandemic: Having enough people and the right systems to manage an influx of money from the federal government. To fully take advantage of these funds, there are steps governments can take now to avoid leaving vital funding on the table. 

A recent MissionSquare Research Institute survey of state and local government employers found that six in 10 respondents said more people have been leaving their jobs voluntarily since the start of the pandemic. Among those who have seen an increase, 78% say this has put a strain on their workload. In Texas, federal data shows that local governments are operating with 20,000 fewer workers than they were before the start of the pandemic.

The workforce shortage and its capacity concerns come as governments handle an unprecedented amount of federal funds from the American Rescue Plan Act (ARPA) at the same time they must compete for grants from the Infrastructure Investment and Jobs Act (IIJA). The fact there are fewer people around to navigate the largest influx of federal funding since the New Deal raises two risk factors:

Many government agencies could be leaving money on the table because they lack the bandwidth to chase down all the infrastructure grants available to them.

Keeping track of the ARPA and IIJA funding they do receive becomes more of a challenge, which can increase the risk of fraud, improper payment, and clawbacks due to noncompliance with rules and regulations.

Adding to this pressure is the fact that the federal funding comes with higher expectations of accountability reporting and auditing. For the IIJA, federal agencies are expected to “establish sufficient transparency, accountability reporting and oversight measures” for any number of programs created in the legislation. For ARPA, the Treasury Department has issued a guide to compliance and reporting on the recovery funds, requiring large governments to submit annual performance reports in addition to annual and quarterly spending reports. 

Meanwhile, many smaller governments for the first time will have to submit external audits, known as single audit reports, to verify that they’ve spent the money according to federal guidelines. While each government is responsible for sending its own single audit to the feds, state agencies distributing recovery funds to these smaller governments will want to ensure that the reporting process goes smoothly. What’s more, a recent GAO report recommends federal agencies step up their own transparency and accountability efforts to lower the risk of fraud – actions that could filter down to state and local government recipients in the form of more stringent reporting rules.

Already, about $110 billion in IIJA funding has been pushed out to states. The remainder of the $350 billion in American Rescue Plan fiscal recovery funds will be pushed out in the coming months. Therefore, recipients and subrecipients of ARPA and IIJA awards must act now to position the people, processes, and technology required to effectively administer, oversee, and monitor their projects and funding.

The good news is that both the ARPA and the IIJA include funding for accounting and administration of funds. Among other things, states and localities should invest a portion of their ARPA funds towards implementing robust data analytics, workflow automation, and reporting to provide program administrators with the real-time visibility required to identify projects needing additional support to stay on schedule and avoid losing funding due to waste or clawbacks. Robust analytics and reporting allow administrators to do more with less – even repurpose staff to spend more time on other tasks that require customer service.

No government wants to be in the position of returning any of that funding to the feds. But losing funding due to a failure to comply with post federal award requirements is a common occurrence. We saw what happened after the Great Recession, when the loss and turnover of experienced staff hurt cities’ ability to manage their resources. Research in 2015 by the U.S. Government Accountability Office found that this staffing shortage caused some federal grant funds to remain unspent and “greatly reduced the ability of some cities to carry out grant compliance and oversight responsibilities.” Two single audits of Detroit's grant management, for example, found more than $45 million in questionable costs.