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STATE COLLEGE — The Shapiro administration expects some Pennsylvania municipalities to become so financially distressed they could require state assistance as billions in federal stimulus dollars dry up.
State and local governments received unprecedented federal aid during the COVID-19 pandemic to cope with its impact on public health and the economy. The funding extended a lifeline to recipients during the emergency, as many spent their allocations to fill revenue gaps, but that help is now going away.
The state Department of Community and Economic Development has asked the legislature to approve a $10 million increase to the special state fund that aids local governments facing severe economic hardships in its proposed budget for the 2025-26 fiscal year. The increase accounts for about 2.3% of Gov. Josh Shapiro’s $430 million pitch to fund the agency.
While one expert says that isn’t enough funding, some stakeholders question whether the money would be better spent addressing the needs of municipal governments before they become distressed.
Under the Municipalities Financial Recovery Act, also known as Act 47, municipalities declare financial distress and gain access to resources.
The Act 47 fund helps these government entities develop and implement recovery plans, supplies grants for achieving those plans, and provides loans as emergency cash flows, a spokesperson for the DCED told Spotlight PA.
The City of Harrisburg, the City of Chester, and the Borough of Newville are currently part of the Act 47 program. About $17.4 million was in the fund as of March 18, according to the Pennsylvania Treasury.
Shoring up the fund with the proposed $10 million is intended as a proactive measure that prepares for “any potential impact for the ARPA cliff,” DCED Secretary Rick Siger told lawmakers during a budget hearing on Feb. 18. He was referencing the expiration of funding authorized by the 2021 American Rescue Plan Act.
The federal government gave $350 billion to tens of thousands of state, county, city, tribal, territorial, and local governments through the State and Local Fiscal Recovery Funds program, which ARPA created. It was meant to help government agencies across the nation through the economic and health impacts of the COVID-19 pandemic.
Government entities had until the end of 2024 to commit their funding, and the deadline to spend the money is Dec. 31, 2026.
The funding can supplement lost revenue, pay for public health and safety services, assist local businesses, and address infrastructure needs. Pennsylvania spent over half its share to counteract revenue loss. It also funded a home repair program, agricultural conservation, and community violence prevention.
Treasury rules allowed a broad range of funding uses in the revenue replacement category but required relatively simple information to be reported back to the agency. That appealed to smaller recipients, including nontribal governments that received less than $10 million, known as Tier 5 entities.
Nearly two-thirds of the 2,140 Tier 5 recipients in Pennsylvania reported committing all their money to replace lost revenue, according to the latest available data they submitted to the U.S. Treasury last March.
Local and state governments now have to make sure the needs covered by the federal pandemic relief money can be supported in some other way, William Glasgall, a public finance advisor at the Volcker Alliance, told Spotlight PA. “This money is not going to be replaced. It was designed for an emergency. The emergency is gone,” he said.
The ARPA funding included $7.29 billion for the Commonwealth of Pennsylvania, $4.95 billion for its largest cities and counties, and $1.21 billion for smaller municipalities, according to data from DCED and the U.S. Treasury.
To date, many municipalities have spent their full allocation, according to the DCED spokesperson. “The agency is aware that many communities used their ARPA allocations to fill budget holes and now that those funds have been expended, may still have deeper fiscal issues,” he wrote to Spotlight PA.
State College, for example, was able to avoid a tax increase in three of the past four years thanks to the pandemic relief funding, StateCollege.com reported. However, Borough Council approved a property tax increase for 2025.
Limiting expenses while finding ways to increase income, such as raising taxes, is going to become a “very common” situation for governments, especially on the local level, Glasgall told Spotlight PA. He pointed to the additional uncertainty regarding federal funding cuts or freezes as another financial stressor.
Glasgall said DCED’s proposal to add $10 million to the Act 47 fund won’t go far.
“I mean, [$10] million will last about three seconds,” he said.
But David Sanko, executive director of the Pennsylvania State Association of Township Supervisors, told Spotlight PA that many local governments are “not stressed at all” because they have been planning for the end of the ARPA funding.
His organization has done “an awful lot of education” with members, he said. Townships were advised not to use the funding for long-term or recurring expenses, he added.
DCED’s proposal attempts to be helpful, Sanko said, but the state should prioritize other actions that could reduce costs in providing local government services. His organization has advocated against prevailing wage — state-mandated minimum pay rates for public work that vary by type of work, location, and project.
More needs to be done to prevent communities from becoming financially distressed instead of offering help afterward, state Sen. Patty Kim (D., Dauphin) told Spotlight PA. Kim is the minority chair of her chamber’s Local Government Committee and represents Harrisburg, an Act 47 city.
Kim told Spotlight PA that it’s unclear whether the $10 million increase will pass the legislature, and Pennsylvania’s budget could be affected if the federal government goes ahead with funding cuts that the state might have to make up for.
“I am bracing myself for a very, very different budget in the next couple of months,” she said.
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