State and Local Investments Poised to Mitigate Future Economic Downturns

Recent data indicating a decline in GDP for the first quarter of 2025 has sparked concerns about a potential economic downturn, raising fears about increased unemployment and a looming recession. The ramifications for working families could be severe, with government policies playing a crucial role in mitigating these effects. During the COVID-19 recession, the swift economic recovery was significantly aided by the Biden administration's American Rescue Plan Act (ARPA), which provided essential fiscal recovery funds to state and local governments. These funds not only supported recovery but also enabled strategic investments to brace communities for the next economic challenge.

Despite a current rise in job numbers, a surge in federal layoffs and growing economic uncertainty are evident. The stock market's decline since the Trump administration is reflective of broader economic weaknesses rather than a sole indicator of economic health. Trump's tariffs, criticized for their lack of strategic design, coupled with the Federal Reserve Bank of Atlanta's prediction of a negative 2.4% GDP growth for 2025, amplify concerns about the economy's trajectory.

ARPA, enacted in 2021, was pivotal in the nation's recovery from the COVID-induced recession. It provided critical support through enhanced unemployment benefits, expanded child tax credits, and investments in healthcare, infrastructure, and food assistance. This policy was instrumental in reducing poverty, supporting working families, and sustaining the economy during challenging times.

Informed by recommendations from organizations like EPI, ARPA allocated $350 billion for State and Local Fiscal Recovery Funds (SLFRF) to mitigate the pandemic's economic impact. This approach aimed to circumvent errors from the Great Recession, where austerity measures by state and local governments hampered recovery and adversely affected working families. SLFRF was fundamental in rejuvenating public services post-pandemic.

Several state and local governments went beyond mere recovery efforts by leveraging fiscal recovery funds to enhance the public sector and fortify protections for working families. The U.S. Treasury Department allowed flexibility in fund usage, enabling strategic decisions to benefit communities, particularly in anticipation of future recessions.

Strengthening Unemployment Insurance Systems

An increase in unemployment will challenge state unemployment insurance (UI) systems. Before COVID-19, many states had outdated UI systems incapable of managing significant demand. The pandemic highlighted these deficiencies, prompting investments in system upgrades by several states using fiscal recovery funds. For instance, Wisconsin allocated $80.8 million for technology upgrades in UI operations, while Kansas invested $9.6 million for user-friendly improvements. Hawaii, Arizona, Colorado, Nevada, New Jersey, Vermont, and Virginia also invested in UI modernization. This preparation will significantly aid states in delivering timely support to families during economic downturns.

Investing in Housing and Eviction Protection

Economic hardships often exacerbate housing insecurity, particularly for renters. During the pandemic, eviction moratoriums helped prevent millions of evictions. However, as these expired, housing insecurity surged, notably within Black and brown communities. States and localities responded by utilizing ARPA funds for housing and renter protections. Over 4.5 million households benefited from mortgage, rent, or utility assistance, with $6 billion dedicated to affordable housing. Some areas, like Johnson County, Iowa, and Detroit, Michigan, implemented free legal counsel for tenants facing eviction, reducing eviction rates significantly.

Restoring the Public Sector

State and local government workforces, still recovering from the 2008–2009 Great Recession, faced further setbacks during the early months of the pandemic. However, by the end of 2023, fiscal recovery funds helped close this employment gap, especially in states that heavily invested these funds. Strengthening the public sector not only supports government employees but also fosters private sector job growth and ensures effective implementation of social safety net programs.

Expanding Broadband Access

Broadband access is critical for economic growth and resilience, especially in rural areas. More than $8 billion from fiscal recovery funds, alongside $65 billion from the Infrastructure Investment and Jobs Act (IIJA), were allocated to expanding broadband access. These investments aim to equalize opportunities across communities and aid families in navigating future economic challenges.

Additional Investments

Beyond these initiatives, state and local governments utilized recovery funds in various impactful ways:

• St. Paul, Chicago, and New Orleans addressed medical debt, as did New Jersey.
• Charleston, West Virginia, established a community grocery store to combat food insecurity.
• The Merrimack Valley Regional Transit Authority in Massachusetts eliminated bus fares, boosting ridership by 40%.
• Colorado created a program extending unemployment insurance to undocumented workers, ensuring support for all workers.
• Boston, Buffalo, and Chicago developed pre-apprenticeship programs to provide access to quality jobs for underserved communities.

The strategic use of fiscal recovery funds plays a vital role in readying communities for economic uncertainties, aiding working families in mitigating the impacts of potential downturns.

All SLFRF spending data in this piece, unless otherwise cited, is from mandated reports submitted to Treasury by state and local governments, available here.