States, cities that expected to go bankrupt from pandemic now seeing cash surplus

When the pandemic hit Alexandria, Virginia, the economic outlook was bleak.

In April 2020, the city projected a budget shortfall of up to $100 million as businesses shut down and workers lost their jobs, eliminating key revenue from sales, tourism and income taxes.

“Early on it was catastrophic for us,” Alexandria Mayor Justin Wilson told ABC News. “Every week, unfortunately, I was getting a notification from hotels, large restaurants, telling us that they were shedding workers.”

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But a year later, those dire budget projections still haven’t become a reality. In fact, the city just passed its spending plan for the first tranche of $30 million in aid it had received from the federal government’s American Rescue Plan Act of 2021. The proposal includes investments in infrastructure, food assistance and a guaranteed basic income pilot program giving out $500 to about 150 families.

“We're working on a variety of different ways to try to help our residents: food insecurity, housing insecurity [and] other efforts to ensure that they get back on their feet in the aftermath of this,” Wilson said.

It’s a story playing out from coast to coast. Thanks to generous federal relief funds, a rebound in consumer spending and stock market gains, state and local governments that had predicted economic calamity are now finding themselves flush with cash.

“So far, we are seeing that a lot of states [that] talked about how they were going to have to raise all sorts of taxes and cut all sorts of spending, and it didn't happen,” Richard Auxier, a senior policy associate at the Tax Policy Center, told ABC News.

Auxier said that while it’s too soon to say that states are out of the woods, federal support has helped keep them afloat during the pandemic.

The American Rescue Plan Act passed in March included $350 billion in direct aid to state, local and tribal governments. A Treasury Department spokesperson told ABC News about $200 billion of that funding has already been paid out.

Unlike the previous two COVID-19 relief laws, there are fewer restrictions on how states can use the money, which must be obligated by 2024 and spent by 2026.

“By the time the third major piece of legislation came around in 2021, there was a big desire to give them that freedom, to have some slack on how they want to spend it,” Auxier said.

President Joe Biden is now urging some cities to use some of the funds toward fighting crime -- for example, by paying overtime to police officers.

The Cherokee Nation is receiving $1.8 billion from the American Rescue Plan Act as well. Principal Chief Chuck Hoskin Jr. told ABC News the funding is going toward $2,000 stimulus checks for every resident, as well as investments in mental health, broadband internet and a new hospital.

“The number one plan was to get relief directly to our citizens,” Hoskin told ABC News.

In the meantime, 13 Republican state attorneys general are suing the Biden administration because they want to use the federal aid to fund tax cuts, which is one of the few restrictions under the current law.

“It's not a matter for the federal government to decide Arkansas's own tax structure,” Arkansas Attorney General Leslie Rutledge told ABC News. “That's where the federal government's overreaching.”

In Maryland, Comptroller Peter Franchot established a working group to determine where the federal money has been going. He said the funding has been a “game-changer” that it helped the state avoid bankruptcy. But he added that it’s clear some of the money isn’t going to the hardest-hit communities that need it the most.

“Some of it will be well spent, [but] a lot of it probably won't be,” Franchot told ABC News. “That's the nature of having a fire hydrant of cash come into the state suddenly.”