Local Spending Choices under ARPA: Government Capacity or Community Investment?

• In Event: Lightning Session: Housing, Community Development, and Urban Policy

Abstract

The American Rescue Plan Act (ARPA) provided local governments with unprecedented flexible federal aid, but its implementation unfolded across highly varied state and local contexts. ARPA combined substantial local discretion with strong federal policy nudges toward equity-oriented spending. Did local governments use these funds to strengthen their own administrative capacity, or to address community needs arising from the unequal social and economic harms of the pandemic? And how did state policies shape those choices?

We analyze 123,557 ARPA funded projects and use large language models to reclassify 77,811 projects reported under the broad “revenue replacement” into substantive spending categories defined by U.S. Treasury guidance. We then combine reported and reclassified expenditures to construct two contrasting measures of local spending. Public sector capacity spending captures internally oriented investments in government operations, workforce, and administrative capacity, while combined negative economic impact and public health spending reflects more community-oriented investments in households, housing, nonprofits, small businesses, alongside public health projects and services. Using data from all 337 Tier 1 recipients (cities and counties with populations over 250,000), we examine the factors shaping local allocation decisions between these two categories.

Our regression models show that these two forms of spending are shaped by different forces. Public sector investment is more strongly associated with state fiscal institutions. Local governments under tighter state fiscal constraints, such as lower state aid and higher tax and expenditure limitations (TELs), tend to use ARPA to support their own operations and administrative capacity, while state fiscal decentralization is not significant. Community-oriented spending is driven more by local need and political orientation. Poverty is positively associated with greater community investment, but minority population share on its own is not significant. However, the interaction among poverty, minority population, and Democratic political orientation is positive and significant, suggesting that social need is more likely to translate into equity-oriented spending in politically progressive places. In other words, ARPA opened a policy window, but progressive local contexts were more likely to turn that opportunity into redistributive action. These findings highlight both the promise and limits of flexible federal grants. ARPA’s equity-oriented policy nudge did not produce uniform outcomes; rather, its effects depended on how state fiscal systems and local political contexts shaped the use of flexibility.

Keywords: Intergovernmental Grants; State Fiscal Policies; Local Government Spending; Policy Nudges; Large Language Models (LLMs)

Authors

• Xuelian Li, Zhejiang University
  Presenting Author

• Yuanshuo Xu, Zhejiang University
  Non-Presenting Co-Author

• Zijing Zhao, Cornell University
  Non-Presenting Co-Author

• Mildred E. E Warner, Cornell University
  Non-Presenting Co-Author