A new report from the local think tank the Bureau of Governmental Research analyzed how New Orleans has managed the $388 million in federal COVID relief funds it received through the America Rescue Plan Act, or ARPA.
The central finding of the report concluded that when taking a holistic look at the city’s budget over the past couple years, it appears that the city hasn’t spent the vast bulk of the $388 million yet. While the city technically appropriated and spent half of the money in 2021 and 2022, the city also built up a general fund surplus roughly equivalent to that amount, meaning that money was essentially converted into fund balance money that the city can appropriate at a later date.
“The city’s expenditures of its first half of its ARPA funding, the first $194 million, allowed it to save its own revenue and build its own reserves with the surplus,” BGR research analyst Susie Dudis said at a Wednesday webinar hosted by BGR.
The report also criticized the city for a general lack of transparency around how the money is being spent.
“The City’s process for approving the appropriations raises transparency concerns,” the report said.
The city received the money in two bulk payments, or “tranches,” of $194 million each. The first tranche came in the spring of 2021 and was almost exclusively used to make up for projected revenue losses in 2021 and 2022. But due to the way the money was appropriated, as well as changes made to the budget throughout the year, it’s difficult to know exactly how the money was used.
The second tranche of $194 million came earlier this year. The City Council recently approved $124 million in ARPA spending as part of the 2023 budget. It also approved $151 million of expenditures using the city’s fund balance, which, the report says, should be treated the same as ARPA dollars since those budget surpluses were accumulated due to ARPA.
“ARPA played a crucial role in building the fund balance, and the same recommendations for ensuring transparency and accountability apply to these one-time dollars,” the report said.
All in all, the council approved $275 million in combined ARPA and fund balance spending. Unlike the 2021 and 2022 appropriations, the 2023 budget appropriations more clearly showed exactly what the money would be spent on. But even then, the report said, that process had significant transparency issues.
“There was no public discussion to provide details on these initiatives that wound up being included in the 2023 budget that was passed,” Dudis said.
As The Lens reported earlier this month, the city had initially told the public that the ARPA and fund balance expenditures would only come to a council vote after the passage of the 2023 operating budget. But without notice, at the request of Mayor LaToya Cantrell, the City Council introduced amendments to the 2023 budget to add the $275 million in one-time fund expenditures.
“Initially the city had talked about looking at the specific ARPA initiatives once the budget was passed on Dec. 1 and then coming back and talking about these initiatives, but ultimately they went ahead and kind of passed everything all at once,” Dudis said. “So not really giving citizens the chance to know the details. There was an internal memo the administration shared with the council that included some details. But that was not provided to the public in advance and didn’t really include all of the details.”
Cantrell’s office did not respond to a request for comment.
Tranche 1, 2021
During the coronavirus pandemic, the city’s revenues plummeted. Coronavirus restrictions lowered sales tax revenues — a primary funding source for the city — across the country. But because of New Orleans’ tourism-heavy economy, the revenue loss impact in New Orleans was worse than in many places.
Unlike previous federal COVID relief, ARPA allowed the city to use the money to make up for lost revenues. That gave the city broad latitude to use the money to fill in practically any gaps in the budget it needed to fill, rather than being constrained by requirements to spend the money specifically on COVID responses and other specific projects.
ARPA guidelines also allow the city to spend the money on responses to public health emergencies, supplemental pay for essential workers and infrastructure projects for water, sewer, stormwater management and broadband.
For the first $194 million ARPA tranche, the city almost exclusively used it to make up for revenue loss in 2021 and 2022. The general plan for the money was to continue to use it to bolster city budgets until the economy, and the city’s revenue streams, fully recovered.
The initial 2021 budget, approved before ARPA passed, included significant budget cuts due to the ongoing pandemic, including furloughs for city workers. The initial 2021 general fund budget was set at $634 million, $92 million below pre-pandemic levels.
After the city received its first tranche of ARPA funds, the City Council added $77 million of ARPA funds to the 2021 budget. But because of the way the city amended the budget, it was initially difficult to track where the money went.
Instead of adding small portions of ARPA funds to many different departments, the city put all of the $77 million into the Fire Department. But not all of the money was actually kept by the Fire Department. Instead, the allocation freed up millions in general fund dollars that the Fire Department would have otherwise spent, and allowed the city to reallocate it to a number of different departments and agencies.
As the BGR report said, the federal requirements only require reporting on direct ARPA expenditures. That means that according to federal reports, as well as the city’s online ARPA spending dashboard, it appears that all of that money was spent on the Fire Department.
But in reality, the money was effectively funneled through the Fire Department and distributed throughout city government. BGR noted that the public could track where the money actually went by monitoring the City Council’s mid-year budget adjustments in 2021, which were necessary to transfer funds away from the Fire Department. The BGR report includes a chart showing how that money was transferred.
Even then, however, it is difficult to know where the money actually went. That’s because the city didn’t end up spending all of its budgeted funds. The city’s 2021 general fund budget after the ARPA money was added was $711 million. But by the end of the year the city had only spent $610 million.
Much of that lower-than-expected spending can be attributed to the city’s difficulties hiring for all of its budgeted positions, including in the department with the single largest budget — the New Orleans Police Department. That hiring trend continued into 2022.
The city also collected more revenue than expected in 2021, leading to an even bigger annual surplus.
“Even if the City had not used any of the $77.3 million in ARPA funds it appropriated in 2021, its General Fund revenue would have covered all expenditures and generated a $25 million surplus,” the report said.
In essence, the ARPA money was moved into the city’s fund balance. The report notes that this doesn’t appear to violate the federal ARPA spending guidelines.
“While federal rules do not allow governments to put ARPA dollars directly into reserve funds, they also do not expressly prohibit recipients from using ARPA to free up other revenue sources that can build reserves.”
Tranche 1, 2022
After the 2021 ARPA allocation, the city still had $110 million leftover from its initial $194 million tranche. Almost all of the remaining funds were put into the Fire Department and Police Department budgets. But similar to 2021, almost all of that was subsequently transferred to other departments throughout the year.
Again, this makes it difficult to track how the money was actually spent. And the report notes that it was even harder to track in 2022 than it was in 2021. That’s because in 2021, all the money that was moved out of the Fire Department occurred in the middle of the year through council ordinances that showed where the money was going.
In 2022, however, most of the freed-up Fire Department funds were moved around as part of the initial 2022 budget.
“When the fire department’s ARPA appropriation and reduced level of General Fund revenue were established in the original budget, as was the case in 2022, the City budget did not identify the revenue redirected to each department and agency,” the report said. “Nor did the City otherwise specify the expenditures in the 2022 budget that depended on the General Fund revenue freed up by the ARPA appropriation to the fire department.”
But even if the public could track the revenue rerouting in 2022 as it could in 2021, there is still another layer of complexity — just as in 2021, the city spent vastly less than it planned to.
The report notes that the year isn’t over yet, so it’s impossible to know exactly how large the 2022 budget surplus will be. But according to the latest numbers provided by the administration, the city had a $238 million general fund balance as of Dec. 1. That’s up $102 million from the beginning of the year.
Taken together, the fund balance accumulated in 2021 and 2022 is nearly equal to the $194 million of ARPA funds the city injected into the budget over those years.
“The City used about $187 million (97%) of the first half of its ARPA to cover expenditures typically included in the General Fund budget,” the report said. “This use, combined with below-budget expenditures and better-than-expected revenues during the last two years, allowed the City to increase its General Fund reserves by roughly an equivalent amount.”
In essence, the city could have spent almost all that it’s spent in 2021 and 2022 without the help of ARPA. Looked at from that perspective, the massive growth in the city’s fund balance can be directly attributed to ARPA.
Plans for Tranche 2 and fund balance
When the city began the 2023 budgeting process, the Cantrell administration laid out plans to spend $444 in one-time funds, including the second $194 million ARPA tranche and $250 million in fund balance dollars.
The city initially said that spending would go before the City Council for approval only after it passed the 2023 operating budget. But on the day the 2023 budget was approved, the administration and council added last minute amendments to include $275 million in one-time spending, including $124 million in ARPA funds and $151 million in fund balance dollars.
This time, the city didn’t funnel the money through the Fire Department or Police Department. The money was specifically allocated to specific departments and projects, making it much easier to track how the city plans to spend the money. But as the report notes, the allocation process had different transparency issues.
The amendments were rather unexpected and last minute. Although the public didn’t have much opportunity to look at the spending plan and comment on it, the administration says the spending priorities were developed over months of community engagement and discussions with the City Council. Still, the report said that the process presented “transparency concerns.”
The city’s Chief Administrative Officer Gilbert Montaño told The Lens earlier this month that the one-time spending items included in the 2023 budget reflected less “controversial” items that the city wanted to roll out immediately. He said that the spending plan for the remaining $100 million in fund balance and $70 million in ARPA funds would be subject to further debate and public vetting in the coming months.