It’s Raining Federal Relief Dollars. Here's How State and Local Governments Can Effectively Use Them.

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Connecting state and local government leaders

COMMENTARY | Funds flowing from the American Rescue Plan will create challenges for states and municipalities. Here are considerations for successfully managing the influx.

After months of lobbying efforts, state and local governments are receiving $350 billion in direct aid through the American Rescue Plan to address the financial distress caused by the Covid-19 pandemic. While this influx of funds is a blessing that many municipal governments welcome, it also creates a major grant management challenge for local governments—many of which have never received direct aid. 

I’ve experienced these challenges firsthand. For example, while working as the chief financial officer in Flint, Michigan, in the aftermath of the water crisis, the city was one of the first to receive funds via the Water Infrastructure Improvement for the Nation Act. Flint received $167 million, a significant increase from the $55 million approved in Flint’s general fund. Scaling up to manage such a large amount of money and spending it down quickly was a challenge for us, creating an image that we were holding back the money, which caused serious skepticism at a time when public trust was already low. 

Now, as the chief financial officer in Wayne County, Michigan, I have experienced similar management challenges with CARES Act funds. While we expected to have an enterprise resource planning platform in place last year—which tracks grant-eligible transactions in one system—implementation was delayed due to the pandemic, making managing grant funds more difficult. Especially considering the rush to disburse the CARES Act funds (and soon the ARP funding), accurate record keeping in local and state government financial systems has been difficult to keep pace with. 

These are just a couple of examples of how a large influx of money can present new challenges and exacerbate existing ones like staffing difficulties, inefficient processes, out-of-date policies or poor communication. 

As state and local governments prepare to receive ARP funding, here are a few items to consider in how to manage these new funds:

Revisit your accounting processes and make sure they are deployed. Many departments will be involved in the handling of federal grant dollars. From central accounting to the budget office, it is important that all involved parties understand how grant dollars will be tracked, personnel costs will be charged, and revenue will be distributed in the general ledger. This is particularly critical given the speed at which the federal government is distributing the money and developing eligibility criteria, both of which can cause confusion on proper grant expenses. This means processes like emergency procurement orders, modifications to the general ledger and approvals for journal entries to respond to eligibility changes will need quick and accurate execution when the dollars begin flying.

Do not wait until a crisis to update your ERP system. Managing a large influx of cash with highly manual record-keeping and poorly integrated technology is a nightmare. An effective ERP system can help categorize grant-specific transactions for the purposes of reporting and compliance. This includes flagging grant eligible purchase orders, categorizing grant-eligible salary costs and marking invoices used to pay vendors for grant eligible services. In a recent survey of representatives from 501 local governments, fewer than 30% said that their 

ERP platforms were ideal for data and reporting needs, reducing manual work or integrating with other applications. Additionally, almost 50% of failed ERP implementations occur in public sector settings. Of course, since ERP implementation takes years, it stands to reason why some entities thought launching an upgrade once Covid hit was not a viable option. However, the value of having an upgraded ERP system underscores the importance of prioritizing its implementation.  

If your ERP upgrade hasn’t started or isn’t completed, do not panic. While not ideal, workarounds to an ERP update can be put in place to manage records. For example, if an out-of-date ERP does not have the ability to code purchase orders to individual grants, there may be a way to designate a specific area on the general ledger for grants (e.g. designating a special revenue fund) and subdividing that fund by individual grants. While using Microsoft Excel work is not ideal, it could be used to track individual grant-related transactions. But note that utilizing extra-system tools only heightens the need to be disciplined in process execution.

Find a way to tell the story. Headlines announcing large amounts of money coming to a municipality are received well by the public, but that could turn to scrutiny quickly if information flows slowly to the general public on how those funds are spent. While it is easier to develop reports ready for legislative body and public consumption when a robust ERP is in place, increasing capability to get to that point may not be possible in a crisis. 

There needs to be a way to relay information real time to the public. For example, in Flint we leveraged a platform to allow the general public to see progress on replacement of lead lines geospatially during the execution of the federally funded project to address the water crisis. 

While the direct aid flowing from the federal government could be a major benefit to many local and state governments, it is important to be proactive and develop a framework for managing these funds. Otherwise, unnecessary pain may be felt down the road.

Hughey Newsome is the chief financial officer of Wayne County, Michigan. He has served as a chief financial officer for local governments since 2017, including for Flint, Michigan, after the water crisis.

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