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Treasury readies first batch of $350B aid to states, localities

Money can be used for health care, aid to businesses and households, front-line workers

A statue of former Treasury Secretary Albert Gallatin stands in front of the Treasury Department in Washington.
A statue of former Treasury Secretary Albert Gallatin stands in front of the Treasury Department in Washington. (Bill Clark/CQ Roll Call file photo)

State and local governments gained access Monday to $350 billion in pandemic relief, as the Treasury Department opened a new program designed to replenish lost revenue and help address economic hardships.

The new funding, part of a $1.9 trillion pandemic relief law enacted in March, will provide a two-year cash infusion for states, localities, U.S. territories and tribal governments that have shed an estimated 1.3 million jobs since the onset of the COVID-19 pandemic last year. Treasury officials released guidance Monday outlining the rules that will govern applications for the aid.

The money can be used for a wide range of purposes that include public health, assistance to families and businesses, the replacement of lost public sector revenue, and “premium pay” for essential workers. It also could be used for infrastructure work that is limited to water and sewer systems and broadband internet access.

State and local governments could begin applying for the aid Monday and the first payments could be processed “in a matter of days,” a senior administration official told reporters in a conference call. But not all the funding will come immediately.

Local governments will receive half their money beginning this month, followed by the second half 12 months later.  Some states would receive payments on that schedule as well. But states that have had an increase in the unemployment rate of more than 2 points since February 2020 could receive their full allocation in a single lump sum, according to the guidance.

The funding, which follows $150 billion in state and local aid awarded last year, amounts to a conviction by the Biden administration that a hefty cash infusion at the local level would accelerate the economic recovery. Officials cited a lack of sufficient aid after the 2008 recession as a reason for sluggish growth.

“This is responding to the lessons of the past in a powerful way,” said Gene Sperling, President Joe Biden’s top coordinator of pandemic relief. If state and local governments had sufficient aid to grow at their normal recovery rates after the Great Recession, the country’s economic growth would have been 3 percent on average instead of 2.3 percent, he said.

But the program could still trigger fights over how the money can be used, particularly as some states or localities seek to offer tax cuts. Some Republican-led states have already filed court challenges to the pandemic relief law, saying a provision barring the aid for tax cuts violates state sovereignty.

The guidance released Monday said the aid can’t be used to fund “reductions in net tax revenue.” If states or localities choose to cut taxes, it said, “they must demonstrate how they paid for the tax cuts from sources other than Coronavirus State Fiscal Recovery Funds.” It said they could do so “by enacting policies to raise other sources of revenue, by cutting spending, or through higher revenue due to economic growth.”

A senior administration official said the government would conduct “checks” to ensure that money is not used to finance a tax cut, but that tax cuts could be enacted through other means.

“If they meet that test, they have that sovereign right as states to do whatever they like,” the official said. An interim final rule on the program was scheduled to be published later Monday, officials said.

The guidance also prohibits the aid from being used to shore up state or local pension funds — a concern raised by many Republican lawmakers.

Sperling said the aid is also designed to ensure an “equitable recovery” by assisting disadvantaged communities with education and housing assistance.

Of the total $350 billion in available aid, $195.3 billion is reserved for states and the District of Columbia. Another $65.1 billion will go to county governments and $45.6 billion will go to metropolitan cities.

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