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The Biden administration will begin sending $350 billion in aid to state and local governments this month, a significant step in its effort to shore up segments of the economy that have been hardest hit by the pandemic, White House and Treasury officials said on Monday.
The infusion of funds, which were included in the $1.9 trillion stimulus bill signed into law in March, marks President Biden’s first big opportunity to start reviving infrastructure across the nation and to fulfill his goal of ensuring a more equitable recovery.
“With this funding, communities hit hard by Covid-19 will able to return to a semblance of normalcy,” Treasury Secretary Janet L. Yellen said in a statement. “They’ll be able to rehire teachers, firefighters and other essential workers — and to help small businesses reopen safely.”
In remarks at the White House on Monday, Mr. Biden underscored the strain that many states and cities have faced in the last year and said the funds would help alleviate that pressure.
“Because states and local governments have to balance their budgets, a lot them had to lay off state employees and local employees when the economy slowed and tax revenues fell,” Mr. Biden said. “We’re talking about 1.3 million state and local employees out of work.”
The details of the disbursement have been eagerly awaited by the states, cities, territories and tribal governments that are expected to receive money. But several Republican-led states and the Biden administration are in a legal confrontation over whether states can cut taxes after taking relief money and using it to solidify their budgets.
The Treasury made clear on Monday that it would insist the relief money not be used to subsidize tax cuts, directly or indirectly.
“The American Rescue Plan ensures that funds needed to provide vital services and support public employees, small businesses and families struggling to make it through the pandemic are not used to fund reductions in net tax revenue,” the Treasury Department said. “If the funds provided have been used to offset tax cuts, the amount used for this purpose must be paid back to the Treasury.”
The Treasury Department also issued detailed guidance to states explaining how it will determine if the money is being used properly and in which cases the relief funds could be recouped. If a state does cut taxes, it will have to demonstrate to the Treasury Department that it offset that lost revenue with spending cuts or another source of revenue that does not include the fiscal recovery funds. If the state cannot do that, Treasury can claw back that amount of money.
“This process ensures Fiscal Recovery Funds are used in a manner consistent with the statute’s defined eligible uses and the offset provision’s limitation on these eligible uses, while avoiding undue interference with state and territory decisions regarding tax and spending policies,” the guidance said.
Treasury and White House officials made clear that they would scrutinize how the funds were being used to ensure that budgets were not being gamed to violate the intent of the law. A new recovery office at the Treasury Department will coordinate with states to help determine if their policies are in line with conditions set forth in the law.
The relief money also cannot be paid into state pension funds to reduce unfunded liabilities.
A White House official would not comment on whether initiatives such as Montana’s return-to-work bonuses could be funded using relief money. States and cities are being given broad discretion on how they can use the money, which is intended to replace public sector revenue that was lost during the pandemic; provide extra pay for essential workers; and invest in sewer, water and broadband infrastructure.
The allocation of the funds is also likely to be a contentious matter as the money starts to flow. Some states have complained that states that managed the pandemic well are essentially being penalized because the formula for awarding aid is based on state unemployment rates.
The Treasury Department said on Monday that the states that were hardest hit economically by the pandemic would also get their money faster.
Local governments will generally receive half the money this May and the rest next year. But states that currently have a net increase in unemployment of more than 2 percentage points since February 2020 will get the funds in a lump sum right away.
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