Treasury will give states a lot of power to decide how to spend $350 billion in Covid relief funds

U.S. Treasury Secretary Janet Yellen speaks as she joins White House Press Secretary Jen Psaki for the daily press briefing at the White House in Washington, U.S. May 7, 2021.

Jonathan Ernst | Reuters

States and local governments will have significant leeway in deciding how to spend the $350 billion in Covid-19 relief funds authorized by President Joe Biden's American Rescue Plan.

The Treasury Department said Monday that governments will be compelled to spend the cash infusion "to meet pandemic response needs and rebuild a strong, more equitable economy."

But importantly, Treasury officials said states and territories are not allowed to use the funding to offset lost revenue as the result of a tax cut or make a deposit to a pension fund.

Senior administration officials said on Monday that approved uses for the funds are intentionally broad and flexible.

"Every state and city are different," Deputy Treasury Secretary Adewale "Wally" Adeyemo told reporters Monday. "In the coming days and weeks, Treasury's Office of Recovery Programs will work hand-in-hand with governors, mayors, members of Congress and other local officials to answer any questions and ensure funds are making it to communities as soon as possible."

Of the $350 billion total, state governments and the District of Columbia will receive $195.3 billion, counties will receive $65.1 billion, cities will receive $45.6 billion and tribal governments and territories will receive $24.5 billion.

Additionally, state governments will receive their funding in either one or two payments based on their respective unemployment rates.

States that have experienced a net increase in their unemployment rate of more than 2 percentage points from February 2020 to the latest available data will receive their funds in a single payment. All other states will receive the funding in two equal tranches.

Counties, cities and tribal governments can apply and be certified for the federal funds via a Treasury website and see payments in as soon as a few days.

"Today is a milestone in our country's recovery from the pandemic and its adjacent economic crisis," Treasury Secretary Janet Yellen said in a press release.

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"With this funding, communities hit hard by COVID-19 will able to return to a semblance of normalcy; they'll be able to rehire teachers, firefighters and other essential workers — and to help small businesses reopen safely," she added.

But governments are barred from depositing money into pension funds, which became a key worry of Republicans in Congress.

Democrats slipped the prevention into Biden's $1.9 trillion American Rescue Plan just before Capitol Hill approved the legislation after several moderates expressed concerns that some states could seize the funds to approve tax cuts or fund retirement plans.

Approved expenditures for the $350 billion include supporting public health expenditures, addressing the negative economic impact caused by Covid-19, replacing lost public-sector revenue or investing in water, sewer and broadband infrastructure.

Governments can also elect to earmark funds to provide premium pay for essential workers.

Officials noted that while some states or local governments may opt to use the funds for select infrastructure projects, the current allocations are not meant to replace the American Jobs Plan.

The Biden administration is trying to persuade lawmakers to support two more multitrillion-dollar stimulus plans.

The White House bills its $2 trillion American Jobs Plan as a once-in-a-generation infrastructure overhaul with hundreds of billions of dollars earmarked for road repair, fixes to the nation's waterways and the developments of climate-friendly energy.

The other is the American Families Plan, a $1.8 trillion collection of spending and tax breaks aimed at encouraging education, reducing child-care costs and supporting national paid family leave.

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