U.S. Treasury opens $350 billion in COVID aid, some states won't get full funds for a year

By David Lawder

WASHINGTON (Reuters) - The U.S. Treasury on Monday opened access to $350 billion in COVID-19 aid for state, local, tribal and territorial governments, but 30 states with faster-recovering employment are likely to see their funds split into two payments a year apart.

The Treasury released new guidance on uses of the aid, timing it based on unemployment and prohibiting states from using it to offset tax cuts.

The guidance did not quell Republican opposition to the rule, which has drawn legal challenges from 18 states largely controlled by Republican legislatures who argue that Treasury is denying their constitutional rights to set state tax and spending laws.

A Treasury official said all states and local jurisdictions that certify their funding requests immediately can start to receive funds within days to rehire first responders or support local school districts or for other approved uses.

Some 20 states and the District of Columbia will be able to receive all their funds as soon as this month because their unemployment rates are now more than 2 percentage points above levels in February 2020 before the pandemic prompted widespread U.S. lockdowns, a Reuters review of Bureau of Labor Statistics state unemployment data showed.

States with smaller increases in unemployment will receive aid in two tranches a year apart. The BLS data showed 30 states in this category, 21 of which were won by former President Donald Trump in the 2020 elections.

Of the states that can get all their funds in a single payment, only four -- Texas, South Carolina, Louisiana and North Dakota -- were won by Trump.

(GRAPHIC: Pandemic aid to states - https://graphics.reuters.com/USA-ECONOMY/STATES/xlbvgabnlvq/chart.png)

Total funding for state governments in Biden's American Rescue Plan Act is $195.3 billion.

A Treasury official told reporters that the year delay for some states, specified by Congress with the formula determined by Treasury, would nonetheless help them in planning their budgets, and they would still receive a substantial amount in the initial payment.

Treasury said $65.1 billion has been allocated to counties and $45.6 billion for metropolitan cities. Both categories will get their funds in two tranches a year apart, with the first payment coming in May.

Tribal governments, which receive a combined $20 billion, will receive an initial payment in May and a second in June based on employment data. The $4.5 billion allocated for U.S. territories will all be delivered in May, Treasury said.

REPUBLICAN OPPOSITION

Ohio Attorney General Dave Yost, whose case is still pending, said the new guidance "can't fix an unconstitutional law. So these meaningless directives on enforcing this tax mandate ought to be treated with the same seriousness as other pieces of fantasy fiction," Yost said in a statement.

Ohio's House of Representatives in April approved a 2% income tax cut totaling about $380 million over two years..

The Treasury has argued that long-established precedents limit how states can use federal funds, and said states that cut taxes must demonstrate how they paid for the cuts elsewhere, "by enacting policies to raise other sources of revenue, by cutting spending, or through higher revenue due to economic growth."

If they cannot demonstrate such offsets, states must pay back COVID-19 aid funds in the amount of their tax cuts, Treasury said.

ESTIMATING SHORTFALLS

Treasury laid out broad eligible uses for state and local aid, including public health responses to the pandemic and replacement of revenues lost to the pandemic.

It said the shortfall can be computed by comparing actual revenues in 2020 to an estimate of what they would have been without the pandemic using a prescribed formula.

The aid can also be used to address economic harm from the pandemic, including aid to unemployed workers and hard-hit communities, and premium pay for essential workers.

The Treasury said the funds can be invested in improvements to water, sewer and broadband internet infrastructure.

The Treasury said it would prohibit use of the funds for debt service or deposits to "rainy day" funds or other financial reserves.

(Reporting by David Lawder, Additional reporting by Howard Schneider and Karen Pierog; Editing by Andrea Ricci, David Gregorio and Kim Coghill)

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