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WASHINGTON — Lawmakers and state officials say the Trump administration is unreasonably restricting how local governments can spend federal aid as they struggle to stay afloat during the pandemic and Republicans raise doubts about providing added financial relief to hard-pressed communities.
The officials say new Treasury Department rules that prohibit local governments from using their share of $150 billion provided last month for “revenue replacement” are impractical. Requiring that such assistance be confined to costs directly tied to the pandemic will be of limited help, they say, particularly in communities that have a low incidence of Covid-19 cases but have seen their revenue dry up because of the government-ordered shutdown of the economy.
“It is clear the revenue loss is going to be coronavirus related; it is just that the expenditures are not specifically for coronavirus,” said Senator Sherrod Brown of Ohio, one of 46 senators in the Democratic caucus who signed a letter made public Sunday urging the administration to revise the ban.
In response to escalating local needs, the Federal Reserve said on Monday that it would substantially expand its municipal lending program, allowing smaller cities and counties to sell their investment-grade debt to the central bank. The move eases the way for local governments desperate to raise funds as the coronavirus drains their coffers.
The push for more state freedom in spending the first batch of money allocated by Congress last month comes as the clash intensifies over whether states should get hundreds of billions of dollars more in the next stage of emergency legislation — or whether there should be another recovery measure in the short term at all.
Senator Mitch McConnell, Republican of Kentucky and the majority leader, suggested last week that he would resist more state aid and said he wanted to push the “pause button” on new legislation. But on Monday, illustrating the pressure to help local governments, he seemed to backtrack in an interview on Fox News Radio, saying his initial comment was meant as a reminder that some states had fiscal issues before the pandemic.
“There probably will be another state and local funding bill, but we need to make sure that we achieve something that will go beyond simply sending out money,” Mr. McConnell said.
Other Republicans have joined with Mr. McConnell, saying they worry that states will take advantage of the opening to obtain federal money to resolve longstanding fiscal problems such as shortfalls in public employee pension funds.
“It’s not fair to the taxpayers of Florida,” Senator Rick Scott, Republican of Florida and a former governor of the state, told reporters in the Capitol on Monday. “We sit here, we live within our means, and then New York, Illinois, California and other states don’t. And we’re supposed to go bail them out? That’s not right.”
With an election six months away, President Trump had been seen as a supporter of more state aid but has vacillated since Mr. McConnell’s statement and the concerns expressed by other Republicans.
“Why should the people and taxpayers of America be bailing out poorly run states (like Illinois, as example) and cities, in all cases Democrat run and managed, when most of the other states are not looking for bailout help?” Mr. Trump said in a tweet on Monday. “I am open to discussing anything, but just asking?”
Mr. Brown said he discussed the flexibility issue by telephone on Monday with Treasury Secretary Steven Mnuchin, who has been negotiating with Democrats. Mr. Mnuchin, according to Mr. Brown, said that he would address the concern in upcoming legislation and that the Treasury would be liberal in its interpretation of what costs were directly related to the pandemic until then.
Given Republican opposition and Mr. Trump’s mercurial nature, Mr. Mnuchin’s comments are no guarantee the problem will be fixed, Mr. Brown said. “That doesn’t mean Trump will fight for it and it doesn’t mean McConnell will go along with it,” he said.
Treasury officials confirmed that the two men spoke about what might be in the next measure. They also pointed to Mr. Mnuchin’s comments on Fox News on Sunday about any further state aid requiring bipartisan support but would not elaborate on his position about granting more flexibility.
“If we need to spend more money we will, and we’ll only do it with bipartisan support,” Mr. Mnuchin said.
In a memorandum last week, the Treasury said states could spend their piece of the $150 billion only for costs incurred directly as a result of the pandemic such as medical and public health expenses and for paying public workers “substantially dedicated” to the response to the outbreak.
“Funds may not be used to fill shortfalls in government revenue to cover expenditures that would not otherwise qualify,” the memo said.
State and local officials from both parties have told lawmakers that they find the Treasury restrictions unworkable.
“We need the flexibility to prioritize how we are spending these dollars,” Gov. Gretchen Whitmer of Michigan said during a virtual interview hosted by Politico on Monday.
With Illinois serving as a fiscal whipping boy for Republicans, Gov. J.B. Pritzker noted at a news conference on Monday that it was a “donor state to the federal government,” paying more in federal taxes than it got back.
“The states who are being bailed out every year, year in and year out, are the states who take more out of the federal dole than they put in in taxes,” he said, adding that, unlike the federal government, Illinois had a balanced budget.
“All states need it now,” Mr. Pritzker said of federal aid. “Because coronavirus, Covid-19, has blown a hole in every state budget all across the nation.”
Proponents of the aid believe that Mr. Trump and Republicans will eventually have to relent when the extent of the fiscal crisis for local governments becomes clear. Senator Bill Cassidy, Republican of Louisiana and a sponsor of bipartisan legislation providing $500 billion for state and local governments, said his Senate colleagues were hearing from Republican governors and state lawmakers that their states were in trouble.
“This is not about a state which has been mismanaged overpromising pensions and underfunding suddenly finding a way to wiggle out of that obligation,” Mr. Cassidy said. “It is about helping to keep police, fire and sanitation in place.”
Democrats are also putting the onus on Republican senators up for re-election, challenging them on whether they back Mr. McConnell or money for their communities.
In their letter to the Treasury spearheaded by Senator Jack Reed of Rhode Island, Senate Democrats accused the Trump administration of “trying to impose overly restrictive regulations” that were not the intent of the original legislation. “This could cripple each state’s ability to respond and recover,” said the letter, which urged the administration to change the rules so state and local governments could maintain essential services.
Senator Susan Collins, Republican of Maine, said on Monday that she agreed that the restrictions were counterproductive.
“It doesn’t help three-quarters of the state of Maine because our incidence rate is low in the northern part of the state,” she said. “But we are still required to be shut down so sales tax isn’t going to the state, restaurant and lodging tax isn’t going to the state, excise tax on registering your car, your boat, your snowmobile isn’t going to the state,” she said.
“It is the indirect costs of being forced by government order to shut down that is killing these communities,” Ms. Collins said.
The Fed had previously announced that it would buy short-term debt from states, cities with populations of more than one million and counties with populations exceeding two million. On Monday, it expanded that to cities with more than 250,000 residents and counties with more than 500,000. A total of 261 states, cities and counties will now qualify for the program, the Fed said.
Reporting was contributed by Julie Bosman, Alan Rappeport, Jeanna Smialek and Emily Cochrane.
