Treasury to start paying out $350B in state and local aid

The Treasury Department on Monday launched its $350 billion program to distribute aid to state and local governments, giving the U.S. economy an added boost after relatively modest hiring in April.

The aid is part of President Joe Biden’s larger $1.9 trillion coronavirus relief package that became law in March. Administration officials said payments could begin to go out in the coming days to eligible governments, allowing state, local, territorial and tribal officials to offset the economic damage from the COVID-19 pandemic.

Guidance from the Treasury Department listed broad categories for spending the money. State and local governments can use the money for public health expenses. They can also offset harm from the downturn to workers, small businesses and affected industries. Money can replace lost public sector revenues. Essential workers can qualify for premium pay, and investments can be made in water, sewer and broadband internet.

But Treasury has also placed restrictions. Officials said the funds should not be used by state and local governments to cut taxes, pay down debt or bolster reserve funds.

The funding could provide a jolt of growth to the economy after the government reported Friday that employers added a disappointing 266,000 jobs in April, a sign of how difficult it can be to restart an economy despite an unprecedented degree of federal assistance. Labor Department figures show that local governments are still down nearly a million jobs since February 2020, right before the pandemic began to cause mass layoffs amid shutdowns.

The aid to state and local governments has largely been pushed by Democrats, who remember how these vital sectors of the economy weighed down the recovery from the 2008 financial crisis and caused relatively modest growth. Republican lawmakers generally opposed the aid because they said it would encourage wasteful spending and noted that state tax revenues had generally rebounded from the downturn.

“We all know that one of the things that held back the recovery the most after the Great Recession was the contraction of state and local government,” said Gene Sperling, who is overseeing aid distribution for the White House. “This is responding to the lessons of the past in a powerful way.”

Local governments should expect to receive funds in two tranches, with half coming this month and the rest a year from now. States that saw their unemployment rates jump by 2 percentage points relative to February 2020 will get their money in a single payment, while the rest will receive their funding in two tranches.