Feds relax rules for local and state governments' relief funds; 'a major win for many smaller communities'

"State and local governments receiving pandemic aid payments under a $350 billion federal program gained new flexibility and further clarity with how they can use the funding, under a final rule that the U.S. Treasury Department issued," Bill Lucia reports for Route Fifty. "The 437-page rule-making document released Jan. 6 provides additional information on how aid recipients can spend money from the American Rescue Plan Act on capital expenditures, employee pay and water, sewer and broadband projects, among other areas."

According to the final rule, local governments can use $10 million of their relief payments to pay down revenue losses. That allows them "to spend the money on a broad range of general government expenses without jumping through administrative hoops outlined in an earlier version of the rule. This is a major win for many smaller communities," Lucia reports. The guidelines also clarify that governments can use some funds for water, sewer, and broadband projects.

The final rule takes effect April 1, but aid recipients can start following the final guidelines now, the department said. "Treasury made clear that state and local government aid recipients are still barred from dumping their aid into "rainy day" reserve funds, using it for debt service payments, or depositing it into pension funds to pay down liabilities," Lucia reports. "The rule also specifies that states cannot use their funding to "directly or indirectly" offset reductions in tax revenue resulting from changes in law or policy, beginning on March 3 of last year. The law's restrictions around offsetting tax reductions have been facing legal challenges brought by multiple states."