Does the American Rescue Plan limit how states can spend funds?

After failing to stop the $1.9 trillion COVID-19 stimulus package from becoming law, Republicans are blasting the plan as a bailout for poorly managed Democratic states and cities.

A key piece of the criticism has been the stipulation that $350 billion be siphoned off for state and local governments, money Democrats who pushed through the legislation with no Republican support argue will blunt the pandemic’s fiscal fallout.

Rep. Mike Bost, a Republican from Murphysboro in southwestern Illinois, joined the national GOP chorus when in a WJPF radio interview he claimed there was nothing in the legislation limiting how states can spend the money.

"Where are the checks and balances in the issuing of these funds? Where is it that in there it says, it can only be used for A, B, C and D? It does not," Bost said. "And that’s the problem."

The law — dubbed the "American Rescue Plan" by President Joe Biden — is more flexible than previous aid packages in how money can be spent, experts told us. But it’s also not a free-for-all.

A relief bill passed last year, when Republicans controlled the White House and the U.S. Congress, earmarked $150 billion in state and local government aid for expenses tied only to the public health emergency. After last year’s law — dubbed the CARES Act — took effect, guidance from the federal Department of the Treasury explained funds could go beyond direct health care spending to cover items such as payroll for first responders and costs associated with caring for the homeless community.

The text of the latest aid package sets more flexible guidelines, allowing state and local governments to spend on the pandemic’s "negative economic impacts." According to the language of the new law, funds can go toward increased pay for essential workers, preventing cuts to government services, and making investments in water, sewer, or broadband infrastructure as well. And unlike the 2020 CARES Act, it covers costs incurred through 2024.

Bost spokesperson Alex Naughton, responding to our inquiry in an email, said the Democrats’ package lacks "any meaningful guardrails" for how state and local governments can spend the funds.

"They so loosely defined the terms of what’s an acceptable use of funds … that literally almost any expense could qualify," Naughton said. "This effectively creates a slush fund to use on whatever they want, as long as they paste a ‘pandemic response’ label on the package first."

Experts agreed the new law provides considerable leeway, but they added that it does set some limits and outlines penalties for states and municipalities if they go beyond the legislation’s parameters.

Specifically, state and local governments can’t use funds to make pension payments or offset lost revenue from state and local tax cuts enacted since March 3, 2021.

In Illinois, the pension fund prohibition is particularly relevant given the state’s struggle to meet its pension obligations. Last April, Democratic state Senate President Don Harmon attracted national media coverage when he sent a letter to Illinois’ congressional delegation requesting $10 billion to help shore up the underfunded pension funds.

The prohibition on direct pension spending doesn’t rule out the possibility the federal aid could free up other state money to shift toward pensions. Audit provisions in the law, however, spell out how states would have to return the money if they violate the spending restrictions.

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"If something is found to be outside the scope of the program, the [state or local] government's on the hook to pay that back," said Amanda Kass, associate director of the Government Finance Research Center at the University of Illinois-Chicago’s College of Urban Planning and Public Affairs.

Bost said the American Rescue Plan "does not" include "checks and balances" on how state and local government funds can be spent.

Experts agreed the package is more permissive than previous state and local relief. It allows spending not only on public health but also on the economic impact of the pandemic as well as government services and infrastructure.

But it still contains two big restrictions: the money cannot pay down pensions or fill in holes created by tax cuts. State and local governments also have to report how they spend the funds, and if they are found in violation must pay the money back.

We rate Bost’s claim Half True.

HALF TRUE – The statement is partially accurate but leaves out important details or takes things out of context.

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