New Guidance on State Aid Under the CARES Act

On Wednesday, the U.S. Department of the Treasury issued new guidance on allowable expenses using the $150 billion in state aid provided under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a point on which there has been considerable confusion. The guidance provides a reasonably flexible interpretation of permissible uses of payments from the Coronavirus Relief Fund, but—thwarting the hopes of those who sought the conversion of the fund into a flexible relief package—the money cannot be used to backfill revenue shortfalls.

The language of the CARES Act imposes three conditions on the use of payments from the fund. These payments may only be used to cover costs that:

1. Are necessary expenditures incurred due to the COVID-19 pandemic;
2. Were not accounted for in the budget most recently approved as of enactment of the CARES Act (March 27); and
3. Are incurred between March and December of 2020.

This relatively spare language resulted in some confusion, with differing expectations as to what would constitute a “necessary expenditure,” or what constitutes an expenditure “incurred due to” the public health crisis, and even how Fiscal Year (FY) 2021 budgets adopted prior to March 27th would be handled.

Per the new Treasury guidance, the word “necessary” will be construed broadly (“the expenditure is reasonably necessary for its intended use in the reasonable judgment of the government officials responsible for spending Fund payments”). Although the funding cannot be used to close revenue gaps, states gain significant flexibility through an interpretation allowing the money to be expended on payroll expenses for public sector workers “whose services are substantially dedicated to mitigating or responding to” the COVID-19 crisis, including public safety, public health, health care, human services, and similar employees.

Importantly, it has also been clarified that legitimate expenditures of Fund dollars include both direct health responses and economic relief. State and local governments could, for instance, provide a financial relief package for individuals or businesses affected by the crisis, paid for out of the fund.

Governments do not need to make separate applications to the federal government for each expenditure; Treasury transfers the funding to state and local governments, which may then spend it for authorized purposes. We have previously documented how the $150 billion is divided among state and eligible local governments. If an eligible locality does not claim its share, it defaults to the state government.

Finally, the new guidance establishes that the “most recently approved” budget refers to the enacted budget for the relevant fiscal period—a statement that still carries a certain amount of ambiguity for FY 2021 budgets adopted prior to March 27th, but which would appear to mean that specific COVID-19 responses expressly budgeted for prior to that date may not be eligible. Crucially, though, a cost meets the requirement of not being accounted for in the budget if either of the following conditions is met:

1. The cost cannot lawfully be funded using a line item, allotment, or allocation within that budget; or
2. The cost is for a substantially different use from any expected uses of funds from such a line item, allotment, or allocation.

This new guidance improves our understanding of eligible expenditures under the Coronavirus Relief Fund, but questions remain.

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