Cities want to relax federal aid spending rules

The Loma Verde Recreation Centre south of San Diego is currently undergoing demolition. This $24 million project will see the facility rebuilt from the ground up with a new pool. The iconic bridge that connects to Oceanside Pier is in disrepair an hour to the north. This is due to lack of funds for the $25 million rehabilitation.

Cities want to relax federal aid spending rules

The American Rescue Plan, the comprehensive COVID-19 relief law that President Joe Biden and congressional Democrats championed, is the reason why one project is moving forward and not the other. It is a massive federal aid program that pumps billions of dollars into the states and local governments.

The U.S. Treasury Department has developed rules that allow some governments more freedom to spend the money how they wish. The new swimming pool is open and the rehabilitation of the pier is OK, at least for the moment.

Local officials have been pushing back against similar disparities across the country, urging Treasury to relax its rules before the program moves forward.

Wade Kapszukiewicz (the mayor of Toledo in Ohio) stated that "otherwise they are penalizing cities because of the pandemic and not providing them relief."

The issue is the $350 billion that states, counties and cities received as part of the huge COVID-19 relief bill Biden signed back in March. This money will be used to support their finances, pay for ongoing costs associated with fighting the virus, and to invest in long-term projects that can strengthen communities for many years. Although the Treasury made the funding available in May, states and cities were slow to spend it.

The Treasury guidelines allow governments to choose from over 60 subcategories of spending money. These include COVID-19 vaccines, premium pay for some workers, housing aid and grants to businesses.

One category is unique for its flexibility. Federal aid can be used by governments that have lost revenue to pay for almost any service, as long as they are not unable to use the federal income. This means that they can use the federal aid to pay for roads, recreation centers, and piers, which may not be possible otherwise.

Liz Bourgeois, spokesperson for the Treasury, stated that the plan gives governments the resources and flexibility to avoid cuts, hire and retain workers, provide essential service and emerge from the pandemic more powerful. Democratic congressional leaders have also praised the Treasury’s flexible guidance.

Some local officials feel that the Treasury's method of calculating lost revenue is too restrictive. Instead of using a fund-by–fund approach to calculating lost revenue, it combines most revenue sources. This would allow governments to claim losses in specific funds like gas taxes for roads, even though other revenue has increased. The calculation should also exclude tax hikes that were recently enacted, as they claim this masks the extent of their losses during the pandemic.

Last November, Toledo voters approved a temporary increase of one-quarter percent in the income tax that will raise $19 million annually for roads. Kapszukiewicz stated that this revenue will offset any other losses incurred by the Treasury. This means the city won’t be able to use relief money for the replacement of old police vehicles.

The mayor stated that it now appears as though our economy has recovered more than it actually has. However, this is merely due to the extra revenue generated by us putting a burden on ourselves. It's absurd.

According to Michael Coleman, a government finance consultant, more than 250 California cities and counties have enacted voter-approved taxes increases since 2018. The majority of these tax increases were implemented during or after 2018-19, which forms the basis for calculating revenue losses.

Chula Vista, a suburb of San Diego, did not adopt new taxes. However, Chula Vista calculated revenue losses exceeding $32 million according to Treasury guidelines. This covers more than half of the $57.5 million allocated under the American Rescue Plan. The city will direct $12.2 million to repair culverts at two intersections in order to reduce flooding. It will also allocate $8 million to build new aquatic facilities for the Loma Verde Rec Center's planned renovation. These projects could have been delayed if the city had not been able tap the revenue-loss section for federal funding.

Valle stated that by doing it all at once, "it's open for the community -- boom! everybody's happy."

However, Oceanside officials are less flexible in determining federal aid. The City's voters approved a one-half percent sales tax, which took effect April 2019. It reduced its revenue loss under Treasury formula from $22million to $12 million and limited its spending flexibility. The city also spent $2.6 million of its reserves, which could have been used to support infrastructure, on meals, homeless services, and grants for businesses during the pandemic. However, the Treasury prohibits federal aid from being used for replenishing reserves.

Oceanside officials want to be able direct more federal money towards fixing the unsafe, seismically unstable bridge from 1920s that leads to its Pier.

Rick Wright, CEO, MainStreet Oceanside's downtown business association, stated that "It is imperative that the Pier be maintained and repaired so that it continues its attraction to visitors." He said, "I don’t think people are immediately aware that the pier is in dire need of restoration. But, if you look closely enough, you can see cracks and pieces that have already fallen out."

Other cities have also written to Treasury asking for it to relax its revenue loss rule and allow them more control over the money. Although it is a valid request, the dispute shows that local governments receive "dramatically more funds" than they need, according to Marc Goldwein (senior vice president, non-profit Committee for a Responsible Federal Budget).

Officials from Treasury said that they are reviewing the comments, but they have not indicated whether or not they will modify the rule. They also did not say when the final version would be published.

Des Moines, Iowa is putting off spending the $47 million it has received. Joe Brandstatter, deputy finance director, stated that the city needs clarification about whether it can count $34million of losses that are not allowed by Treasury rules. This would allow it more flexibility.

The Treasury's revenue loss rule has delayed plans for a new Lincoln parking garage. According to Kate Bolz, mayoral adviser, parking revenue fell during the pandemic. However, the city cannot make up the difference because a new sales tax that is earmarked for streets has reduced the Treasury's 2020 revenue loss from $13.5million to $2.4 million.

Flagstaff, Arizona has also put off plans for a downtown garage because of the Treasury rule. It may have to delay replacing its old snow plows and street sweepers, and trucks. The city's loss due to the Treasury's formula is offset by storm-water fees and dedicated taxes, which reduces its flexibility for federal aid.

Rick Tadder, city treasurer, stated that Congress intended to support cities with big-dollar losses in order to provide services. The Treasury's rule is "restrictive" in terms of how cities can show the true impact on revenues during this pandemic.

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