Biden Administration Pulls Out Amid Threat of Withholding Arizona Relief Funds

WASHINGTON — The Biden administration backed away from its threat to withhold Arizona’s pandemic relief money after accusing the state earlier this year of misusing the funds to undermine mask mandates in schools.

A spokesman for Arizona Governor Doug Ducey, a Republican, confirmed that the state had received its second payment of about $2.1 billion last month.

The withdrawal comes amid renewed focus on the $1.9 trillion aid package Democrats passed last year, which is blamed for helping fuel rapid inflation and raised concerns about whether some of the money had embezzled.

Arizona received $4.2 billion as part of its share of $350 billion scheduled for states and cities to help replace revenue that was lost during the pandemic, support health initiatives, and invest in water, sewer, and band infrastructure projects. wide. Arizona received its first installment of $2.1 billion in 2021, but the Treasury Department, concerned that the state was using the funds to undermine public health efforts, warned Arizona officials that it could take back $173 million it had previously awarded or retain the second tranche of funds. .

Dayanara Ramírez, a spokeswoman for the Treasury Department, declined to explain why the funds were released after the department threatened to withhold them.

“Treasury does not comment on matters in its enforcement process,” Ms. Ramírez said.

Treasury said the funds were disbursed through the standard process that the Office of Recovery Programs has established for making second tranche payments.

The dispute over funding began after the Republican-controlled Arizona legislature banned mask mandates in schools in 2021, but some school districts imposed them anyway. Last August, Mr. Ducey announced that he was implementing two educational programs designed to undermine those requirements.

One of the programs, which received $163 million in federal funds, provided up to $1,800 in additional funding per pupil in public and charter schools that complied with “all state laws” and were open for in-person instruction. Schools that required masks would not be eligible.

A separate $10 million program funded vouchers worth up to $7,000 to help poor families move out of districts that require face coverings or impose other Covid-related “restrictions.”

Treasury first warned Arizona about the use of the funds last October, saying they were undermining the law and public health guidance. In January, the Treasury threatened to start the recovery process if the programs were not redesigned in 60 days. Treasury also warned in January that it might not release the second installment because it believed Arizona had misused part of the first installment of what are known as state and local fiscal recovery funds (SLRFFs).

“Treasury may also withhold funds from the second tranche of the State of Arizona’s SLFRF funds until Treasury receives information confirming that the issues described above have been adequately addressed,” wrote Kathleen B. Victorino, an officer with the Office of Arizona Programs. Treasure recovery.

But Arizona went ahead with the programs anyway, and Mr. Ducey sued the Biden administration to block any effort to recover pandemic relief money.

“The Biden administration is trying to hold congressionally appropriated funds hostage and is trying to intimidate Arizona into complying with this takeover move,” Ducey said at the time.

The Biden administration has called for the case to be dismissed. In a May legal filing, Justice Department attorneys argued that Mr. Ducey had no right to sue because the Treasury Department had not actually tried to recover the money.

“Treasury has not initiated any enforcement proceedings to recover the embezzled funds from Arizona, so there is no imminent harm,” they wrote, adding that Treasury’s letters are not final agency actions.

Lawyers representing Arizona did not respond to requests for comment on their next steps in the lawsuit.

The Arizona case is one of several hurdles the Treasury Department has faced in disbursing and overseeing the recovery fund.

A $4 billion debt relief program for black and other “socially disadvantaged” farmers that was part of the relief legislation was frozen after lawsuits from white farmers’ groups who questioned whether the government could offer debt relief. debt based on race.

A Treasury Department rule that states cannot use pandemic relief money to subsidize tax cuts has also stalled in the legal system after several states filed lawsuits arguing the rule violated their sovereignty. Court orders have been granted to four states that prevent the Treasury Department from enforcing the regulation.

Many other states have found workarounds, and about three dozen have enacted tax cuts this year, thanks in part to surpluses that have been inflated by aid money.

The Biden administration continues to deploy money from the American Bailout more than a year after it was signed into law. On Thursday, the Treasury Department announced it would award more than $350 million to Kansas, Maine, Maryland and Minnesota from a capital projects fund to expand broadband access.

With Mr. Biden’s social safety net and climate spending proposals still stalled in Congress, the Biden administration has been encouraging states and cities to use their pandemic relief money to invest in climate development initiatives. workforce and housing, which would further the administration’s equity agenda.

Yet despite the large amount of stimulus money Treasury oversees, the department itself is running out of funds to administer some of the programs. It is seeking permission to redirect administrative money from other programs so that it has more resources to oversee state and local funds.

“While state and local funds have tremendous long-term potential to improve equity, Treasury faces a funding shortfall to administer this program, which is why we urge Congress to take action that addresses this issue and supports success. continuation of these programs,” Wally Adeyemo, Undersecretary of the Treasury, said at an event sponsored by the Urban Institute this week.

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