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Ducey sends $400M of CARES money to state agencies

Gov. Doug Ducey is using hundreds of millions of dollars in federal funds earmarked for COVID-19 relief to pay for state operations, such as salaries, which some say contravenes the intention of Congress.

Ducey, who controls nearly $1.9 billion of federal coronavirus relief money, funneled nearly a quarter of it to state agencies, which, in turn, plan to send portions of their original budget allocations back to the state.

The Governor’s Office touted his move as an example of prudent budgeting that is helping the state elude a dire fiscal crunch, but observers argue that Arizona could be stretching, if not outright breaking, rules on how states can use funds they received under the Coronavirus Aid, Relief, and Economic Security Act, and that the state might be compelled to pay back the federal government.

Congress didn’t allow states to use CARES Act money to replace revenue lost because of the pandemic. All of the roughly $150 billion divided among states must be used directly to address the effects of the virus, and any unspent money reverts back to the federal government at the end of the year. But Arizona effectively allocated nearly $400 million to state coffers by using the federal funds to pay for already-budgeted salaries and some other expenses across several state agencies.

The agencies, in turn, plan to return money originally allocated to them by the Legislature back to the state treasury.

Ducey’s office is confident that it used the money properly, said Matt Gress, the governor’s budget director.

“There’s always a chance that the auditors come back and say, ‘We need a little bit more clarification on X, Y and Z,’” Gress said. “But I don’t see a scenario in which they say, ‘Return this money,’ because we followed the guidance as clearly as we could.”

Arizona received more than $4 billion from the CARES Act, and Ducey holds wide latitude in how to spend $1.86 billion of it. As of November 18, he has allocated $1.48 billion, according to the most recent date for which legislative budget analysts have updates on CARES Act spending.

About $396 million of that was used for “state agency public health and public safety expenses,” according to tracking documents. Eleven agencies — the departments of Agriculture, Corrections, Economic Security, Health Services, Insurance and Financial Institutions, Juvenile Corrections, Liquor Licenses and Control, Public Safety, Revenue and Transportation, as well as Arizona Parks & Trails — that received CARES Act funding will deposit $300 million back into the state’s General Fund and $96 million into other funds.

Some agencies, like the Department of Health Services, have a clear connection to the pandemic. For others, Ducey’s office relied on guidance from the U.S. Treasury Department that says payroll for public health and public safety employees could be presumed to be related to the pandemic and therefore eligible to be funded by the CARES Act.

Ducey’s office determined that all state workers who are certified peace officers could count as public safety employees for the purposes of using CARES Act funds to pay their salaries.

The Department of Liquor Licenses and Control, for instance, plans to transfer a total of $126,738 back to the state’s General Fund. In his FY2022 budget request, agency director John Cocca wrote that the CARES Act funds were used to pay for operating expenses in the fourth quarter of FY2020.

Cocca, like several other agency heads, praised the governor in explaining why his agency is returning cash to the state treasury.

“The Department of Liquor Licenses and Control recognizes that the Governor is focused on maintaining the fiscal integrity of the State’s General Fund in light of the COVID-19 Public Health Pandemic,” he wrote. “Further, the Governor is uniquely positioned to collaborate across all departments, identifying and crafting the best solution that is appropriate for each.”

Using federal money to pay for expenses that otherwise would have been covered by the state boosts Arizona’s state coffers. Ducey spokesman Patrick Ptak said it has helped stabilize the state’s budget so Arizona doesn’t have to cut spending from key programs, such as education and public safety.

“I would add that we know the pandemic isn’t just about the public health response,” Ptak said. “It’s about the long-term recovery and the decisions we’re making with these dollars, while prioritizing public health, will help us in years to come to avoid the tough decisions that many other states are going through right now.”

Arizona’s revenues appear to be in good shape. Legislative forecasters went from anticipating a potential deficit of $1.1 billion to predicting the state could have as much as $800 million extra in the bank by July 2022, as higher-than-expected sales tax revenue, lottery sales and job losses concentrated in lower-wage fields abated concerns about an extended economic downturn.

While the CARES Act gives states broad parameters in which to spend their share, it requires spending to be directly related to the public health emergency caused by COVID-19 and only for expenses that “were not accounted for in the budget most recently approved as of the date of enactment” of the CARES Act on March 27. The federal funding must also be spent between March 1 and December 30.

Ducey waited to sign the FY2021 budget, which lawmakers passed on March 23 and which contained $50 million in state funding to help with the response to COVID-19, until March 28, ensuring that he could use federal money before dipping into the state’s own allocations.

There is no complete centralized record of how states are using their CARES Act funds, but incomplete databases maintained by organizations, such as the National Conference of State Legislatures, show that Arizona’s approach of reimbursing the General Fund is uncommon.

Across the nation, much of the money has been spent on coronavirus tests, medical equipment and relief for small businesses and renters who could face bankruptcy or eviction because of the pandemic. Many states, including Arizona, also set up programs to provide grants to cities and towns that are too small to qualify for direct funding under the CARES Act.

Some states have chosen to liberally interpret the guidance provided by the U.S. Treasury Department, said Jared Walczak, vice president of state projects at the Tax Foundation’s Center for State Tax Policy

A handful used millions of dollars to invest in broadband infrastructure, reasoning that it’s an important economic development as many employees and students are expected to work remotely. West Virginia, for example, planned to use about $50 million to repair rural roads it designated as “medical access highways.”

“Most states have avoided what might be interpreted as directly disregarding the guidance, but many have been flexible in the interpretation of that guidance in hopes that ultimately the Treasury will be similarly flexible in the accountability standards,” Walczak said. “Nonetheless, what’s being proposed in Arizona is a very aggressive interpretation.”

States are on the hook for paying back federal money if audits next year show that they spent it in a manner that doesn’t align with the law. In Idaho, fears of an audit prompted several cities to decline their governor’s offers of CARES Act money to pay police officers’ salaries.

States that weren’t hit hard early by the pandemic have struggled with how to use their share of the federal money because they may be barred from using it in areas where the money could be most useful, Walczak said.

“Many states have more money than they know what to do with in the coronavirus relief fund, but at the same time they’re looking at shortfalls in their operating budget,” he said. “It’s very tempting to reach into this one pot to fill a hole in another, but that’s not what the money’s for. Getting too creative could create a worse situation down the road where the money has already been spent, and now you need to reimburse the federal government.”

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