As I noted Tuesday, Washington’s state and local governments will receive $7.120 billion from the coronavirus state and local fiscal recovery funds, which are part of the American Rescue Plan (ARP) Act.

The fiscal recovery funds may generally be used for costs related to the pandemic and its negative economic impacts; to provide premium pay to essential workers; to backfill lost revenue; and for water, sewer, or broadband infrastructure. The Legislature has already appropriated $3.162 billion of the state’s $4.428 billion share of the coronavirus state fiscal recovery fund (CSFRF).

The U.S. Department of the Treasury’s interim final rule includes more guidance as to what types of spending will be allowed from the fiscal recovery funds. For example, jurisdictions may use the funds to provide cash assistance for households (if “reasonably proportional to the negative economic impact they are intended to address”), “improve efficacy of programs addressing negative economic impacts,” and rehire government employees. Aid to impacted industries is another permissible use of the funds. The guidance notes that if a jurisdiction provides “aid to industries other than tourism, travel, and hospitality, recipients should consider the extent of the economic impact as compared to tourism, travel, and hospitality.”

Also, “Treasury will presume that certain types of services . . . are eligible uses when provided” in census tracts with large proportions of low-income people. (These services would include things like housing, addressing education disparities, and healthy childhood environments.)

The transportation budget passed by the Legislature includes $400.0 million from the CSFRF for fish passage barrier removal. It’s not clear if that will be considered an allowable use of the fund. Fish barrier removal is not needed to respond to the pandemic. Allowed uses within the water infrastructure category, according to the guidance, are limited to “projects that improve access to clean drinking water” or “improve wastewater and stormwater infrastructure system.”

Additionally, the guidance specifies that jurisdictions may use the money to make deposits into their unemployment insurance (UI) trust funds to restore pre-pandemic balances. (Washington’s trust fund balance on Jan. 1, 2020 was $4.778 billion; on Jan. 1, 2021, it was $1.798 billion.) Treasury’s reasoning for allowing this is

the close nexus between Unemployment Trust Fund costs, solvency of Unemployment Trust Fund Systems, and pandemic economic impacts. Further, Unemployment Trust Fund deposits can decrease fiscal strain on Unemployment Insurance systems impacted by the pandemic. States facing a sharp increase in Unemployment Insurance claims during the pandemic may have drawn down positive Unemployment Trust Fund balances and, after exhausting the balance, required advances to fund continuing obligations to claimants. Because both of these impacts were driven directly by the need for assistance to unemployed workers during the pandemic, replenishing Unemployment Trust Funds up to the pre-pandemic level responds to the pandemic’s negative economic impacts on unemployed workers.

That reasoning ignores how increased UI benefits automatically translate into higher UI taxes for employers. (We wrote about the system in a policy brief earlier this year.) To help address this negative economic impact on employers, the Legislature passed ESSB 5478. (Gov. Inslee signed the bill yesterday.) Under the bill, certain unemployment insurance benefits will not be charged to employers.

Instead, the benefits will be funded through a state operating budget appropriation. As passed by the Legislature, the 2021–23 operating budget appropriates $500.0 million from the CSFRF to the unemployment insurance relief account, which would then be used to implement ESSB 5478. The budget bill states that if that use of the CSFRF is not allowed under federal rules, the funding will instead come from the Washington rescue plan transition account (the new, unrestricted shadow reserve account to which the rainy day fund balance is transferred).

(I’ll have more on using the funds to replace lost revenue and to pay for tax cuts in future posts.)