Relief funding to cities could cause headaches

May 1, 2020


Money from the federal CARES Act, $562.5 million, is slated to go to local municipalities in Alaska to help with the COVID-19 public health crisis. That’s great news for local governments that are reeling from the unexpected blow to tax revenues caused by the slowdown of the economy.

But there is confusion about how, exactly, that money may be spent, leaving some cities concerned that they’ll face penalties or even have to return money in the future if they spend it incorrectly.

Kenai City Manager Paul Ostrander testified to the House Finance Committee on Thursday.

“I do think that it’s critical that these funds are distributed to the municipalities and the boroughs across the state,” Ostrander said. “That local control is critical. Communities know where that need is within their community, so I think that is very important.”

Wording in the CARES Act and subsequent direction from the Department of the Treasury are at odds about whether the money can be used only for direct costs related to the pandemic, such as purchasing PPE equipment, or whether it can be used to buffer losses in revenues.

Kenai, for instance, doesn’t have that many direct COVID-19 costs but is hurting from a loss of sales tax revenue. That could result in having to raise taxes, which would shift the burden to residents.

City policy requires that expenditures match revenues over a three-year period, so the city can’t cover losses from its fund balance for very long. And there’s a cap on the city’s fund balance amount, requiring a lowering of taxes if the balance gets too high.

“But even with that, even with our fiscal responsibility over the decades, this budget, the preparation of this budget, has been the most difficult of my career,” Ostrander said. “There’s so many uncertainties.”

Ostrander says, in preparing next year’s budget, the city has cut over $1 million worth of capital projects, has furloughed four positions and is looking at three more, and has increased the amount employees contribute to their health insurance. But the city is still looking at using $760,000 in fund balance next fiscal year. CARES money would soften that hit — but not if the city ends up having to give the money back.

“I think, without that clear guidance, we’re going to see communities that are utilizing these funds in ways that the Treasury may determine is inappropriate and potentially be asked to return those funds, and, certainly, funds that, at that point, will not exist,” Ostrander said.

In an interview with KDLL on Friday, Alaska Sen. Dan Sullivan said his hope for the CARES Act local government support is that it be flexible.

“This money should be able to be used for that, to shore up these revenue losses that are no fault of any community in Alaska that need the help, so they can still pay for firemen and policemen and other important community services,” Sullivan said.

Sullivan says he has been encouraging the secretary of the U.S. Department of Treasury to clarify the regulations that revenue replacement is an allowed use. However, he does want to make sure the money is only used for losses associated with the pandemic.

“There have been some concerns that if you don’t put strict limits on the use of this that, for example, the state of Illinois will use this money to bail out their long-standing problems that they’ve had with, for example, their pensions that are under water,” Sullivan said. “They’ve mismanaged their government system for years, if not decades. It shouldn’t be used for that, but if it's impacts directly related to the pandemic, which is what we’re seeing in our state, that’s exactly what I believe the CARES Act allows for.”

If the Department of Treasury does not issue a regulatory interpretation soon, Sullivan says he intends to introduce legislation to clarify the matter once the Senate is back in Washington, D.C. next week.