(Critical) Observations on the Ohio District Court Decision Enjoining the Rule Limiting the Use of ARPA Relief Funds Provided to States
The decision goes to great lengths to reach an implausible result and does not seem fully aware of the nature and extent of existing federal-state entanglements as to budgeting.
Ordinarily, the federal government provides funding to the state with numerous strings attached. The federal government did this in connection with aid provided to states and localities under the CARES Act. Requiring aid to be spent in such particular ways was criticized as putting too much pressure on states and localities to fit their spending into precise categories during an emergency. This was especially unfortunate given that a lesson of the Great Recession was/is that state and local governments should not cut vital services during a crisis to balance their budgets, but not every necessary social service could be related back to the CARES Act categories. [For further discussion, see here.]
ARPA tried to address this issue by providing more general aid to states and localities. However, Congress wanted the aid to be spent on responding to the pandemic rather than tax cuts. In other words, rather than burden states and localities with a requirement to spend these relief funds in only a few specific ways, the federal government only prohibited a narrow set of uses.
Yesterday, somewhat surreally, this rule, Section 9901(c)(2)(A) of ARPA, codified at 42 USC 802(c)(2)(A), limiting the use of relief funds was struck down by an Ohio district court (in part) on federalism grounds. There is much I don’t agree with in the opinion, but in this post just want to make one broad and one narrow point.
First, the broad point. As my, admittedly opinionated, summary indicates, this decision is, at best, ambiguous as to advancing federalism concerns because it makes it harder for the federal government to ask less of the states. Further, the decision strains to reach this peculiar result. The Treasury Department has issued an interim final rule that in effect make it extremely unlikely that any state, including Ohio, would run afoul of the prohibition on the use of relief funds for tax cuts. And this is not just my opinion of the regulations, but the opinion of state-level advocacy groups who are all about supporting tax cuts. See here and here — the latter article includes the following memorable line: “When all is said and done, the ARPA clawback, following the interim rule, seems to be a bit of a nothingburger.”
If the Treasury has issued rules that are so state-friendly that no state is likely to run afoul of them, and Ohio has already certified that it can live by these rules, then where is the injury? To be sure, if the Treasury changes the rules or claims that Ohio did not follow them, then Ohio would have every right to claim that the statute was unconstitutional or that the Treasury regulations were ultra vires. There are many reasons why our legal system discourages rulings in hypothetical cases like this and there are many doctrines, constitutional (standing) and prudential (mootness, ripeness) that courts can and do use to await the further development of a legal issue. And, not surprisingly, this is what a Missouri district court did in dismissing the very same argument. In fairness, the Ohio court does address these issues, unpersuasively (in my view). My broad point is to illustrate how much work the court does to get to a somewhat upside down federalist result that will have no practical result — at least as to ARPA.
The narrow point I wanted to make has to do with “federalism norms.” This notion plays a minor role in the district court’s analysis. The idea is that Congress needs to be particularly clear when it upsets federalism norms, which is something, it is claimed, that the ARPAprovision does as to state taxes. There is a lot here to be unpacked, from the underlying principle to whether the provision is unclear, but for the sake of argument I will grant that there is such a principle and even that the provision at issue is unclear. But what I don’t want to grant is that this is some big violation of federalism norms.
Since this is a blog post, not a brief, I will just focus on the closest analogy (but see this piece on federal entanglement through securities law): the statutes and regulations dealing with arbitrage bonds. Since the beginning of the income tax, the interest paid on state and local bonds has been exempt from federal income tax (for some of the history, see here). This means that the federal government is essentially given a free-floating grant to any state and local project that passes muster under state and local borrowing law. Over time, Congress has acted to restrict the terms of the grant. For example, Congress decided it did not want state and local governments to borrow at a tax- exempt rate in order to invest at a higher (taxable) rate. Any arbitrage so earned needs to be rebated to the United States. The tax-exempt bonds can also not directly or indirectly be used to acquire higher-yielding investments. See 26 USC 148(a)(2). The district court did not seem to think that the notion of “indirectly” could be made sensible in the context of the ARPA rule restricting using relief funds for tax cuts and yet it seems to have worked well enough for a long time in the arbitrage context. If only the district court had not been in such a hurry.
There is an exception to the no arbitrage rule for cash flow borrowings. These are borrowings that occur because tax revenues often come in unevenly, whereas government expenditures need to be far more steady. But how to control the amount of arbitrage? Federal tax law regulates the size of these borrowings by requiring they not exceed the entity’s “cash flow deficit.” See 26 USC 148(f)(4)(B)(iii).
The regulations from the Treasury list many permitted COVID-related uses for ARPA funds, including covering “a reduction in a recipient’s general revenue” [See 31 CFR 35.6(d)(2) of the interim rule]. Without doubt, the formula Treasury arrived at is not the same as the methodology to establish a cash flow deficit, but that is not my narrow point. Rather, my point is that Congress was in fact legislating against the background of federal agencies, particularly the Treasury (but also, for example, the SEC), having a lot of interface with state and local budgeting and the specific issue of replacement funds. What Congress did with the ARPA provision was no novel norm violation and so there was no need for the district court to contort itself to evade standing doctrine etc. and then require of Congressional drafters special super explicit clarity and affirmation.
[Note: Just because the district court got it wrong as a matter of law does not mean that it would be better as a matter of policy for the federal government to address its fiscal relationship with the states systematically (something I think should happen), but that is a policy preference not a legal mandate.]
