The Morning Report
Get the news and information you need to take on the day.
How the city of San Diego can or should spend its COVID-19 relief money from the federal government is emerging as a political fight among elected leaders grappling with unprecedented financial catastrophe.
San Diego received $248 million through the federal government’s Coronavirus Aid Relief and Economic Security Act. Cities have to spend that money responding to the crisis, and can’t use it to replace lost revenue from the collapse in economic activity, according to guidance the Treasury Department issued last month and updated this week.
But after Mayor Kevin Faulconer proposed cuts to library and rec center hours, graffiti clean-up and code enforcement to close a $300 million shortfall between this and next years’ budgets, some City Council members are hoping the federal money can help the city avoid losing those neighborhoods services. Others are worried the city could find itself in serious legal trouble if it is not extremely cautious with how it spends those funds.
Interpreting what qualifies as a direct response that the federal money can cover – freeing the city to use its general pot on other priorities – falls somewhere between art and science.
Council members who represent the city’s lower-income, predominantly minority districts – on which the impact of cuts to city services would fall especially hard – have pressed the city to use the CARES Act funding to the greatest extent possible to stave off those cuts. Council President Georgette Gómez in an April 24 memo urged the mayor to maximize CARES expenditures to minimize budget cuts, and told the city’s independent budget analyst to offer its own analysis on eligible spending.
In comments at the Council’s budget review committee last week, Councilwoman Monica Montgomery and Councilwoman Vivian Moreno echoed those concerns, urging the city to view the funding as a way of avoiding painful cuts in lower-income neighborhoods.
“We have underserved communities in San Diego – but we get very comfortable in having communities that are underserved,” Montgomery said in an interview. “It’s just a term we throw out. My comments and concerns (at the budget hearing), are specific to, is that the same mentality that will go into our decision-making in spending down these dollars? We are suffering more, and so there is going to be more urgency.”
But others fear a loose interpretation of eligible funding could lead to even worse consequences down the line. San Diego is among the largest cities to receive funding from the law’s Coronavirus Relief Fund. Staffers working on the budget think an audit is likely. Councilman Chris Cate said he can imagine city officials having to answer uncomfortable questions at future congressional oversight hearings.
“The funding for the CARES Act is not a blank check for the city to go on a free-for-all spending spree,” Cate said. “The millions of dollars in lost revenue due to the COVID-19 pandemic cannot be backfilled by federal funding. We need to be extremely prudent in ensuring the CARES Act funds we use are directly related to the pandemic, and within the timeframe provided. The last thing we need as a city is to be hauled into a congressional panel explaining the rationale behind misappropriating taxpayer monies.”
The mayor’s office is determining what spending counts as a “direct response” to the virus and will report its conclusion this month when it updates the budget picture based on the latest information.
Eligible costs need to have occurred between March and December. And anything from the city’s current budget, which was already in place when the pandemic hit, will undergo extra scrutiny. Paying for employees whose salaries were already included in the budget, for instance, is only OK if their responsibilities are “substantially different” since the crisis hit.
The city, for example, budgets every year to pay lifeguard salaries – some $24 million for 174 lifeguards in the city’s latest budget. The existing budget envisioned those lifeguards patrolling the beach, rescuing drowning swimmers, but their jobs have since changed. In March, they enforced beach closures. Now, they enforce social distancing.
It’s unclear if those lifeguard salaries, based on their new responsibilities, are part of the city’s COVID-19 response. And there’s a better chance they’re acceptable in the city’s next budget than in the one already in place. Similar questions face other payroll costs across city departments. Operating the Convention Center as a temporary homeless shelter, on the other hand, represents a clear example of a new cost from the pandemic.
At the same time, the city is considering whether there are things it should spend the money on that aren’t related to its normal course of business, like replenishing the city’s relief fund for small businesses, which the Treasury has explicitly said is OK.
“The federal economic relief package is very good news for San Diego and will help address various one-time expenses related to COVID-19, including support for small businesses,” Faulconer spokeswoman Christina Chadwick said in a written statement. “The city will continue to seek federal guidance so these funds are allocated appropriately as it moves closer to issuing a revised budget in May, and will also continue to work with our federal representatives on any future relief packages.”
Council members Barbara Bry and Chris Ward each lent support for beefing up small business grants with the funds, in memos on how they’d like to see the money spent.
The city could also use the money to cover the cost of equipping some staffers to work from home.
In all, the city is left to balance using the money on new initiatives and seeing how it can prevent certain budget cuts. It also needs to determine whether it wants to use all of the money now, or keep some available in case things keep getting worse.
Jared Walczak, director of state tax policy at the nonprofit Tax Foundation, which has been analyzing CARES Act implementation, said eligible expenditures under the Coronavirus Relief Fund were initially vague and confusing based on Act’s formal language, but subsequent Treasury guidance has largely clarified those questions. The only confusion that remains, he said, is for edge cases – and he acknowledged the hypothetical about lifeguards in San Diego is a good example.
“Local and state governments should only use this money on things in direct response to the COVID-19 crisis – that can be economic or public health, but it can’t be repurposed to existing expenditures that are just tied to the crisis. It really needs to be a new function because this crisis has happened.”
Lifeguards who are still primarily doing their previous responsibilities, while also monitoring social distancing, probably don’t count, he said. But an employee whose primary responsibilities now involve enforcing social distancing probably do.
The city, though, has added coronavirus-response specific billing codes, so staffers can account how many hours they worked that were directly related to the crisis. Those potentially eligible hours to date are expected to be included in the mayor’s report later this month.
But Walczak said cities that look for creative ways to redefine regular expenditures as part of their COVID-19 response are taking a risk, even if it’s an understandable impulse as they face dire revenue shortfalls at the same time they’ve got a separate pot of money sitting right there.
“Trying to cover something approximating an existing expense despite the language of the bill, that’s dangerous,” he said. “You could have a government spend it, and then be required to reimburse it at a time when they still can’t afford to. And that seems like a bigger risk with cities than with states – states will have a more rigorous process than some cities.”
Moreno’s comments at the budget hearing were especially urgent.
Moreno said the city has no excuse for not spending every dollar it received.
She was not available for an interview, but in a statement said the law gives enough leeway to prevent significant budget cuts both this and next year.
“It is important to remember that the main response to the COVID-19 pandemic locally was the San Diego County public health order that closed non-essential businesses, parks and beaches,” Moreno said in a statement. “That order did not enforce itself. City employees enforced it: police officers, park and rec employees, lifeguards and others. Without city employees, the county public health order would not have been effective.”
She said the city should avoid spending its budget reserves or using one-time revenue sources, like proceeds from selling the Mission Valley stadium property to SDSU, if CARES Act money is available.
“Refusing to spend money from the CARES Act Coronavirus Relief Fund and instead depleting our reserves is reckless and shortsighted. We might need that reserve funding if there is another spike in COVID-19 infection rate and the federal government does not issue any additional stimulus funding for cities.”
The most recent Treasury guidance suggests cities are safe in considering public safety workers “substantially dedicated” to responding to the pandemic, and counting their payroll expenses against the CARES Act money. And it provides flexibility for people the city was already planning to pay who are now doing different jobs.
It specifically says, for instance, that police officers who were already accounted for in a city’s adopted budget can be paid out of the new fund for time spent “to support management and enforcement of stay-at-home orders.”
Montgomery said she is not necessarily committed to using the CARES Act money to prevent budget cuts. She like the idea of using it to replenish the small business relief fund, for instance.
“I want to use it within the guidelines, but I want to make sure that means by any way allowable to help the community, whether that’s the people standing in food lines, the business or nonprofit community. But looking at the budget, where essential services are looking at being cut, if there’s any way to avoid those, I will be in that conversation.”