City, county to receive combined $580M in COVID-19 relief money.

Federal funding cannot be used to cover revenue shortfalls from pandemic

SAN DIEGO

Federal officials notified the county and city of San Diego this week that a combined $580 million in COVID-19 relief money they recently received can’t be used to cover revenue shortfalls caused by the pandemic.

But federal officials have given the city and county some flexibility to use the money in ways that could still help close large budget gaps created by business closures and event cancellations that have cratered local tax revenues. For example, the money can cover efforts to allow employees to use technology to work from home, to make city services available online, and to allow government to continue functioning in general.

In addition, the money can be used to pay police and firefighters actively enforcing public health orders, which could include efforts to make sure beaches and bars remain closed and to prevent large gatherings in parks.

The money also can be used for direct COVID-19 expenses, such as testing people for the virus, and to mitigate “second order” impacts, such as providing grants to businesses forced to close by public health orders.

The city and the county — the only two local governments to receive federal relief money so far — have been lobbying federal officials to allow the money to cover revenue shortfalls caused by the pandemic.

The city, which received $249 million in federal relief, estimates that the pandemic will wipe out $300 million in tax revenue. That estimate is a combination of hotel tax and sales tax revenue.

The county, which got $330 million in federal relief, estimates a revenue loss of between $260 million and $395 million. The largest chunk of that is the loss of sales tax revenue.

Because so many cities across the nation are experiencing similar revenue shortfalls, federal officials sent all agencies that received relief money a five-page memo Wednesday night that aims to clarify how

the money can be used.

“Funds may not be used to fill shortfalls in government revenue,” the memo says. “Although a broad range of uses is allowed, revenue replacement is not a permissible use of fund payments.”

The memo also says the money can’t be used for payroll expenses, unless the workers being paid are performing duties “substantially dedicated to mitigating or responding to the COVID-19 public health emergency.”

The memo also uses language that appears to give the city and county significant latitude.

For example, it says the money can be used for any “Covid-19-related expenses reasonably necessary to the function of government.”

It seems to be particularly flexible regarding use of the money to pay firefighters and police officers, which make up the lion’s share of the city’s personnel expenditures.

The memo says the federal money can be used for “public safety measures undertaken in response to COVID-19,” with no limiting details.

On grants for local businesses, the memo indicates there is no limit to how much the city can spend.

It says eligible expenses include money spent on “grants to small businesses to reimburse the costs of business interruption caused by required closures.”

The city used some existing revenue streams last month to create a $6.1 million relief fund for small businesses that is doling out $10,000 grants and loans of $10,000 to $20,000.

The memo indicates the city could instead use the federal money and potentially increase the size of the program to help more businesses.

The county also has established a similar relief program for small businesses.

While the memo is clear that the relief money can’t be used to cover revenue shortfalls, local officials say they are still hopeful a subsequent federal relief bill will help cover those shortfalls.

Andy Pease, finance director of the county’s Health and Human Services Agency, told the board of supervisors Tuesday that the county’s lobbyist is continuing to seek greater flexibility on how the relief money can be spent.

Pease said that in addition to providing money to cover revenue shortfalls, a subsequent stimulus bill could also amend the restrictions in the existing relief bill.

San Diego Councilwoman Barbara Bry, who leads the City Council’s Budget Committee, said Friday she’s been told by officials that such an outcome is likely.

Bry said it’s disappointing that the federal relief can’t yet be used to cover revenue shortfalls but, she noted, there is significant flexibility in how the money can be spent.

Bry said she plans to urge her council colleagues to spend the federal money with a focus on establishing a “foundation for an economic recovery” that all San Diegans can participate in.

She said three potential uses of the federal money are providing free broadband Internet service to the entire city, more relief for small businesses and reconfiguring libraries and other city facilities to comply with social distancing guidelines.

The relief money received by the county and city comes from the $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act, which was signed into law March 27.

It included $150 billion for state and local governments. For cities to be eligible, they must have at least 500,000 residents.

San Diego was one of six California cities to qualify, along with Los Angeles, San Jose, San Francisco, Fresno and Sacramento.

According to the federal legislation, cities must return any money they don’t use to cover eligible expenses.