Some Senate Republicans are warming to giving states the flexibility to use federal aid to replace lost revenue as advocated by Democrats and some governors.

John Kennedy, R-La., introduced a bill to provide this flexibility Tuesday and expressed confidence Wednesday that if his bill goes to the floor “it will pass.”

At issue is the $150 billion in aid to state and local governments provided in the $2 trillion economic rescue package passed in March. Under the law, that aid can only be used for pandemic-related costs, not to replace state and local revenue lost due to the economic shutdown.

“I think the general consensus is, make the money in the pipeline more flexible and take a pause,” Lindsey Graham, R-S.C., said after the Senate GOP lunch Wednesday.

Kennedy said his proposal responds to complaints from governors that “there are strings attached” to the aid. Governors say they “can’t use the money to plug holes in their budget. So, the obvious answer it seems to me is to give them the authority, and my bill would do that,” he said.

Critics say allowing the aid to be used to plug revenue holes could reward states that have mismanaged their finances. Kennedy said his bill “would not allow a state to take the money and bail out a pension plan that has been mismanaged.”

“But other than that, it would allow states to use the money within reason for anything they want to, and cities too,” he said.

Some in the GOP favor more aid to states as well as more flexibility, while others prefer to give existing aid time to work its way through the system.

Rob Portman, R-Ohio, said on April 21 that the next bill should provide additional aid to state and local government. He also called for guidance to be issued by the Treasury to allow states to use the aid to replace revenue.

“Ohio’s cities rely on local income and sales taxes for their budgets and their revenues have declined due to increased unemployment,” Portman said in a statement, adding that state and local governments “should be able to use the funds allotted to them to replace funding for our first responders, police and fire departments.”

But there is far from universal support in the GOP for using the money to replace lost revenue.

“I don’t think that revenue replacement is the best way for us to respond to states,” Roy Blunt, R-Mo., said Tuesday.

Senate GOP Whip John Thune, R-S.D., was noncommittal when asked about the Kennedy bill Wednesday.

Thune said Republicans favor more flexibility for state aid, but he noted that the Treasury in updated guidance already provided more flexibility while still barring the use of the funds to replace lost revenue.

“I know it’s an issue that’s under active consideration and discussion by the conference, pretty much on a daily basis, because people are hearing from their governors and local governmental leaders about the need for more funding,” he said.

Thune said most GOP senators “feel more comfortable … giving states flexibility with what’s already been appropriated rather than, you know, another trillion dollars, which is what [Speaker Nancy] Pelosi is asking for,” he said.

Pelosi has said the relief package House Democrats could vote on as early as next week could include close to $1 trillion in aid to state and local governments. She said earlier this week that Democrats were now considering separate pots of money totaling as much as $500 billion for state governments, and up to $300 billion for cities, counties and towns.

Three conditions

The March aid package that appropriated the initial $150 billion didn’t come with much guidance for states and localities, beyond three conditions.

First, use of the money had to be for “necessary expenditures incurred due to the public health emergency with respect to” COVID-19; second, the costs could not have been accounted for in the most recent budgets approved by states and localities; and finally, costs have to be incurred between March 1, 2020 and the end of the year.

In its initial guidance fleshing out the restrictions, Treasury said the aid could only be used to pay for costs resulting from the public health emergency, such as for pandemic-related medical expenses and paying public safety workers whose duties are “substantially dedicated to mitigating or responding to the COVID-19 public health emergency.”

But in the updated May 4 guidance, flexibility was the theme, with the agency, for example, saying states could use the money to support state unemployment insurance systems when the costs are incurred as a result of the pandemic. The guidance also said the cost of providing workers compensation to first responders and health care workers related to the pandemic is eligible for the aid, among other uses.

Thune said codifying more flexible rules in law might help assuage lingering concerns. “They’ve tried to liberalize it a little bit. There are those who want to see it done in statute,” he said.

Jennifer Shutt contributed to this report.