Treasury Department and Governor Ducey Battle Over the Proper Usage of Federal Funds

By Kylie Horne.

On January 21, 2022, Arizona Governor Doug Ducey sued the Biden administration in an ongoing battle over Arizona’s use of American Rescue Plan funds for schools that do not mandate masks or utilize virtual learning, even in the face of large COVID-19 outbreaks. The outcome of this case could have wide implications regarding the ways other states can use federal funding to promote their COVID-19 response priorities.

Where Did the Disputed Funding Originate From?

In March 2021, Congress passed the American Rescue Plan. The U.S.  Secretary of Education, Miguel Cardona, said the plan’s K-12 funding was designed to help schools, students, and teachers get past and recover from the pandemic. He further elaborated that the intent of the funding is to ensure “that the schools have the resources they need to make sure the environments are safe for learning and work and make sure they have more than just enough to keep the lights on.”

Arizona received $2.1 billion dollars with $163 million dollars going towards schools. At that time, State Superintendent Kathy Hoffman noted, “This funding must be tied to a COVID-related need or expense…. Other than that, it’s very flexible.” The funds will flow from the Treasury Department to the individual states in certain increments until the end of 2024. Arizona is still entitled to $2.1 billion dollars in recovery funds.

How Has Arizona Put the Disputed Funds To Use?

In August 2021, Governor Ducey used some of the funds from the American Rescue Plan to create two controversial grant programs. First, the COVID-19 Educational Recovery Benefit Program provides up to $7,000 for parents if their child’s school requires masks or quarantining after exposure. The money can be used for private school tuition or other educational costs. Second, Arizona’s Education Plus-Up Grant Program provides $163 million in funding to schools in higher-income areas that received less than $1,800 per student in federal aid. However, schools that require masks or have gone virtual due to outbreaks are ineligible to receive this funding.

Governor Ducey has put school boards between a rock and a hard place. Forcing some to decide between doing what is best for their students and community, or receiving funding the school district desperately needs. The funds have caused division within the state. State Superintendent Hoffman stated the plan was an “outrageous attack on public education.” A poll conducted at the end of August 2021 found that 54.7% of surveyed voters strongly opposed the Education Plus-Up Grant Program. Additionally, the Educational Recovery Benefit Program has rarely been used. The Arizona Republic found just 90 students were approved for funding. The Republic also found that money was allocated under both programs to schools and families that were ineligible.

How Did the Treasury Department Become Involved?

The Treasury Department has vocally opposed Ducey’s programs, insisting they violate the $1.9 trillion American Rescue Plan. The Treasury Department issued its first warning to Governor Ducey in October signaling the funds used for the programs could be recouped if the programs were not altered or halted. The Treasury stated the Arizona programs undermined evidence-based efforts and CDC recommendations to stop the spread of COVID-19; therefore, the funds are not being used for the purpose intended by the American Rescue Plan. After no action was taken by Governor Ducey, on January 14, 2022, the Treasury Department issued a second warning. The letter stated that if Arizona did not cease or change their programs within 60 days, the federal government would start the process to recoup the misused funds. The Treasury also threatened to hold back the second installment of COVID relief money, $2.1 billion dollars, that Arizona is scheduled to receive this year. In their warning, the Treasury Department wrote “by discouraging families and school districts from following this guidance, the conditions referenced above undermine efforts to stop the spread of COVID-19.” Governor Ducey promised to fight back stating, “The Biden administration is attempting to hold Congressionally-appropriated funds hostage and is trying to bully Arizona into complying with this power-grabbing move.”

Governor Ducey’s Lawsuit

A week after the second warning, Governor Ducey sued the Biden administration to block efforts to recoup the relief money used for the Arizona programs. Ducey’s lawsuit claims the Treasury Department created restrictions on spending the money without legal authority. In the pleading, Ducey argues, “If Congress had truly intended to give Treasury the power to dictate public health edicts to the States, and recoup or withhold (monies) … it would have spoken clearly on the matter. It did not.” The Treasury Department responded in a statement stating they believe their rule is correct, constitutional, and allowed by the statute.

Governor Ducey faces the uphill battle of the Chevron test, which provides great deference to government agencies. The two-part test holds that courts should defer to the reasonable interpretation of a statute by a federal agency. The intent of Congress must not be clear, and the interpretation by the agency must be reasonable. Since the creation of the Chevron test, courts have rarely overturned decisions by government agencies. In his lawsuit, Governor Ducey argues that the Treasury Department is acting “arbitrarily and capriciously” in their conditions for the relief funds and therefore should not receive Chevron deference.

What Now?

For now, it appears Governor Ducey isn’t backing down and will continue operating his grant programs until this case is decided. In fact, Governor Ducey recently announced the plans for a third program that will be operated using federal funds. Under the program, any child whose school closes for a day due to COVID-19 can receive a $7,000 voucher to help with childcare, food, and other expenses. Governor Ducey’s intent to disregard the Treasury’s warning is clear.

Both parties feel they have a strong case and will achieve a successful outcome in the district court. This case could have implications on how the federal government conditions federal funding in the future.

Ultimately, we should continue focusing on the children attending school to help them overcome this difficult time everyone is living through. Helping children continue to learn and succeed in a safe environment should be a top priority for both the state and federal government.

"U.S. Treasury Department" by afagen is licensed under CC BY-NC-SA 2.0

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By Kylie Horne

J.D. Candidate 2023

Kylie is a 2L staff writer from Gilbert, Arizona. She earned a Bachelor of Science in Business Strategy from Brigham Young University. In her free time, she enjoys going to the movie theater, watching sports, and spending time with friends and family.

The opinions expressed herein are those of the individual contributors to the ASLJ Blog and should not be construed as the opinions of the Arizona State Law Journal or the Sandra Day O’Connor College of Law at Arizona State University.