Biden administration threatens to return Covid funds from Arizona over anti-mask school policy

US First Lady Jill Biden speaks to people during a tour of the COVID-19 vaccination site at Isaac High School in Phoenix, Arizona, June 30, 2021.

Caroline Custer | swimming pool | Reuters

The Biden administration on Friday threatened to withhold millions of dollars in federal coronavirus aid to Arizona, accusing the state of using the funds to undermine efforts to stop the spread of the virus.

Republican Gov. Doug Ducey’s office has 60 days to either change two state-subsidized school programs totaling $173 million or redirect the money to “eligible purposes,” the Treasury Department said in a letter.

The letter says the programs are imposing conditions that prevent mask-wearing enforcement in schools, which is contrary to guidance from the Centers for Disease Control and Prevention on how to reduce Covid transmission.

If Arizona does not or refuses to comply with the Treasury Department’s demands, the Biden administration could return that stimulus money and withhold the second tranche of pandemic aid funding, the Treasury said.

Ducey’s office did not immediately respond to a CNBC request for comment on the letter.

The controversial federal funds come from the Coronavirus State and Local Fiscal Recovery Funds, or SLFRF, part of a $350 billion multi-trillion-dollar Covid relief package dubbed the American Rescue Plan that President Joe Biden signed into law last year.

The funds are intended to “mitigate the financial impact associated with the public health emergency caused by COVID-19, including by supporting efforts to stop the spread of the virus,” the Treasury Department said in a letter to Ducey’s Office of Strategic Planning and Budgeting.

But two Arizona school programs are using federal money to “impose conditions on participation or receiving a service that undermine efforts to stop the spread of COVID-19 and prevent compliance with evidence-based solutions to stop the spread of COVID-19.” the letter said.

That $163 million Education Plus-Up Grant Program, for example, allows funds to be allocated only to schools that do not enforce mask-wearing requirements, the Treasury Department writes.

That other program under consideration, totaling $10 million, is providing grant money to help parents move their children out of schools deemed to impose “unnecessary closures and school orders.”

The program is “only available to families if the student’s current or previous school requires the use of face coverings” during the school day, the Treasury Department said in a letter.

The latest email, sent to Acting Associate Director of Compliance Kathleen Victorino of the Treasury Department’s Office of Recovery Programs, follows months of correspondence between the Biden administration and Grand Canyon State.

In October, the Treasury Department asked Arizona to explain how it would address issues identified in two school programs.

The state responded a month later, detailing its rationale for the anti-mask conditions, but without “describing any plans to address the issues identified,” Victorino wrote.

The latest fight over Covid safety rules comes as the high-transmission omicron variant causes an unprecedented spike in cases. The U.S. Supreme Court on Thursday blocked the implementation of the Biden administration’s rule that employees of large companies either get vaccinated or get tested weekly, but the Supreme Court upheld the vaccination mandate for healthcare workers.

But spores precede the omicron. Last year, the Republican-controlled Arizona legislature attempted to pass provisions to ban mandatory masks and other Covid-related safety measures. In November, the State Supreme Court ruled that these measures were taken unlawfully

Tom Frank of CNBC contributed to this report.

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