U.S. Treasury threatens to claw back Arizona funds over anti-masking school grants

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WASHINGTON, Jan 14 (Reuters) - The U.S. Treasury told Arizona officials on Friday it may claw back some of the state's pandemic aid funds and withhold future disbursements unless the state stops or redesigns education grant programs aimed at schools without mask mandates.

In a letter to Arizona Governor Doug Ducey's office, the Treasury said that two programs, including a $163 million grant program for schools that follow state laws banning public school mask mandates, are "ineligible uses" of State and Local Fiscal Recovery Funds.

The $350 billion state and local funding program was enacted last year as part of the American Rescue Plan COVID-19 aid law.

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Another $10 million Arizona program deemed ineligible offers $7,000 education grants to families of students for alternative instruction if their school requires face coverings.

The Treasury said Arizona must redesign the programs to comply with Centers for Disease Control and Prevention guidelines on universal masking for students, teachers, staff and visitors to K-12 schools, or redirect the funds to other eligible uses under Treasury rules.

"Failure to take either step within 60 calendar days may result in Treasury initiating an action to recoup SLFRF funds used in violation of the eligible uses," the Treasury's acting deputy chief compliance officer, Kathleen Victorino, said in the letter.

The department added that it also may withhold Arizona's 2022 installment of state and local aid funds until the Treasury confirms the education funding issues have been resolved. The Treasury first warned Arizona about the programs' non-compliance in October.

Ducey, a Republican, said on Twitter that Treasury's letter "is the latest example of a President that is completely out of touch with the American people," calling it a "rewrite" of funding rules that would reduce funding for schools, particularly in low-income communities.

Ducey said the state "will respond to this letter and we will continue to focus on the things that matter to Arizonans."

Arizona could face withholding of up to $2.1 billion by Treasury, the second half of its $4.2 billion state allocation of COVID-19 aid funds due to be disbursed in 2022.

In addition, cities and counties in Arizona received separate allocations based on their size and unemployment rates that would be unaffected by the state's dispute with Treasury, including $871 million for Maricopa County, $203 million for Pima County and $396 million for Phoenix.

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Reporting by David Lawder; editing by Jonathan Oatis and Richard Chang

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