(Bloomberg) -- The U.S. Treasury Department on Monday began accepting applications from states and municipalities for $350 billion in relief funds, laying out rules to ensure the money quickly flows toward Covid-19 relief and other programs that will support the economy.The step will trigger the release of money to governments potentially within days, with the funds being a key part of the $1.9 trillion American Rescue Plan law signed by President Joe Biden in March. Generally, the funds are intended to help states and local governments combat the pandemic and stoke their economic recoveries.Treasury’s guidelines spell out the range of potential uses by governments -- such as rehiring workers or supporting industries that were hit hard by Covid-19 -- as well as prohibited uses. States and territories can’t use the funds to pay for tax cuts, a provision of the law that has sparked lawsuits from Republican state officials. Recipients are also barred from using aid to fund debt payments, legal settlements, or deposits to rainy-day funds or financial reserves, according to a Treasury fact sheet.Despite the legal challenges, administration officials who spoke with reporters on a conference call repeatedly characterized the restrictions tied to the use of the funds as common among federal spending measures that involve distribution of money to states. The officials also emphasized that the guidance prepared by the Treasury was designed to fit with Congress’s intent to limit the funds to specific eligible uses.“Today is a milestone in our country’s recovery from the pandemic and its adjacent economic crisis,” Treasury Secretary Janet Yellen said in a statement accompanying the release. “With this funding, communities hit hard by COVID-19 will able to return to a semblance of normalcy; they’ll be able to rehire teachers, firefighters and other essential workers -- and to help small businesses reopen safely.”Biden RemarksTreasury’s announcement came less than an hour before Biden spoke at the White House on the economy. He highlighted the release of the state aid funds, among other federal efforts to help Americans return to work, three days after a surprisingly weak April jobs report stoked criticism that excess government benefits are persuading some people to stay at home.The scale of the state and local aid is so vast that it will in many cases more than make up for any lost revenue, providing governors, mayors and other officials with an opportunity to jolt their economies and avoid a repeat of the years-long austerity that gripped the nation’s statehouses after the housing market crash and global financial crisis during the 2000s.State tax revenue has come in much better than initially anticipated, which may free up governors to use the aid to provide relief to their residents and businesses. On Monday, California Governor Gavin Newsom said the state is now expecting an unprecedented $75 billion operating budget surplus thanks to the surging economy and capital-gains taxes. Newsom is planning to give nearly $12 billion in direct payments to Californians. The rescue package will give California about $27 billion, according to the Treasury. Ahead of the guidance’s release, state officials have been releasing their plans for the funds over the past two months.Read more: California Governor Proposes $100 Billion Recovery PackageGovernments can use the American Rescue Plan money to cover revenue declines during the pandemic. That provision allowed Republicans -- who opposed the bill -- to characterize the money as a bailout for poorly-run states. Democrats argued that propping up local government spending and services would help the broader economic recovery.Local governments will receive the funds in two tranches beginning in May, and the second will be provided 12 months later. States that have seen their unemployment rate rise more than 2 percentage points since February 2020 will receive the funds in a full payment.Treasury said in the fact sheet that governments will have “broad latitude to use this funding to support government services, up to this amount of lost revenue.”Tax CutsTreasury’s fact sheet reiterated a provision in the legislation that bars states from using the money to pay for tax cuts, which has triggered legal challenges by Republican officials in states like Ohio.If a state or territory cuts taxes, it must demonstrate how it paid for the tax cut from other sources, such as “by enacting policies to raise other sources of revenue, by cutting spending, or through higher revenue due to economic growth,” the Treasury fact sheet said.States can’t put the funds toward tax cuts until the end of the fiscal year during which the aid money is spent, Treasury said. If the money is used to pay for tax cuts, the state will have to repay that money to the Treasury.Related: Ohio Sues Biden Administration Over Stimulus Tax RestrictionMontana Governor Greg Gianforte, a Republican, announced last week his state would use some of the federal aid to give a $1,200 payment to people who give up unemployment benefits and work for four weeks in order to combat a labor shortage there. Connecticut Governor Ned Lamont, a Democrat, in April proposed using some of the state’s estimated $2.6 billion of federal aid for workforce development programs.County governments, especially those planning for the aid, will likely move quickly to use the funds, Teryn Zmuda, chief economist for the National Association of Counties, said in an interview Friday ahead of the Treasury release.“This is a historic investment in local government,” she said.(Updates with details on Biden remarks, chart on spending uses)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.