I worried about it this morning. Now one White House official tells the Atlantic:
The rules are on how federal money is spent by the states. Put another way, the rules concern what sort of state and local projects we will fund under the Recovery Act. The enforcement is that we won't fund projects that don't meet the standard.
This is obviously possible for a huge amount of grant money (though I'd like some more details), but I'm not sure it's the same as what Obama and Biden were talking about yesterday. POTUS and VPOTUS implied that there would be retroactive consequences for the misuse of funds -- that is, once the money had been handed out, the administration would hold state and local governments up to a high bar on its use. But this answer implies that a bar will only apply to how the money is handed out.