"we have clients"

Business? Individual? School? Medical professional?

"who received "COVID-related" local (city) grant money here in CA,"

City grant funds through the State? What for? The client applied, and the city granted, and all of this is Named, and Specified. That's how this works and has worked, all this time.

Example: Medical professionals got grants for PPE.

Schools got grants for HVAC.

Your CA client might be getting the Golden State payment.

You need to get, and/or give us, the missing details. Then you would know what to search on. In general, as you likely have already found, these are Taxable unless you can find the specific exclusion.