American Rescue Plan Act of 2021: Coronavirus State & Local Fiscal Recovery Funds Final Rule – Spending Funds for General Government Purposes

Published for Coates' Canons on January 12, 2022.

US Treasury issued the Final Rule implementing the Coronavirus State and Local Fiscal Recovery Fund program of the American Rescue Plan Act of 2021 (ARP/CSLFRF) on January 6, 2022. There are several significant changes from the Interim Final Rule (IFR), as well as clarifications and a few new limitations. There will be a period, from now through March 31, 2022, during which local governments may proceed under the authority in the Interim Final Rule and/or the Final Rule. As of April 1, 2022, only the Final Rule will apply.

US Treasury has done some re-categorizing in the Final Rule. There are now four main expenditure categories, with several added subcategories. The categories are:

  1. Addressing the COVID-19 public health emergency and its negative economic impacts
  2. Premium pay for eligible workers performing essential work during the pandemic (see prior blog post on premium pay for local government employees)
  3. Necessary water, wastewater, and broadband infrastructure
  4. Revenue replacement for lost revenue growth

Local governments should carefully review the Final Rule, as well as the updated Compliance Guide, to fully understand the contours of their expenditure authority and compliance obligations. This is the first in a series of posts highlighting specific areas of interest for NC local governments. It focuses on the fourth category—revenue replacement for lost revenue growth, and details the expanded authority for local governments to spend ARP/CSLFRF monies for general government purposes. It also identifies the federal and state process, reporting, and other compliance requirements for expenditures in this category.

REVENUE REPLACEMENT CATEGORY OPTIONS

The ARP/CSLFRF states that the grant monies may be used “for the provision of government services to the extent of the reduction in revenue of such . . . government due to the COVID-19 public health emergency relative to revenues collected in the most recent full fiscal year of the …. government prior to the emergency.” See Section 603(c)(1)(C) of 42 U.S.C. 801 et seq (the Social Security Act). In the IFR, US Treasury presented a detailed lost revenue growth formula for local governments to calculate lost revenue growth over four calendar years – 2020-2023. A local government could expend ARP/CSLFRF monies for general government services to the extent of the lost revenue growth, as revealed by the formula each year. The difficulty with this approach is that many NC local governments did not actually experience any lost revenue growth. (This is great news in general, but not for purposes of freeing up ARP/CSLFRF funds for broader general government expenditures.)

The Final Rule now gives local governments the option to either

  • Use a default minimum lost revenue growth amount of $10 million (standard allowance); or
  • Use the (slightly modified) lost revenue growth formula.

Some local governments should continue to use the formula approach because actual lost revenue growth will exceed $10 million over the 4-year period, but most NC local governments will now select the $10 million standard allowance, which will free up a significant portion (if not all) of the local government’s ARP/CSLFRF monies to be spent for general government services (defined below). A local government must make a one-time irrevocable election to utilize either the revenue loss formula or the standard allowance (more info to come from US Treasury on where/how to make this election.). Each option will be discussed in turn.

Default Option – $10 million Standard Allowance

Perhaps the biggest change in the Final Rule is to give local governments the option to elect a standard allowance for revenue replacement. The standard allowance is $10 million for the entire award term. There are several key things to note about the standard allowance:

No Need for Actual Loss. A local government does NOT need to demonstrate any actual revenue loss to select the standard allowance. There is no formula or documentation of actual revenues involved with this option.

$10 million Total. The $10 million standard allowance is the total amount for the entire grant period.

Irrevocable Choice. Once a local government elects the standard allowance, it may not switch back. A local government should make sure that its actual lost revenue growth will not (or is not likely to) exceed $10 million over the four-year period. US Treasury made a few significant changes to the formula, so even if a local government could not calculate sufficient revenue loss under the IFR formula, it should check the new formula before making a final choice. (See this prior blog post for details on the formula. It will be updated within the next few days to reflect the Final Rule changes detailed below.) If a local government already reported revenue loss according to the formula for the calendar year 2020 on the Interim Report, it will have the option to switch to the standard allowance going forward, assuming the local government reported less than $10 million in revenue loss.

Revenue Replacement Funds May Be Spent for General Government Services. The significant benefit of this new option is the spending flexibility it affords NC local governments. The $10 million standard allowance may be spent on any general government services, authorized by state law, subject to the grant award terms and other compliance requirements. (What constitutes general government services is defined below.) If a local government receives $10 million or less in total ARP/CSLFRF funding, it may spend its entire allocation on general government services.

All Other Grant Requirements Still Apply. Electing the standard allowance does not, however, convert the ARP/CSLFRF monies to general funds. They are still grant funds. That is significant because all expenditures made under the standard allowance are subject to ARP/CSLFRF award terms, reporting requirements, and federal Uniform Guidance compliance obligations. The standard allowance only expands eligible projects, it does not release a local government from any of its other grant requirements. (The requirements are detailed below.)

Formula Option

Local governments also have the option to continue to use a modified formula to calculate revenue loss. Although the formula is more involved, larger local governments in higher growth areas may identify more than $10 million in revenue loss. US Treasury made some important tweaks to the formula in the Final Rule. (See this prior blog post for a detailed exposition of the formula. It will be updated in the next few days to incorporate these changes.)

General Revenues Now Includes Local Government Utilities. The Final Rule allows a local government to include revenues from utilities that are part of its own government, or received as intergovernmental transfers from other government entities, in the calculation of “general revenues.” Many NC local governments saw their biggest losses in water and wastewater revenues, so this may bolster revenue loss calculations. (A local government also may now include revenues from liquor stores that are operated by a local government in its general revenue calculation. Because NC local governments generally do not operate ABC stores directly, this change likely will not apply. NC local governments already were allowed to count ABC store revenue transfers as general revenues under intergovernmental transfers.)

Increased Inflationary Factor. The Final Rule increases the default inflationary growth factor to 5.2 percent (it was 4.1 percent). Note that a local government may still elect to use average actual annual growth of general revenues for the three full fiscal years prior to the pandemic as the inflationary factor.

Calendar Year or Fiscal Year Calculations. The Final Rule allows a local government to do the lost revenue growth calculation on either a calendar year or a fiscal year basis. A local government must choose a consistent period for each of the four years, though. A local government will have the opportunity to revise its initial reported calculation to reflect a change from calendar year to fiscal year.

Changes in Tax Policy Factored Out of Lost Revenue Growth. The Final Rule retains the presumption that all general revenue loss is due to the pandemic, with one significant exception–changes in taxes. If a local government changes its tax rate(s), eliminates taxes, or adds new taxes (including property taxes, special taxing district taxes, sales and use taxes, animal taxes, motor vehicle licensing taxes, beer and wine license taxes, rental car gross receipts taxes, shot-term heavy equipment rentals taxes, real estate transfer taxes, etc.), the revenues generated or lost because of the tax change(s) do not factor in the calculation of general revenues. If a local government increased its tax rate(s) or added new taxes, it must subtract the estimated amount of additional revenue from its total actual general revenues. Conversely, if a local government decreased its tax rate(s) or eliminated taxes, it must add the estimated amount of revenue that the taxes would have generated to the total actual general revenues. A local government will be able to rely on reasonable written budget estimates as proof of the revenue impact due to the tax change(s). The effective date for this requirement is a bit tricky. For years beginning after January 6, 2022, revenue impacts from tax changes MUST be factored out of the calculation of general revenues. But in calculating (or re-calculating) general revenues for the first two calendar or fiscal years (2020 and 2021), a local government has the option to include the impact of tax changes or not. However, if a local government chooses to subtract out revenue growth from an increase in tax(es), it must also add in revenue decreases from a decrease in tax(es).

SPENDING REVENUE REPLACEMENT FUNDS

Once a local government identifies revenue replacement funds (either the standard allowance or formula amount), it may spend this portion of its ARP/CSLFRF monies for “general government services,” with a few limitations, prohibitions, and process requirements.

General Government Services

US Treasury did not define general government services in the IFR and it still does not define the term in the Final Rule. Instead, US Treasury provides a non-exclusive list of examples of general government services – “maintenance or pay-go funded building of infrastructure, including roads; modernization of cybersecurity, including hardware, software, and protection of critical infrastructure; health services; environmental remediation; school or educational services; and the provision of police, fire, and other public safety services.” These enumerated examples suggest that the definition of general government services is very broad and encompasses both capital and operational expenses. In the supplemental information, US Treasury emphasizes the need for local governments to continue to provide services to its citizens. So, it makes sense to interpret this authority to allow expenditures for any government program, service, activity, or capital project that benefits its citizens, including all public enterprise operations. What might not be allowed? It’s difficult to say for certain, but it’s possible that the authority does not extend to expenditures solely for general administration or regulatory activites that are not tied to the direct provision of government services. And the authority might not extend to certain economic development projects, such providing incentives to attract new businesses. A local government should consult its attorney before making final expenditure decisions. It is probably safer to select expenditure items that are involved in directly serving citizens. A local government also must comply with Uniform Guidance requirements related to allowable costs, which may prohibit or limit certain cost items. As with all ARP/CSLFRF monies, a local government has until December 31, 2024 to fully obligate these funds and until December 31, 2026 to fully expend them.

Are there any limits or approval requirements for capital expenditures made with revenue replacement monies? There continues to be a bit of ambiguity related to capital outlay, but other than the specific prohibitions listed below, it appears that the revenue replacement funds may be expended for any pay-go capital purposes authorized by state law, regardless of their cost, without further justification or approval from US Treasury. (US Treasury has imposed extra justification requirements for capital outlay in the “addressing the COVID-19 public health emergency and its negative economic impacts” category, but those requirements do not apply to revenue replacement ARP/CSLFRF funds. And, although the Final Rule does not specifically exempt local governments from complying with 2 CFR 200.439, it appears that US Treasury interprets the Final Rule as providing approval for all pay-go capital outlay paid for with revenue replacement ARP/CSLFRF funds.)

Limitations on Expenditures

There are several specific limitations on all ARP/CSLFRF monies, including revenue replacement funds. A local government is PROHIBITED from

X Using ARP/CSLFRF funds to make a deposit into a pension fund that constitutes an extraordinary payment of an accrued, unfunded liability (Note that routine contributions as part of a payroll obligation for an eligible project are ok.);

X Using ARP/CSLFRF funds to borrow money or make debt service payments;

X Using ARP/CSLFRF funds to replenish rainy day funds or fund other financial reserves;

X Using ARP/CSLFRF funds to satisfy an obligation arising from a settlement agreement, judgment, consent decree, or judicially confirmed debt restricting in a judicial, administrative, or regulatory proceeding (There is an exception to this prohibition if the settlement or judgment requires the local government to provide services to respond to the COVID-19 public health emergency or its negative economic impacts or to provide government services, then the costs of those otherwise ARP/CSLFRF-eligible projects are allowed.);

X Using ARP/CSLFRF funds for a project that includes a term or condition that undermines efforts to stop the spread of COVID-19 or discourages compliance with recommendations and guidelines in CDC guidance for stopping the spread of COVID-19;

X Using ARP/CSLFRF funds in violation of the conflict-of-interest requirements imposed by the award terms. Specifically, the award terms require that a local government “agree it must maintain a conflict-of-interest policy consistent with 2 C.F.R. Sect. 200.318(c), and that such conflict-of-interest policy is applicable to each activity funded under this award. [Local governments] and subrecipients must disclose in writing to Treasury or the pass-through agency, as appropriate, any potential conflict of interest affecting the awarded funds in accordance with 2 C.F.R. Sect. 200.112.” (My colleague, Connor Crews, discusses the conflict-of-interest requirements in more detail here – starting at the 1 hour, 42-minute mark.)

X Using ARP/CSLFRF for any expenditure that would violate other applicable federal, state, and local laws and regulations. A local government must stay within the contours of its state law authority and follow federal and state law budgeting, financial management, contracting, reporting, document retention, auditing, and other compliance requirements. And a local government must follow all other applicable state and federal laws. In the supplemental information to the Final Rule, US Treasury specifically mentions the Uniform Guidance, federal environmental laws, and federal civil rights and nondiscrimination requirements as examples.

Process and Other Compliance Requirements

Unfortunately, the Final Rule did not simplify the other reporting and compliance requirements for revenue replacement funds (beyond allowing a local government to bypass the lost revenue growth formula by selecting the standard allowance option). A local government still must report on its specific expenditures and comply with the federal Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, 2 CFR Part 200 (commonly referred to as the Uniform Guidance or UG). The UG is a set of regulations that apply to the management of federal grant awards.

Uniform Guidance Compliance

The Assistance Listing: Coronavirus State and Local Fiscal Recovery Funds and Part 2 of the US Treasury State and Local Fiscal Recovery Funds Compliance and Reporting Guidance(Compliance Guide), the following UG provisions apply to the ARP/CSLFRF grant award (with a few modifications):

Most of these UG provisions impose process and internal control requirements, but some impose limitations on when, how, and for what purposes federal grant funds may be spent. The UG requirements are in addition to those imposed by the Final Rule related to project eligibility. Many of the UG provisions require that the grant recipient adopt and implement policies and procedures to ensure compliance with its requirements, including related to project eligibility determinations and allowable costs, financial management and internal controls, procurement, subawards, property management, program income, human resources, and document retention.

Reporting & Budgeting

Based on current guidance, US Treasury will provide a mechanism in the Project and Expenditure report for a local government to elect the standard allowance or the formula option. With either option, a local government must track and report on how the funds are spent. (US Treasury has indicated it will provide more guidance on the reporting format soon.) Because of this, it is still advisable for a local government to budget these funds in a grant project ordinance (see sample below). A grant project ordinance is easy to create and adopt and will make documenting and tracking required information much easier, particularly given the long grant term and even longer document retention requirements. A local government may spend all its ARP/CSLFRF funds directly out of the grant project ordinance, even those expenditures that are for general government or public enterprise purposes

Maximizing the Revenue Replacement Funds, Minimizing the Administrative Burden

One of the impetuses behind US Treasury’s addition of the standard allowance option is to reduce the reporting and administrative burden on smaller local governments. Local governments can further reduce the burden by making strategic expenditure decisions. A local government is fully allowed to supplant existing local government revenue sources for any of the eligible general government services. A unit should identify expenditure items for ARP/CSLFRF that will trigger fewer UG process requirements. That may free up general fund revenues to be used for more complicated projects, that will not trigger UG compliance. As an example, if a local government wants to use its ARP/CSLFRF monies to fund new police vehicles, it may be easier to instead use the monies to fund police salaries, freeing up other general fund revenues to be used for police vehicles. That way a local government will not need to follow UG procurement and property management obligations for the police vehicles. Of course, it will still have to comply with state law!

WHAT NOW?

The following are summary “roadmaps” for local governments electing the standard allowance and the formula option.

Local Government Elects Standard Allowance and Receives Less than $10million in Total ARP/CSLFRF Funding

For most NC local governments, electing the standard allowance will enable you to spend all your ARP/CSLFRF funds for general government services. Before (or at least at the same time as) you finalize your expenditure decisions, you should set up all the compliance provisions. The scope of each of these policies and procedures will vary based on size of government, amount of money funds involved, and the nature of the projects, but the following are the minimum compliance requirements. (The SOG will continue to roll out sample policies and procedures this winter/spring.)

  • Adopt budget (see grant project ordinance sample tailored to units that elect the standard allowance)
  • Set up an accounting system to track obligations and expenditures by cost item (Based on current guidance, you will be required to provide an explanation of how the revenue replacement funds were allocated to specific government services, so you must be able to track this information for the entire grant term.)
  • Adopt and implement the following required written policies and procedures:
    • General Financial Management & Internal Controls Policy (Internal Controls must meet federal Green Book)
    • Eligible Projects (if you elected the standard allowance, this can be a basic policy establishing internal controls to ensure that funds are spent for general government services and not spent for the handful of prohibited purposes. To make it easier, you could simply establish these controls in the grant project ordinance.)
    • Cost Principles/Allowable Costs Policy (see sample here)
    • Conflict of Interest Policy
    • Nondiscrimination Policy
    • Human Resources Policy
    • Records Retention Policy (Note that all documentation related to the ARP/CSLFRF must be retained for at least 5 years after the end of the award term.)
  • Adopt and implement the following written policies and procedures, if needed:
    • Procurement, Suspension, & Debarment Policy (If local government will enter any service, purchase, or construction contract with ARP/CSLFRF funds.)
    • Subaward Policy (If local government will partner with another government, nonprofit, or other private entity as part of an expenditure of the ARP/CSLFRF funds).
    • Program Income Policy (If local government will earn any income from ARP/CSLFRF-funded programs, such as loan programs and rentals of real or personal property.)
    • Property Management Policy (If expenditures will result in the acquisition of any real or personal (supplies & equipment) property.)

Local Government Elects the Formula Option and/or Receives More Than $10million in total ARP/CSLFRF Funding

For local governments that elect the formula option and/or receive greater than $10million in total ARP/CSLFRF funds, before (or at least at the same time as) you finalize your expenditure decisions, you should set up all the compliance provisions. The scope of each of these policies and procedures will vary based on size of government, amount of money funds involved, and the nature of the projects, but the following are the minimum compliance requirements. (The SOG will continue to roll out sample policies and procedures this winter/spring.)

  • Adopt budget (see sample grant project ordinance)
  • Set up an accounting system to track obligations and expenditures by cost item
  • Implement a Project and Expenditure Report data tracking system (Here is a Project and Expenditure Report tracking template. Note that we are working on modifying it consistent with Final Rule justification and documentation requirements and will release a new version soon).
  • Adopt and implement the following required written policies and procedures:
    • General Financial Management & Internal Controls Policy (Internal Controls must meet federal Green Book)
    • Eligible Projects
    • Cost Principles/Allowable Costs Policy (see sample here)
    • Conflict of Interest Policy
    • Nondiscrimination Policy
    • Human Resources Policy
    • Records Retention Policy (Note that all documentation related to the ARP/CSLFRF must be retained for at least 5 years after the end of the award term.)
  • Adopt and implement the following written policies and procedures, if needed:
    • Procurement, Suspension, & Debarment Policy (If local government will enter any service, purchase, or construction contract with ARP/CSLFRF funds.)
    • Subaward Policy (If local government will partner with another government, nonprofit, or other private entity as part of an expenditure of the ARP/CSLFRF funds).
    • Program Income Policy (If local government will earn any income from ARP/CSLFRF-funded programs, such as loan programs and rentals of real or personal property.)
    • Property Management Policy (If expenditures will result in the acquisition of any real or personal (supplies & equipment) property.)