Budgeting for American Rescue Plan Act Coronavirus State and Local Fiscal Recovery Fund Expenditures

Published for Coates' Canons on May 26, 2022.

As detailed in previous posts, the American Rescue Plan Act of 2021 Coronavirus State and Local Fiscal Recovery Fund (ARP/CSLFRF) provides funding for North Carolina counties and municipalities. There are four main authorized expenditure categories: (1) Responding to the pandemic and its negative economic impacts; (2) Provision of government services to the extent of lost revenue due to the pandemic; (3) Premium pay for eligible employees providing essential services during the pandemic; and (4) Necessary water, wastewater, stormwater, and broadband infrastructure. Most North Carolina local governments will spend some, and many all, of their ARP/CSLFRF allocation on category (2) expenditures—the provision of government services. (See blog post on the standard allowance.)

Regardless of the specific expenditures, a local government must follow state law budgeting laws to authorize them. In North Carolina, a local government may not legally obligate or expend (disburse) funds unless they are first appropriated by the governing board in a budget. See G.S. 159-8 (“[N]o local government or public authority may expend any moneys, regardless of their source (including moneys derived from bond proceeds, federal, state, or private grants or loans, or special assessments), except in accordance with a budget ordinance or project ordinance adopted under this Article….”).

There are different budgeting options available based on the specific types of ARP/CSLFRF expenditures. This post walks through the budget processes for several common expenditure types: reimbursing salaries and benefits; future salaries and benefits; future capital projects and programs; and future premium pay. Although these examples do not encompass the full array of possible expenditures, they provide a representative sample of the budgeting processes.

 

EXAMPLE 1:  REIMBURSING PRIOR SALARY AND BENEFIT EXPENDITURES (SUPPLANTING)

In this example, the Town of Tarheel’s total ARP/CSLFRF allocation is $1.3 million. The governing board wants to use $650,000 to reimburse itself for certain departmental salaries and benefits it incurred between March 3, 2021 and March 31, 2022. It does not yet know how it will expend the remaining $650,000.

The following details the budgeting (and accounting) steps to budget for this (or any) reimbursement expenditure.

Step 1: Adopt the Grant Project Ordinance. The governing board adopts a grant project ordinance, recognizing the ARP/CSLFRF funds as revenue and authorizing their expenditure for one or more reimbursement projects. In this example, the reimbursement “projects” are the departmental salary and benefit expenditures. To aid with auditing and compliance, the board should break down the project cost by estimated cost items in the grant project ordinance. Because the costs being reimbursed have already been obligated and expended, there is no further budget action required. Once budgeted, the reimbursement amounts are considered obligated and expended directly out of the grant project ordinance.

Step 2: Move the Cash. The next step is strictly an accounting action. The finance officer makes journal entries to move the amount of reimbursement cash ($650,000 in this example) from the special revenue fund associated with the grant project ordinance to the general fund and/or enterprise fund(s), depending on the purposes for which the local government expects to expend the new fund balance amounts. Conceptually this is the equivalent of the local government “cutting the check” to disburse the funds to itself. The monies are no longer ARP/CSLFRF funds. They are unrestricted fund balance that are available for the board to appropriate in the annual budget ordinance or a capital project ordinance for any expenditure authorized by state law (including general fund and/or enterprise fund purposes). Note that when the governing board budgets these freed up non-grant amounts, they should be labeled “appropriated fund balance” in the budget ordinance.

That is the full process. Reimbursements are simple from a budgetary and accounting perspective. And the same process may be used for any reimbursement expenditure type. Of course, a local government must also comply with award terms and Uniform Guidance (UG) requirements. (More on those requirements here.) In this example, for salary and benefit reimbursement expenditures, that means adopting and implementing all relevant UG policies and procedures and maintaining documentation of the Town of Tarheel’s compensation policy, written benefits policy, payroll records, timesheets for non-exempt employees, and effort certification forms for employees who salaries/benefits are being reimbursed.

Click HERE for the sample grant project ordinance and journal entries for this example.

In this example at least some portion of the reimbursements cover expenditures that occurred in a prior fiscal year. Does that require the local government to restate its prior year financial statements? The answer is no. The ARP/CSLFRF grant authorizes a local government to treat “reimbursement expenditures” as separate expenditures altogether. The reimbursements are not intended to replace the revenues used to make the initial expenditures. The initial expenditures were properly paid out of other general fund and/or enterprise fund revenues (eg. property taxes, sales taxes, fee revenues, etc.). The reimbursement expenditures are paid directly out of the grant project ordinance. (The grant project ordinance is effective for the life of the grant, in this case from March 3, 2021 through December 31, 2026.) The legal effect of the reimbursement expenditures is to create unrestricted fund balance.

 

EXAMPLE 2: COVERING FUTURE SALARY AND BENEFIT EXPENDITURES (SUPPLANTING)

In this example, the Town of Tarheel’s total ARP/CSLFRF allocation is $1.3 million. The governing board wants to appropriate the remaining $650,000 to cover salaries and benefits for the upcoming fiscal year—July 1, 2022 through June 30, 2023. (Recall that the local government used the initial $650,000 to reimburse itself for certain departmental salaries and benefits it incurred between March 3, 2021 and March 31, 2022 in Example 1.) 

For this example, there are two different budgeting options. Option 1 is to budget the ARP/CSLFRF as future reimbursement appropriations in the grant project ordinance. Option 2 is to budget the ARP/CSLFRF funds as direct expenditures in the grant project ordinance and then transfer the budget appropriation to the annual budget ordinance.

        Option 1: Budget the ARP/CSLFRF as future reimbursement expenditures

Under this option a local government appropriates ARP/CSLFRF funds in a grant project ordinance to reimburse expenditures that will be made in the future. Once the expenditures are incurred with other (non-grant) funds, the finance officer will do a journal entry to move the cash from the special revenue fund associated with the grant project ordinance to the fund balance associated with the general fund and/or enterprise funds. A local government should use this option if it wants to use ARP/CSLFRF funds to supplant regular local government expenditures, but the governing board is not ready to budget the freed up non-grant funds for specific projects or programs. It allows a local government to avoid skewing its property tax rate or other non-grant revenue amounts. The potential challenge with this option is that it forces a local government to wait until the initial expenditures occur before making the cash transfers. For some units, it could take many months, or even multiple fiscal years, to free up all the non-grant funds.

There are 2.5 steps to this process:

Step 1: Adopt the Grant Project Ordinance. The governing board adopts a grant project ordinance, recognizing the ARP/CSLFRF funds as revenue and authorizing their expenditure for one or more reimbursement projects. (A project is defined as a group of closely related activities.) In this example, the appropriations should be made by department. To aid with compliance, reporting, and auditing, the board should break down the project cost by estimated cost item in the grant project ordinance. No further budget action is needed.

Step 1.5: Wait Until Expenditures Paid with Other Funds and (For Some Expenditures) Until Second Tranche of ARP/CSLFRF Cash Received. Once the reimbursement amounts are budgeted, the local government must then wait until the expenditures that will be reimbursed are paid with other (non-grant) funds. As those disbursements occur, the local government’s finance officer may proceed to Step 2. Note, however, that before it moves cash associated with the second tranche of ARP/CSLFRF funds, a local government also must wait until it receives the remaining ARP/CSLFRF cash from US Treasury.

Step 2: Move the Cash. Once the disbursements are made with other funds to pay the salaries and benefits (and for amounts beyond the first tranche of ARP/CSLFRF funds, after the local government receives the second tranche), the finance officer makes journal entries moving the amount of reimbursement cash from the special revenue fund associated with the grant project ordinance to the general fund and/or enterprise fund(s). Conceptually this is the equivalent of the local government “cutting the check” to disburse the funds to itself. The monies are no longer ARP/CSLFRF funds. They are unrestricted fund balance that are available for the governing board to appropriate in the annual budget ordinance or a capital project ordinance for any expenditure authorized by state law. Because the monies are no longer ARP/CSLFRF funds, the grant award terms and UG do not apply to the appropriation or expenditure of the fund balance. Note that when the governing board budgets these freed up non-grant amounts, they should be labeled “appropriated fund balance” in the budget ordinance.

Click HERE for the sample grant project ordinance for example 2, option 1. (Note that it incorporates the amounts already appropriated for reimbursement in example 1.)

 

Option 2: Budget the ARP/CSLFRF funds as direct expenditures

What if a local government wants to use ARP/CSLFRF funds to supplant regular local government expenditures and it is ready to appropriate the freed up non-grant funds for other purposes? A governing board may adopt a grant project ordinance authorizing the expenditures and then amend the grant project ordinance to transfer the appropriation and associated revenues to the annual budget ordinance. The benefit of this more complex budgeting process is that it allows a local government to budget, obligate, and expend the freed up non-grant funds immediately, as opposed to having to wait on reimbursement expenditures or even on the receipt of the second tranche of ARP/CLSFRF funds. The freed up non-grant funds may be used for new expenditures or to substitute for all or a portion of appropriated fund balance in the annual budget ordinance.

Step 1: Adopt the Grant Project Ordinance. The governing board adopts a grant project ordinance, recognizing the ARP/CSLFRF funds as revenue and authorizing their expenditure for expenditure for one or more projects. (A project is defined as a group of closely related activities.) In this example, the appropriations should be made by department. To aid with auditing and compliance, the board should break down the project cost by estimated cost item in the grant project ordinance.

Step 2: Amend the Grant Project Ordinance and Annual Budget Ordinance. The governing board amends the grant project ordinance to transfer to the FY 2022-2023 annual budget ordinance the amount of ARP/CSLFRF funds needed to fund the authorized expenditures for the upcoming fiscal year. The governing board then adopts (or amends) the FY 2022-2023 annual budget ordinance to recognize the ARP/CSLFRF revenue (which should be listed as ARP/CSLFRF grant revenue in the budget ordinance) and appropriate the equivalent amount in appropriations to maintain a balanced budget (or reduce appropriate fund balance by the equivalent amount). The ARP/CSLFRF funds will be used to fund the salaries and benefits specified in the initial grant project ordinance, whereas the freed up non-grant revenues will be used to fund the corresponding new appropriations or substitute for appropriated fund balance. (The same process would apply to whatever fiscal year the board wants to spend the freed up non-grant funds in.)

Why should a local government first adopt the grant project ordinance and then transfer the appropriation to the annual budget ordinance? Although it might appear a useless step, initially appropriating all the ARP/CSLFRF funds in a grant project ordinance allows a local government to clearly document and track how the grant funds are spent and aids in complying with the award terms, UG, and audit requirements. Because of the nature of annual budget ordinance appropriations, it is very difficult to track specific expenditures.

Click HERE for the sample grant project ordinance, grant project ordinance amendment, annual budget ordinance, and annual budget ordinance amendment for example 2, option 2. Assume for this option that the governing board intends to appropriate the freed up non-grant revenues for new park projects.

Note that both options assume that the governing board wants to leverage the one-time grant funds into new programmatic or capital project expenditures, as opposed to using it to temporarily reduce the property tax levy or replace other revenue sources. If the board instead wants to use ARP/CSLFRF funds to temporarily offset reduced or lost revenues, it will simply transfer the ARP/CSLFRF funds from the grant project ordinance to the annual budget ordinance, without appropriating any additional expenditures.

 

EXAMPLE 3: BUDGETING FOR FUTURE PROGRAMS AND CAPITAL PROJECTS (NOT SUPPLANTING)

In this example, the local government is receiving $6,000,000 in total ARP/CSLFRF funds. It intends to split the money between two projects. The first is a $5,900,000 water system rehabilitation project and the second is a $100,000 new rental assistance program for low-income citizens.

This example illustrates the budgeting process if a local government wants to spend its ARP/CSLFRF funds directly for a new project, program, or other activity (collectively referred to as projects). The governing board may make appropriations of the ARP/CSLFRF funds in the grant project ordinance and then expend those funds directly out of the grant project ordinance for the authorized project(s). The projects may be authorized in any of the four ARP/CSLFRF expenditure categories, including revenue replacement. There is only one step in this budgeting process.

Step 1: Adopt the Grant Project Ordinance. The governing board adopts a grant project ordinance, recognizing the ARP/CSLFRF funds as revenue and authorizing their expenditure for one or more future specific expenditure projects. (A project is defined as a group of closely related activities.) To aid with auditing and compliance, the board should break down the project cost by estimated cost item in the grant project ordinance. The local government may obligate and disburse funds directly from these grant project ordinance appropriations. There is no further budget action. (Note that as an alternative for the water project, a board could first budget the expenditure in a grant project ordinance and then transfer the appropriation to a new or existing capital project ordinance.)

Click HERE for sample grant project ordinance for example 3.

It is important to remember that although the budgeting process is simple, spending ARP/CSLFRF funds directly for capital projects and programmatic expenditures will trigger more federal compliance requirements. The project expenditures are subject to award terms and applicable UG requirements.

 

EXAMPLE 4: BUDGETING FOR PREMIUM PAY

In the final example, the local government is receiving $400,000 in ARP/CSLFRF funds. The governing board is implementing a premium pay program according to the parameters set forth in the Final Rule. It will expend $162,750 for that program in FY 2022-2023. The local government does not yet know how it will expend the remaining funds. 

Because premium pay is treated as part of an employee’s salary and will be run through payroll, a local government likely will want to expend those ARP/CSLFRF funds out of the annual budget ordinance. But to properly track all ARP/CSLFRF expenditures for compliance, reporting, and audit purposes, a local government should, again, first budget this program in a grant project ordinance.

Step 1: Adopt the Grant Project Ordinance. The governing board adopts a grant project ordinance, recognizing the ARP/CSLFRF funds as revenue and authorizing their expenditure for the premium pay program. To aid with auditing and compliance, the board should break down the project cost by estimated cost item in the grant project ordinance.

 Step 2: Amend the Grant Project Ordinance and Annual Budget Ordinance. The governing board amends the grant project ordinance to transfer to the FY 2022-2023 annual budget ordinance the amount of ARP/CSLFRF funds needed to fund the premium pay program for the upcoming fiscal year. The governing board then adopts (or amends) the FY 2022-2023 annual budget ordinance to recognize the ARP/CSLFRF revenue (which should be listed as ARP/CSLFRF grant revenue in the budget ordinance) and appropriate the equivalent amount in appropriations for the premium pay amounts by department to maintain a balanced budget. The ARP/CSLFRF funds will be used to fund the premium payments. And these payments are subject to award terms and UG requirements. (The same process would apply to whatever fiscal year the board wants to spend the freed up non-grant funds in.)

Click HERE for sample grant project ordinance, grant project ordinance amendment, annual budget ordinance, and amended annual budget ordinance for example 4.

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