Budgeting for American Rescue Plan Act Funds

Published for Coates' Canons on June 16, 2021.

As detailed here and here, the federal American Rescue Plan Act (ARP) provides significant funding for NC local governments. (These funds are also referred to as Coronavirus State and Local Fiscal Recovery Funds, CSLFRF, CLFRF, or Fiscal Recovery Funds.) Many counties and municipalities over 50K population (metropolitan municipalities) have already received their first tranche of funds directly from the federal government, which comprises one-half of their total allocation. (For counties and metropolitan municipalities who have not yet applied, you may do so here.) All other municipalities, referred to as nonentitlement units of local government or NEUs, should receive their allocation from the state within the next month or so, which also will comprise one-half of their total allocation. The NC Pandemic Recovery Office (NCPRO) has important guidance for local governments, including a checklist of items to complete in anticipation of receiving the ARP funds. They also are compiling and addressing frequently asked questions here. The US Treasury has addressed NEU distribution FAQs here.

Local government officials have many questions about when they’ll receive their funds and how much, for what purposes may they spend the monies, and what contracting, reporting, auditing, and other compliance requirements apply. Unfortunately, we do not yet have all the answers from the federal government. The good news is that local officials do not have to rush to spend the funds. According to the US Treasury’s Interim Final Rule interpreting the ARP, local governments have until December 31, 2024, to obligate the ARP monies and until December 31, 2026, to expend all the funds. As an immediate matter, though, local officials need to know how to accept the funds, what to do with the cash, and how to budget the monies under state law. Those are the topics of this post.

Accepting ARP Funds

In addition to following the applicable federal or state processes for receiving the ARP funds, a local governing board must vote to accept the funds. See G.S. 160A-17.1. A board may not delegate the authority to accept the funds to the manager, mayor, or another official or employee. The board need not adopt a formal resolution, but it must vote to authorize the receipt of the funds and then delegate the responsibility to execute any necessary agreements on behalf of the board to the manager, mayor, or another employee or official. If the local government has already received the funds without a board vote, the board should vote to ratify the acceptance at its next regular meeting.

What if the governing board is not ready to make specific appropriation decisions yet, should it still accept the ARP funds? A governing board is not legally required to wait to accept ARP monies until it determines how to spend the funds. A local government should make sure that it has an accounting structure in place to be able to comply with all the reporting requirements, but it need not finalize expenditure decisions to accept the monies. (If a governing board chooses to wait, it should be mindful of any deadlines for accepting the ARP funds.)

Cash Management of ARP Funds

Once a local government receives the ARP monies, they must be deposited in one or more bank accounts in the unit’s official depositor(ies). The finance officer may open a separate bank account for ARP funds, but that is not legally required. Instead, the finance officer may co-mingle the ARP funds with its other revenues in an existing bank account. The finance officer must be able to separately track the ARP monies as an accounting matter, though. And the ARP funds should not be combined with CARES Act (aka CRF) monies or other grant funds for accounting purposes. In short, the cash may be co-mingled, but there must be separate accounting. And a local government should consult the preliminary reporting requirements in the Interim Final Rule (pages 110-112) to help inform proper accounting and documentation. (More compliance details will be coming soon.)

The finance officer may invest the ARP funds according to the investment authority in G.S. 159-30. We do not yet have final guidance on whether investment proceeds earned on ARP monies are restricted to ARP purposes. It is possible that ARP funds will be treated the same as CARES Act/CRF funds, such that if they are co-mingled with other monies for investment purposes, the investment proceeds will not be restricted. But we do not know for certain. Until we get further guidance from US Treasury, local governments should be able to separately track (or be able to proportionally allocate) investment proceeds related to ARP monies.

Budgeting ARP Funds

Once the local government accepts the funds, does the board need to immediately budget the ARP monies? The legal answer to this question is no. If the board accepts the funds but takes no budgetary action, the ARP funds are restricted fund balance (for legal purposes) until budgeted by the board. Having said that, a local government will be well-served by setting up a budget structure for these funds even before it makes specific appropriation decisions. Adopting a budget structure early on may help the local government better manage the ARP monies and comply with reporting requirements. And, of course, no ARP monies may be obligated or expended until they are properly budgeted by the board.

There are two budgeting options for ARP funds—annual budget ordinance or grant project ordinance.

Annual Budget Ordinance

The first budgeting option is the Annual Budget Ordinance. If a local government uses the annual budget ordinance, the board may appropriate all, or a portion of, its ARP funds to the appropriate department, function, or project in a special revenue fund and/or an applicable enterprise fund. The board could initially appropriate all the monies to a place-holder department and prohibit the budget officer from obligating/expending any of the funds until the board amends the budget ordinance to make more specific budget appropriations. If the board intends to obligate ARP monies by July 1, 2021, then it must amend the FY 2020-21 budget ordinance to make the specific appropriations. Otherwise, the board should make the appropriations for the next year in its FY 2021-22 budget ordinance.

It is possible that a local government will be spending ARP funds over the next five years. The annual budget ordinance is effective only for a single fiscal year, from July 1 through June 30. A governing board will need to make appropriation decisions each year, even on continuing projects and programs. Any appropriated but unspent ARP monies at the end of a fiscal year must be reappropriated by the board in the following year’s annual budget ordinance. The board may not authorize transfers of budget appropriations automatically from one fiscal year to the next, even if the monies are encumbered. Unappropriated ARP monies remain restricted fund balance. (Note that a local government may not purposely use ARP monies for financial reserves, but it may temporarily hold the money in fund balance pending specific appropriation decisions.)

Grant Project Ordinance

The second option is a Grant Project Ordinance, which is a special budgeting tool for multi-year grant projects. A governing board may establish a grant project ordinance for any “project financed in whole or in part by revenues received from the federal and/or State government for operating or capital purposes….” G.S. 159-13.2. The benefit of a grant project ordinance is that it is effective for the life of the grant, which in the case of the ARP may run until December 31, 2026. Using a grant project ordinance also may help a governing board focus its appropriation decisions on the specific expenditure items authorized by the ARP, because these monies will not be mixed in with general fund appropriations. Finally, because the ARP does not allow ARP monies to be used to fund rainy day funds or other financial reserves, the grant project ordinance structure may allow the government to depict its specific expenditure plans more easily, without losing any budget flexibility.

The structure for a grant project ordinance is straight-forward. The governing board adopts an ordinance specifying the “project” to be funded, at least in part, by the grant revenues. It then identifies both the estimated grant and non-grant revenues for the life of the project and authorizes their appropriation for the project.

Grants typically are more limited in scope, often involving a single program or capital undertaking. ARP funds are different in that they may be used to fund a wide variety of local government projects, programs, services, and other activities. The term “project” in the statute should be interpreted to encompass all the potential expenditure items for which a local government may use ARP funds. It will be up to the governing board how best to delineate these various activities in the grant project ordinance.

A board does not need to finalize all of its appropriation decisions before adopting the grant project ordinance, though. Initially, the board could simply (1) identify the general project parameters, as set forth in the ARP and in accordance with state law authority; (2) estimate at least the first tranche of ARP funds (or the total estimated allocation) and estimate any other revenues that will be used to fund the “project;” and (3) make a general appropriation to cover the entire “project.” Alternatively, the board could make initial appropriations by ARP expenditure category. Either way, the board may amend the grant project ordinance at any time to add (or delete) specific activities, move monies among expenditure items, or appropriate monies from the grant project ordinance to the general fund or an enterprise fund in the annual budget ordinance. And the board could prohibit the budget officer from obligating any ARP monies until the board makes more specific appropriations in the grant project ordinance.

Once the grant project ordinance is adopted, it must be included in the official minutes of the meeting in which it was adopted. Further, each fiscal year, the budget officer provides information to the board during the annual budget process about the expected expenditures for grant project funds during the upcoming fiscal year. The governing board may mandate more frequent status reports on a grant project ordinance in its discretion. Board requirements beyond the minimum established by statute should be reflected in the grant project ordinance. And the board should also direct the unit’s finance officer to maintain an accounting of the “project” sufficient to comply with all grant reporting and documentation requirements.

Sample Grant Project Ordinance

As a simple example, suppose a local government, Town of TarHeel, receives a total allocation of $2m in ARP monies, with $1m distributed in July 2021. The following is a sample initial grant project ordinance to budget for these funds. This sample is not the only way to structure a grant project ordinance, but it provides a template for local governments that complies with all the legal requirements. It is worth emphasizing that this is a sample for the initial grant project ordinance. Once a governing board makes its more specific expenditure decisions, it should amend the grant project ordinance to reflect these.

Grant Project Ordinance for the Town of TarHeel Coronavirus State and Local Fiscal Recovery Funds

BE IT ORDAINED by the town council of the Town of TarHeel, North Carolina that, pursuant to Section 13.2 of Chapter 159 of the General Statutes of North Carolina, the following grant project ordinance is hereby adopted:

Section 1: This ordinance is to establish a budget for a project to be funded by the Coronavirus State and Local Fiscal Recovery Funds of H.R. 1319 American Rescue Plan Act of 2021 (CSLRF). The Town of TarHeel has received the first tranche in the amount of $1,000,000 of CSLRF funds. The total allocation is $2,000,000, with the remainder to be distributed to the town within 12 months. These funds may be used for the following categories of expenditures, to the extent authorized by state law.

    1. Support public health expenditures, by funding COVID-19 mitigation efforts, medical expenses, behavioral healthcare, and certain public health and safety staff;
    2. Address negative economic impacts caused by the public health emergency, including economic harms to workers, households, small businesses, impacted industries, and the public sector;
    3. Replace lost public sector revenue, using this funding to provide government services to the extent of the reduction in revenue experienced due to the pandemic;
    4. Provide premium pay for essential workers, offering additional support to those who have borne and will bear the greatest health risks because of their service in critical infrastructure sectors; and,
    5. Invest in water, sewer, and broadband infrastructure, making necessary investments to improve access to clean drinking water, support vital wastewater and stormwater infrastructure, and to expand access to broadband internet.

Section 2: The following amounts are appropriated for the project and authorized for expenditure:

CSLRF Project                            $2,000,000*

[*Once it determines how it will spend all or a portion of the ARP fuds, the governing board will amend this section to authorize appropriations for specific programs, services, projects, and activities. A board also may appropriate some or all of these funds to an enterprise fund in an annual budget ordinance for a water, wastewater, or stormwater infrastructure project.]

Section 3: The following revenues are anticipated to be available to complete the project:

CSLRF Funds                             $2,000,000

Section 4: The Finance Officer is hereby directed to maintain sufficient specific detailed accounting records to satisfy the requirements of the grantor agency and the grant agreements.

Section 5: The Finance Officer is hereby directed to report the financial status of the project to the governing board on a [monthly/quarterly]] basis.

Section 6: Copies of this grant project ordinance shall be furnished to the Budget Officer, the Finance Officer and to the Clerk to Town Council.

Section 7: This grant project ordinance expires on December 31, 2026, or when all the CSLRF funds have been obligated and expended by the town, whichever occurs sooner.

Adopted this ___ day of ____, 20__


Designated Town Council Representative


Clerk to the Town Council

Additional Resources

In addition to the NCPRO and US Treasury resources linked above, local officials should consult the NC Department of State Treasurer’s Blog for important accounting, reporting, auditing, and other compliance information. And NC Finance Connect now has a dedicated discussion forum category for ARP funding, to facilitate discussions, and information and document sharing, among local government officials across the state. If you do not already subscribe to NC Finance Connect, you may create a free account here. You may then sign up to receive email notifications of discussions in any of the categories, including the ARP Funding category, by clicking on “Manage E-mail Notifications” under the “Discussion (Listserv)” drop down menu at the top of the NC Finance Connect home page. Finally, here are links to the NC League of Municipalities’ and NC Association of County Commissioners’ valuable resource pages on ARP.

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Topics - Local and State Government