Expending ARP/CSLFRF Funds for Local Government Employee Salary, Benefit, and Other Payroll Costs OUTSIDE of Revenue Replacement (For Local Governments with OVER $10 Million Allocation Only)

The American Rescue Plan Act of 2021 Coronavirus State and Local Fiscal Recovery Fund (ARP/CSLFRF) program provides significant funding to all North Carolina counties and municipalities. As detailed in previous posts, this federal grant program groups allowable expenditures of these funds in four main categories:

• Responding to COVID and Its Negative Economic Impacts
• Revenue Replacement
• Premium Pay
• Necessary Water, Wastewater, Stormwater, and Broadband Infrastructure

For reasons that are detailed here, North Carolina local governments receiving between $0 and $10 million in total ARP/CSLFRF funds can and should expend all their funds in the Revenue Replacement category. Local Governments receiving over $10 million in ARP/CSLFRF (hereinafter “over $10 million units”) may expend at least $10 million in Revenue Replacement (and maybe more under certain circumstances). But most of the over $10 million units will have to expend at least some ARP/CSLFRF outside of Revenue Replacement.

The good news is that there are some additional opportunities for these units to fund, and in some cases supplant, local government employee compensation and certain other local government expenses in the Responding to COVID and Its Negative Economic Impact category. With respect to employee compensation, a local government may use ARP/CSLFRF funds for the following projects:

1. To cover the portion of public health, public safety, and social services staff members’ salaries and benefits to the extent that they are working on COVID-related issues (31 CFR 35.6(b)(3)(ii)(E)(1).
2. To hire for positions that were budgeted as of January 27, 2020 (pre-pandemic) but were subsequently unfilled or eliminated as of March 3, 2021 or to hire to increase number of budgeted positions by 7.5 percent above its pre-pandemic baseline, as determined by formula (31 CFR 35.6(b)(3)(ii)(E)(2));
3. To make employees whole who experienced pay reductions or were furloughed during the pandemic (31 CFR 35.6(b)(3)(ii)(E)(4));
4. To maintain current compensation levels to prevent layoffs (31 CFR 35.6(b)(3)(ii)(E)(4)); and
5. To provide worker retention incentives, including reasonable increases in compensation under certain conditions (31 CFR 35.6(b)(3)(ii)(E)(4)).

This blog post focuses on one of these authorized projects: Using Responding to COVID and Its Negative Economic Impact ARP/CSLFRF funds to cover the compensation costs of certain new hires or rehires that occur between March 3, 2021 and December 31, 2024 (number 2. above). Before turning to the specifics, it bears repeating that all these authorized projects under the Responding to COVID and Its Negative Economic Impact category are in addition to a local government’s ability to use Revenue Replacement ARP/CSLFRF to fund any employee compensation costs during the grant term.

The Responding to COVID and Its Negative Economic Impacts category affords two options for a local government to use ARP/CSLFRF to cover salary, benefit, other payroll costs (such as payroll taxes) for certain employees newly hired or rehired between March 3, 2021 and December 31, 2024. A local government must choose between the options. It MAY NOT use both.

Option 1: Restore Positions Unfilled or Eliminated Between January 27, 2020 and March 3, 2021.

The first option allows a local government to use ARP/CSLFRF monies to fund salaries, benefits, and other payroll costs to hire employees for the same positions that existed on January 27, 2020, but were vacant or eliminated as of March 3, 2021. But the monies may only be used to fill or restore the exact same positions that existed on January 27, 2020. To take advantage of this option, a local government must:

1. Identify all full- and part-time staff positions in the local government that existed on January 27, 2020. There is no restriction on the type of position, it includes all positions on that date. Identifying the positions will require some due diligence, though. A snapshot of the budget ordinance alone will not provide sufficient data. A local government must have additional documentation of the actual positions in each department. For example, assume there were five positions in the finance department on January 27, 2020. The specific positions must be identified, such as 1. Finance Director; 2. Deputy Finance Director; 3. Internal Auditor; 4. Accounting Tech I; and 5. Payroll Specialist. This information likely exists in a combination of the local government’s human resource records and payroll records. A local government must retain its documentation of these specific positions as part of the ARP/CSLFRF project file.
2. Identify all full- and part-time staff positions in the local government that existed on March 3, 2021. A local government will have to follow a similar process and retain the same documentation as in step 1.
3. Match up the positions from March 3, 2021 with those on January 27, 2020, to determine if any positions that existed on January 27, 2020, were vacant or eliminated as of March 3, 2021. Note that this requires a comparison of positions on just these two dates. It does not account for changes before or after these dates.
4. A local government may use ARP/CSLFRF to fund the salary, benefit, and other payroll costs to fill or replace the specific positions that existed on January 27, 2020, but were unfilled or eliminated as of March 3, 2021. It may not substitute other positions. The local government must hire or rehire the personnel to fill the positions between March 3, 2021 and December 31, 2024. Once hired, a local government may use ARP/CSLFRF funds for the salary, benefit, and other payroll costs of the person(s) in the identified position(s) through December 31, 2026.[1]

To illustrate, sticking with the example above suppose on January 27, 2020, the finance department had the following positions:

1. Finance Director;
2. Deputy Finance Director;
3. Internal Auditor;
4. Accounting Tech I; and
5. Payroll Specialist,

and on March 3, 2021, the finance department had the following positions:

1. Finance Director;
2. Deputy Finance Director;
3. Internal Auditor; and
4. Accounting Tech I.

For this project, a local government could use ARP/CSLFRF funds to replace the Payroll Specialist position, but only the Payroll Specialist position. The grant funds could cover the eligible costs from the time the person is hired (any time after March 3, 2021 through December 31, 2024) through December 31, 2026.[2]

Salary and benefit amounts must be consistent with the local government’s written salary and benefit plans in place at the time of the hire (which may be different than those paid/provided for the same position on January 27, 2020). A local government also may reimburse itself for salary, benefit, and other payroll costs for eligible positions that were filled between March 3, 2021 and now. And the unit may use ARP/CSLFRF funds to cover the direct administrative expenses of hiring and paying for the replacement positions, unless it is recouping them as indirect costs. As with all ARP/CSLFRF funds, these compensation expenditures are subject to all applicable budgeting and compliance requirements (more on that below).

Option 2: Hiring Above Pre-Pandemic Levels.

As an alternative to filling the exact positions that existed on January 27, 2020, and were vacant or eliminated as of March 3, 2021, a local government may use ARP/SLFRF funds to hire new employees, or rehire employees, in any position to fill a specified number of positions above its pre-pandemic baseline. Treasury provides a detailed formula to determine the exact number of Full Time Equivalent (FTE) positions eligible to be funded with ARP/CSLFRF funds. With this option a local government must:

1. Determine the Number of FTE Positions Budgeted on January 27, 2020. A local government must be able to identify the number of budgeted FTE positions that the board had appropriated monies for on January 27, 2020 (as part of the FY2019-2020 budget ordinance). FTE is the full-time equivalent hours that all the employees in a local government represent. Each full-time employee counts as 1 FTE. To calculate the unit’s FTE positions, add the hours worked by part-time employees to the hours worked by full-timers to get the total hours. Divide the total hours worked by the number of full-time hours for the given time period to find the number of FTE positions. A local government may count budgeted FTEs for all positions in the local government on January 27, 2020, even if the positions were not filled at the time. The positions are not limited to certain types of employees; all budgeted employee positions may count towards the total.[3] Because North Carolina local governments must budget by department, function, or project, see G.S. 159-13, a local government will have to provide other documentation to show what the budgeted FTEs were on this date. Potential documentation includes working budgets that detail specific positions for each department and/or actual payroll records.
2. Increase the Budgeted January 27, 2020 FTE positions by 7.5 Percent. To compensate for historical understaffing in local government, US Treasury is allowing a local government to multiply its Budgeted FTEs on January 27, 2020, by 1.075 to set the New Baseline Budgeted FTEs for January 27, 2020.
3. Determine Number of FTE Positions Budgeted on March 3, 2021. As with step 1. above, a local government must be able to identify the number of budgeted FTE positions that the board had appropriated monies for on March 3, 2021 (in the FY2020-2021 budget ordinance). A local government must count all budgeted FTEs on this date, even if the positions were not all filled at the time.[4]
4. Compare Budgeted FTEs on March 3, 2021 to the New Baseline Budgeted FTEs for January 27, 2020. If the New Baseline Budgeted FTEs for January 27, 2020 is greater than (>) the Budgeted FTEs on March 3, 2021, the difference is the unit’s Expansion FTEs.
5. A local government may use ARP/CSLFRF funds to cover salary, benefit, and other payroll costs for new hires or rehires up to the maximum of the Expansion FTEs. The grant funds may be used for any eligible new hires or rehires that occur between March 3, 2021 and December 31, 2024. A local government is not limited in type of position. But ARP/CSLFRF funds may only be used for the Expansion FTEs if the local government otherwise maintains at least the same FTEs as existed on March 3, 2021. In other words, Expansion FTEs must be in addition to the FTEs that existed on March 3, 2021. Once hired, a local government may use ARP/CSLFRF funds for the salary, benefit, and other payroll costs of the individuals filling the Expansion FTEs through December 31, 2026.[5] Salary and benefit amounts must be consistent with the local government’s written salary and benefit plans in place at the time of hire. A local government may reimburse itself for salary, benefit, and other payroll costs for Expansion FTEs that were filled between March 3, 2021 and now. And the unit may use ARP/CSLFRF funds to cover the direct administrative expenses of hiring and paying for the replacement positions unless it is recouping them as indirect costs. And, as with all ARP/CSLFRF funds, these compensation expenditures are subject to all applicable budgeting and compliance requirements (more on that below).

To illustrate, assume a local government had 100 FTE positions on January 27, 2020, across all departments. Increase this number by 7.5 percent (multiply by 1.075), to get 107.5 as the New Baseline Budgeted FTEs. Then suppose that the local government had 100 FTE positions on March 3, 2021. Because 107.5 > 100, the local government subtracts the March 3, 2021 budgeted FTEs from the Modified January 27, 2020 budgeted FTEs, to get 7.5 as the Expansion FTEs. Assuming the local government maintains regular FTEs of at least 100, it may fund new hires or rehires that occur between March 3, 2021 and December 31, 2024, with ARP/CSLFRF funds, up to the maximum of 7.5 FTEs. These FTEs may be allocated to any position in any department. The local government may reimburse itself for new hires or rehires that occurred between March 3, 2021 and now. And as long as the new hires or rehires occur on or before December 31, 2024, the local government may use ARP/CSLFRF funds to pay the salary, benefit, and other payroll costs through December 31, 2026.[6] The local government must properly document the justifications and expenditures and follow other applicable budgeting and compliance requirements.

Again, a local government may use Option 1 or Option 2 in to fund the salary, benefit, and other payroll costs of certain new hires or rehires, but it may not proceed under both options. Most units will choose Option 2 because it is more flexible.

Documenting and Reporting These Salary/Benefit/Other Payroll Expenditures

As mentioned above, as with all ARP/CSLFRF expenditures, a local government must follow the award terms and conditions, applicable Uniform Guidance requirements, and state law budgeting and fiscal control. Projects involving only salary, benefit, and other payroll expenditures are among the easiest from a compliance perspective, but there still are process steps a local government must take. Good news is that several of the basic compliance obligations apply to all ARP/CSLFRF expenditures, so the local government likely has already completed them. The following is a checklist of all the requirements for an Option 2 project:

Step 1: Adopt and implement the following basic policies that apply to all ARP/CSLFRF expenditures:

• Record Retention. This policy supplements a local government’s regular records retention policy to establish procedures to retain all ARP/CSLFRF-related information for at least 5 years after the expenditure of all ARP/CSLFRF funds. (Sample policy here.)
• Civil Rights Compliance. This policy reaffirms the local government’s commitment to compliance with federal civil rights laws and establishes processes for reporting potential violations and tracking complaints and resolutions. (Sample policy here.)
• Eligible Use. This is a simple policy that indicates allowable and unallowable projects, based on the expenditure categories in the ARP/CSLFRF Final Rule. It requires a local government to identify staff to document and review ARP/CSLFRF expenditures. That documentation must be retained according to the record retention requirements. (Sample policy here.)
• Allowable Cost. This is a more complex policy that requires a local government to do a detailed review of each cost item and ensure compliance with special limitations and documentation mandates for certain cost items. (Sample policy here.)
  • Note that the specific cost item regulations 2 CFR 200.430 and 2 CFR 200.431 WILL APPLY to these expenditures. They apply some limitations on what fringe benefits may be funded with ARP/CSLFRF monies and impose some additional documentation obligations.
• Conflict of Interest. The UG requires recipients and subrecipients of federal financial assistance to maintain written standards of conduct covering conflicts of interest and governing the actions of its employees engaged in the selection, award, and administration of contracts. (Sample policy here.)

Step 2: Adopt or amend general written internal controls, incorporating the above policies.

Step 3: Review Award Terms & Conditions for compliance with all other applicable provisions.

Step 4: Calculate Expanded FTEs, according to steps outlined above.

Step 5: Complete eligible use and allowable cost review documentation (Template Here) The Expenditure Category for this project is EC 3.2. Include a brief description of the project and written calculations from Step 4. For the allowable cost review, document that salaries and benefits paid to employees in Expansion FTEs are in accordance with local unit’s regular pay plan and that no improper benefit expenditures were paid, pursuant to 2 CFR 200.431.

Step 6: Adopt or amend grant project ordinance making specific appropriations for the project (Template Here). There should be separate entries for reimbursements back to March 3, 2021, and for forward-looking expenditures.

Step 7: For forward-looking expenditures, amend the grant project ordinance and annual budget ordinance, as appropriate, to transfer appropriations to the general fund and/or enterprise fund(s). This must be done each fiscal year through the end of the grant term or expenditure period for this project, whichever occurs first. Complete corresponding journal entries to move the cash.

Step 8: Follow the local government’s usual human resources and payroll processes to hire and pay individuals filling the FTEs. Document processes in writing and include in project file.

Step 9: Document and retain additional information as part of the project file to comply with 2 CFR 200.430 and 2 CFR 200.431, specifically:

• Written pay scale/pay plan (or other documentation that compensation is in line with usual compensation paid for the position(s)) to justify amounts paid to each employee covered by Expansion FTEs;
• Written benefits policy applicable to all employees, including those covered by Expansion FTEs;
• Payroll records for all pay periods in which ARP/CSLFRF monies are used to fund Expansion FTEs;
• For non-exempt employees, copies of timesheets for all pay periods in which ARP/CSLFRF monies are used to fund Expansion FTEs; and
• For each employee whose entire salaries are covered with ARP/CSLFRF funds during the funding period, semi-annual effort certification forms (template here); and for employees whose salaries are partially covered with ARP/CSLFRF funds during the funding period, at least semi-annual personnel activity reports (template here).

Additionally, retain documentation of all budgets, budget amendments, journal entries, eligibility and allowable cost review, other resources used to calculate FTEs, written details of the calculations, and any additional information about implementing this project as part of the project file. (In assessing the degree of documentation required, the rule of thumb is that it should be sufficient to allow someone without any knowledge of the grant or project to track that the project was authorized by the grant and to ensure the project was properly administered according to its parameters.)

Step 10: Track and report obligations and expenditures for this project during each quarterly reporting period. The local government must record these, along with the number of FTEs funded through this project, in the Project and Expenditure reports.

[1] Note that after December 31, 2024 a local government will not be able to substitute another individual in the position if the staff member terminates before December 31, 2026. It will have to pay the remaining portion of ARP/CSLFRF funds allocated for that person’s compensation between the termination date and December 31, 2026 back to Treasury.

[2] But See footnote 1.

[3] If a local government combines this project with using Responding to COVID and Its Negative Economic Impact ARP/CSLFRF monies to fund the salary, benefit, and other payroll costs of public health, public safety, and social services employees to the extent they are working on COVID response, it will subtract those FTEs from this calculation.

[4] See footnote 3.

[5] But see footnote 1.

[6] But see footnote 1.

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