Update: On January 6, 2022, the U.S. Department of the Treasury issued the Final Rule, which governs the eligible uses of Coronavirus State and Local Fiscal Recovery Funds (“SLFRF”) under the American Rescue Plan Act (“ARPA”). The Final Rule makes several key changes to the Interim Final Rule, including expanding the eligible uses of CSLFRF and easing the administrative burden for some program requirements. Please review the Final Rule to learn more about the updated CSLFRF program requirements. (Treasury has also published these helpful resources: overview of the Final Rule and a Compliance and Reporting Guidance (updated 11/15/21).) As always, consult your local attorney with questions.

Note that the information below has not been updated since the release of the Final Rule and some of it may no longer be accurate. Please visit our main category page to access more recent posts.

UPDATED June 18, 2021 to provide additional information on investment proceeds of ARP Funds, based on a June 17 update from US Treasury.

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 first distribution 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. (Here is a sample resolution that a governing board may modify and adopt to accept the funds.)

What if the governing board is not ready to make specific appropriation decisions yet, may 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. According to the US Treasury’s revised Coronavirus State and Local Fiscal Recovery Funds Frequently Asked Questions, as of June 17, 2021, local governments are not required to remit interest earned on ARP monies to the US Treasury. (Normally, a grantee must remit interest over $500 per year on grant funds to the federal government.) The payments are not subject to the requirement of the Cash Management Improvement Act. They also are not subject to the requirement of 2 CFR 200.305(b)(8)-(9) to maintain balances in an interest-bearing account and remit payments to Treasury. Local governments may retain the interest earnings to use for administrative expenses or any other purpose authorized by state law. The investment earnings are not subject to the ARP expenditure restrictions. See US Treasury Compliance and Reporting Guidance.

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 a few budgeting options for these funds, but the best budgeting tool is a grant project ordinance.

Grant Project Ordinance

A grant project ordinance 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.

For accounting purposes, a grant project ordinance is a special revenue fund. See G.S. 159-26(b)(2).

Sample Grant Project Ordinance

As an example, suppose a local government, Town of TarHeel, receives a total allocation of $2m in ARP monies, with $1m distributed in July 2021. Here is a sample 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.

Other Budgeting Options

Annual Budget Ordinance

Another 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.)

Capital Project Ordinance

If a local government is using some or all of its ARP monies to fund an existing or new capital project, it may budget those funds in a capital project ordinance. The process for creating or amending a capital project ordinance is the same as for a grant project ordinance, although it is a separate legal budgeting vehicle.

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.