5/9/22 Update: U.S. Treasury released an updated set of Final Rule FAQs on April 27, 2022, that helped clarify the program income reporting requirements. FAQ 13.11 stipulates that the addition method set forth in 2 C.F.R. 200.307(e)(2) applies to program income generated from CLSFRF funds. Recipients must add program income earnings to the total award amount and expend it on eligible projects during the award period. The deduction method is no longer the default method used to account for program income.

In addition, FAQ 4.9 provides that if a recipient uses revenue loss funds to fund a loan, the loaned funds may be considered expended at the point of disbursement to the borrower, and recipients are exempted from program income rules (i.e., there is no requirement to track the repayment of principal and interest on loans of CSLFRF funds under the revenue loss eligibility category). Program income rules still apply to loans of CSLFRF funds made pursuant to the other eligibility categories (public health/economic impacts and infrastructure).

An updated program income policy is available for download on the “document share” page of the SOG’s new website for all things ARP/CSLFRF.

This blog post has also been updated to reflect the new guidance.

Scenario #1:  A city has received a payment of Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF funds”) from the U.S. Department of Treasury (“Treasury”) pursuant to the American Rescue Plan Act. The city decides to undertake a park improvement project using a portion of its CSLFRF funds (which is an allowable use of CSLFRF funds under the general government services category). Part of this project will include the purchase of 15 canoes, which citizens will be able to rent to enjoy the lake located at the center of the park. The city will charge a $10/hr. rental fee for the use of the canoes from June-September. The city expects to earn approximately $20,000 in annual gross income from the rental fees. How should the city treat this income?

The short answer: During the ARP/CSLFRF award’s period of performance, the city must treat the gross income it earns from the rental fees as “program income.” This is because the city has earned this income as a direct result of an expenditure of CSLFRF funds during the ARP/CSLFRF award period (through December 31, 2026). Program income is the property of Treasury during this time. Pursuant to 2 C.F.R. 200.307(e)(2), the city must add program income to the total award amount and expend it on an eligible project.

Scenario #2: A city decides to loan $200,000 in CSLFRF funds to a nonprofit homeless shelter that also provides addiction recovery services under the public health/negative economic impacts eligibility category. The nonprofit will expend these funds on eligible projects under the ARP/CSLFRF award and will repay the loan (principal plus interest) in monthly installments, with a final payoff date of October 31, 2026. How should the city treat the repayment of principal and interest during the life of the loan?

The short answer: Because this loan will mature during the period of performance (on or before December 31, 2026), the city must add the repayment of principal and interest (both “program income”) to the total amount of the ARP/CSLFRF award and use it for any eligible project under the award terms and in accordance with State law. (Note: loans of revenue loss CSLFRF funds are exempt from program income rules, but scenario 2 involved the repayment of a loan made under the public health/negative economic impacts category, so program income rules do apply.)

What is program income?

The Uniform Guidance (“UG”), specifically 2 C.F.R. § 200.1, defines program income as “gross income earned by the non-Federal entity that is directly generated by a supported activity or earned as a result of the Federal award during the period of performance except as provided in § 200.307(f).”

Program income includes, but is not limited to, the following:

• The collection of fees for services performed or provided by the non-Federal entity (e.g., admission fees paid by the public to use a city-owned recreation facility when CSLFRF funds support the underlying project);
• Rental fees for use or rental of real or personal property (e.g., fees for renting a room in a public library or fees to rent a picnic shelter in a public park when CSLFRF funds support the underlying project);
• The sale of commodities or items fabricated under the Federal award; and
• The payment of principal and interest on loans made with Federal award funds.

Program income does not include:

• Rebates, credits, discounts, and interest earned on any of them;
• Governmental revenues, such as taxes, special assessments, levies, or fines; or
• Proceeds from the sale of real property, equipment, or supplies (these proceeds must be handled in accordance with the UG property standards 2 C.F.R. §§ 200.311, 200.313, and 200.314, or as specifically required in the federal statutes, regulations, or the terms of the award). (See 2 C.F.R. § 200.307(d))

Are all local governments required to adopt a program income policy?

Not necessarily. Any non-Federal entity that will earn program income from expenditures of CSLFRF funds during the ARP/CSLFRF award’s period of performance will need to adopt a program income policy. Program income should be tracked and recorded in a separate account and not comingled with other CSLFRF funds.

A non-Federal entity that earns program income must account for and expend that income in compliance with the Uniform Guidance and in accordance with Treasury’s regulations that govern expenditures of CSLFRF funds, including the Final Rule, and the State and the Local Fiscal Recovery Funds Compliance and Reporting Guidance  (“Compliance Guide”) (V.3, updated 2/28/22), which provides:

“Recipients of SLFRF funds should calculate, document, and record the organization’s program income. Additional controls your organization should implement include written policies that explicitly identify appropriate allocation methods, accounting standards and principles, compliance monitoring checks for program income calculations, and records.”

By adopting a program income policy, the non-Federal entity better ensures its compliance with these and other governing laws and federal regulations applicable to program income.

How is program income used/calculated?

2 C.F.R. § 200.307(e) sets forth three methods for how program income may be used: the deduction method, the addition method, and the cost sharing/matching method § 200.307(e). The Final Rule FAQ 13.11 stipulates that “that recipients may add program income to the Federal award. Any program income generated from SLFRF funds must be used for the purposes and under the conditions of the Federal award.” Accordingly, the addition method applies to program income earned pursuant to expenditures of CSLFRF funds.

• Deduction method. The deduction method is the default method for calculating program income. Program income is deducted from the total allowable costs to determine net allowable costs (see 200.307(e)(1)). This method reduces awarding agency’s obligation under the award.
• Addition method. Program income is added to the CSLFRF award and used to increase the funds available for the program (see 200.307(e)(2)). For the addition method to apply, the non-Federal entity must receive prior approval from the awarding agency. Treasury has specified that program income may be added back to the total CSLFRF award amount and use on eligible projects under the award terms.
• Matching or Cost Sharing Method: With prior approval, program income may be used to meet the cost sharing or matching requirement of the Federal award. The amount of the Federal award shall not change. 2 C.F.R. § 200.307(e)(3). The Final Rule provides that a non-Federal entity may expend up to the amount of its reduction in revenue due to the pandemic to meet the non-federal cost-share or matching requirements of other federal programs. (Final Rule, p. 4437). However, the Final Rule does comment on whether program income may be expended to meet any cost-sharing or matching requirements. To be safe, the non-Federal entity probably should not allocate program income to meet cost share or matching requirements without prior approval from Treasury.

Are there any types of program income that are exempt from program income rules?

Yes. Treasury has exempted the repayment of principal and interest on loans made with CSLFRF from the restrictions under § 200.307(e) as follows:

• Loans funded with SLFRF funds under the revenue loss eligible use category. “If a recipient uses revenue loss funds to fund a loan, whether or not the maturity of the loan is after December 31, 2026, the loaned funds may be considered to be expended at the point of disbursement to the borrower, and repayments on such loans are not subject to program income rules. Similarly, any contribution of revenue loss funds to a revolving loan fund may also follow the approach of loans funded under the revenue loss eligible use category.” FAQ 4.9.
• For Loans of CSLFRF under the public health/economic impacts eligibility category or infrastructure category with maturities longer than December 31, 2026: A non-Federal entity may use CSLFRF to fund only the “projected cost” of each loan that will mature after December 31, 2026. The non-Federal entity may determine the projected cost of the loan using one of two methods described in the Final Rule FAQ 4.9. Loans in this category are not subject to the restrictions of 200.307(e) and, accordingly, there is no requirement for the non-Federal entity to separately track the repayment of principal and interest.

Are all fees for services provided program income?

Probably. When a services is supported by an an underlying expenditure of CSLFRF, any fees charged pursuant to providing that service is likely program income. Such fees may include income from the sale of previously unavailable services, such as internet access; incremental income from the sale of upgraded services; hookup fees, new user fees, and other rate increases.

How is program income treated after the period of performance?

A recipient of CSLFRF funds is not required to account for program income earned after the period of performance.

For additional comments or questions about program income, contact Rebecca Badgett: rbadgett@sog.unc.edu