UPDATED August 2022: On July 27, 2022, US Treasury amended its Final Rule FAQs to exempt expenditures in the Revenue Replacement category from some Uniform Guidance provisions. Those changes are reflected in the updated post below. 

Many NC local governments, particularly those receiving under $10 million and claiming the standard allowance, have decided to spend some or all their American Rescue Plan Act Coronavirus State and Local Fiscal Recovery Fund (ARP/CSLFRF) monies to cover employee salary and benefit expenditures. Spending ARP/CSLFRF funds on these internal expenditures affords a local government the easiest path through the applicable compliance requirements.  And, importantly, it frees up the non-grant revenues that would have been used to cover the salaries and benefits to be expended on new projects or programs, to increase fund balance, or to replace other revenue sources. The freed up non-grant revenues are not subject to award terms, time limits, or other federal grant regulations.

Although this expenditure option reduces the administrative burden of expending ARP/CSLFRF funds, it does not eliminate it. This post walks through the legal authority and federal substantive and process requirements related to using ARP/CSLFRF funds to pay salary and benefit costs. It includes a checklist to help local governments ensure full compliance.

Legal Authority to Expend ARP/CSLFRF Funds for Local Government Salaries and Benefits

There are several allowable expenditure categories for ARP/CSLFRF funds. The most expansive category (known as the revenue replacement category) allows the grant monies to fund the provision of government services to the extent that the local government experiences lost revenue growth due to the pandemic. A local government that claimed the standard allowance in the April 30, 2022 Project and and Expenditure report may spend up to their full amount of ARP/CSLFRF funds or $10 million, whichever is less, on the provision of government services without having to demonstrate any actual lost revenue growth. As explained here, the standard allowance allows a local government to presume this lost revenue growth even if it did not happen.

If a local government does not elect the standard allowance, it may only expend ARP/CSLFRF funds in this category to the extent that US Treasury’s detailed formula reveals actual lost revenue due to the pandemic. For local governments receiving more than $10 million, if the formula approach reveals more than $10 million in actual lost revenue growth, the local government may expend the full amount of its lost revenue growth in this category, up to the maximum of its ARP/CSLFRF award. (Note that US Treasury will now allow local governments to make a final decision on the standard allowance or formula approach for revenue replacement through April 30, 2023.)

What constitutes “government services?” In other words, what can a local government spend these revenue replacement monies to fund? US Treasury does not define “government services,” but provides several non-exclusive examples:

In US Treasury’s Final Rule Supplement, government services include: “maintenance or pay-go funded building of infrastructure, including roads; modernization of cybersecurity, including hardware, software, and protection of critical infrastructure; health services; environmental remediation; school or educational services; and the provision of police, fire, and other public safety services.”

In US Treasury’s Final Rule Overview, it states: “[g]overnment services generally include any service traditionally provided by a government, unless Treasury has stated otherwise. Here are some common examples, although this list is not exhaustive: Construction of schools and hospitals; Road building and maintenance, and other infrastructure; Health services; General government administration, staff, and administrative facilities; Environmental remediation; [and] Provision of police, fire, and other public safety services (including purchase of fire trucks and police vehicles).”

And in US Treasury’s FAQs on the Final Rule, the answer to Q 3.2 states: “Treasury is clarifying here that under the final rule, payroll for government employees, contracts, grants, supplies and equipment, rent, and the many other costs that governments typically bear to provide services are costs that could comprise the costs of government services, and are eligible uses of funds.”

As these examples attest, the authority to expend ARP/CSLFRF funds in the revenue replacement category is very broad. It encompasses almost anything a local government has state law authority to undertake, including administrative expenses and local government employees’ and officials’ salaries and benefits, subject to the limitations below.

Limitations on Salary and Benefit Cost Items

There are some restrictions on ARP/CSLFRF salary and benefit expenditures, including prohibited double-dipping and allowable cost limitations.

No double-dipping. If a local government has (or will) receive other external funds to specifically cover or reimburse certain salaries and benefits, it MAY NOT also use ARP/CSLFRF for these costs.

Allowable Cost Limitations. As detailed below, the expenditures of all ARP/CSLFRF funds, including revenue replacement ARP/CSLFRF funds, are subject to grant award terms and some of the provisions of the Uniform Guidance (UG), 2 CFR Sect. 200, which is an extensive set of federal regulations governing federal grants. Among other things, the UG imposes limits on allowable cost items. Cost items generally align with purpose codes under state law. Common examples include compensation (salaries), fringe benefits, supplies, equipment and other capital, communications, contract expenses, and audits. A local government must ensure that cost items are necessary, reasonable, allocable, not duplicative, consistently treated, and properly documented. What this means for salaries and benefit expenditures is that ARP/CSLFRF funds may be used to cover regular / ordinary costs. A local government should follow its normal processes for hiring employees, setting their compensation, and determining their work schedules. It may not increase employees’ salaries or benefits or authorize additional overtime hours just because of the availability of federal funds to cover the costs. It also must document, and follow ARP/CSLFRF retention requirements, all payroll expenditures that are paid for with the grant funds. As of July 27, 2022, US Treasury has exempted revenue replacement expenditures from the more detailed cost item regulations, including 2 CFR 200.430 and 200.431.

Expenditure Timing

The ARP/CSLFRF allows local governments to obligate funds between March 3, 2021 and December 31, 2024. That is the period a local government should focus on for supplanting salaries and benefits. It means that a local government may reimburse itself for salary and benefit expenditures that occurred between March 3, 2021 and now and/or it may appropriate ARP/CSLFRF funds to cover salary and benefit expenditures that are paid from now through December 31, 2024. A local government may cover all, or some portion, of its salary and benefit costs during this award term or it may select some more limited time period between these dates. (Technically, a local government only has to obligate ARP/CSLFRF funds by December 31, 2024 and has until December 31, 2026 to pay the expenditures, but the local government will take on some risk that all ARP/CSLFRF funds will not be able to be spent if employees quit or are terminated between December 31, 2024 and December 31, 2026 because the funds will not be able to be re-obligated to another employee (or other expenditures) at that point. For this reason, it is safest to supplant only salaries and benefits that are actually paid out between March 3, 2021 and December 31, 2024.)

Federal Compliance Requirements

As indicated above, although using ARP/CSLFRF funds to supplant salaries and benefits reduces federal compliance requirements, it does not eliminate them. There are a handful of policies and procedures that a local government must adopt and implement for ALL ARP/CSLFRF expenditures. They include setting up basic financial administration and internal control provisions; adopting and implementing certain policies; completing all required reporting; maintaining appropriate records; and complying with state law budgeting and fiscal control provisions. The good news is that the applicable federal provisions are relatively easy to implement.

Compliance Checklist for Using Revenue Replacement ARP/CSLFRF to Fund Salaries and Benefits

The following serves as a checklist of compliance requirements to expend ARP/CSLFRF funds to supplant salaries and benefits:

STEP 1: SET UP BASIC FINANCIAL ADMINISTRATION AND INTERNAL CONTROL PROVISIONS

Financial administration (2 CFR 200.302). A local government must have a financial management system that is sufficient to allow it to complete all necessary reporting requirements related to the ARP/CSLFRF award. It does not have to be a sophisticated system. For many local governments a simple spreadsheet will suffice. At a minimum, a local government must track obligations and expenditures of ARP/CSLFRF funds by project and include real-time comparisons to budgeted amounts for those projects. For salary and benefit expenditures, that means being able to track payroll encumbrances and disbursements by department. If a local government’s current financial management system does not allow for this level of tracking, it may use this simple Excel template for these ARP/CSLFRF funds.

Additionally, the regulations related to financial administration require proper documentation for all covered financial transactions, written procedures to implement internal controls, written policy and procedures for performing allowable cost item reviews, retention of all relevant information for at least 5 years post award term, and compliance with all other applicable UG requirements.

Internal Controls (2 CFR 200.303). A local government must have a written set of internal controls related to its financial transactions. The nature of these controls will vary based on the size of the unit and its staffing capacity, but there are some minimum requirements. The regulation prompts a local government to generally conform its internal controls to those that apply to federal agencies through what is known as the federal “Green Book.” That does not mean that a local government must adopt all the specific controls that apply to federal agencies; rather, it should simply follow the same general framework for its own controls. Also as part of its internal controls, a local government must regularly monitor and evaluate compliance with applicable federal and state laws and must take reasonable measures to safeguard protected personally identifiable information. The controls fall within 5 main categories. A local government’s written internal controls should identify specific actions/procedures within each of these categories. The five categories are:

1. 1. Control Environment. Include provisions related to the role of the board in setting the tone for full compliance by all local government employees and officials and the board’s commitment to integrity and ethics. Also include provisions related to how the board enforces accountability—periodic reporting, internal audits, audit committees, consequences for noncompliance, etc.
   2. Risk Assessments. Include provisions about how the local government identifies and analyzes risk of fraud, mistake, or other misappropriation. Who performs this function? What is involved in risk assessments? How are they documented? How often are risk assessments performed? What changes impact risk?
   3. Control Activities. Include provisions about activities that address potential risks. This section should include the specific controls that the local government has adopted, such as segregating duties for financial transactions, processes and oversight related to cash drawers, processes for receiving and reconciling revenues, rotating duties for financial transactions, controls over access to technology, cash management, deposits, and disbursement controls, etc. It should specify who performs what duties and who is responsible for supervision/oversight.
   4. Communication/Training. Include provisions related to how personnel are informed and trained on appropriate controls and how any changes are communicated.
   5. Monitoring Activities. Include provisions related to how the local government will monitor all financial activities to ensure proper compliance with controls and to ensure controls are effective. Who performs this function? How is it documented? This section should also detail what happens when deficiencies are detected and identify specific consequences for noncompliance.

STEP 2: ADOPT THE FOLLOWING POLICIES: 

Records 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 end of the award term (through December 31, 2031). (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 policy requires a local government to perform a general review of each cost item to ensure they are allocable, reasonable, consistently treated, and properly documented. (Sample policy here.) As noted above, the specific cost item regulations in the UG do not apply to revenue replacement expenditures. That section of the allowable cost policy will not be triggered for expenditures in this category.

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.)

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 3: IMPLEMENT ELIGIBLE USE AND ALLOWABLE COST POLICES FOR SUPPLANTING SALARIES AND BENEFITS

As stated above, the implementation of these policies related to supplanting salary and benefit costs is not complicated. A local government must do the following:

Document eligibility determination for salary and benefit costs as part of the provision of government services. This is a simple process that can be accomplished with this Sample Form.

Document basic allowable cost review for salary and benefit costs. This is also a simple process that can be accomplished with the same Sample Form as the eligibility determination. It ensures that only allowable (and properly documented) salaries and benefits are covered with the grant funds.

Collect and retain required documentation for covered salary and benefit costs. A local government should retain payroll records for all salaries/benefits that are paid for directly or reimbursed with ARP/CSLFRF funds.

STEP 4: COMPLETE PERIODIC REPORTS TO US TREASURY.

The ARP/CSLFRF requires a local government to complete periodic reports to US Treasury. Most local governments must complete a yearly Project and Expenditure Report. Some will complete this report quarterly and a few (the largest local governments) also will complete a yearly Recovery Plan Performance Report. A schedule of reporting requirements and deadlines is here. For local governments that expend all their ARP/CSLFRF funds on the provision of government services, including salaries and benefits, completing the Project and Expenditure Report is easy. All revenue replacement expenditures may be reported as a single project with a brief narrative to outline the specifics.

STEP 5: FOLLOW STATE LAW BUDGETING AND OTHER FISCAL CONTROL MEASURES

Finally, it is important to remember that ARP/CSLFRF funds are public funds, subject to the provisions of the Local Government Budget and Fiscal Control Act provisions and other state laws and regulation. ARP/CSLFRF funds must be properly budgeted before they can be obligated, and a local government must follow preaudit and disbursement processes before they can be obligated and expended. For more information on budgeting options for using ARP/CSLFRF to fund salaries and benefits (including sample budgets), click here.