North Carolina’s local governments have been inundated with federal funds since the onset of the COVID-19 pandemic in March 2020. But the complexity and quantity of the rules applicable to the expenditure of those monies have not decreased since the pandemic began. Federal funds continue to arrive in local government coffers, as they always have, with significant “strings attached.”
Local Finance Bulletin No. 63, released last week, discusses one “string” that Congress and federal agencies commonly attach to federal financial assistance—a requirement that, when spending federal monies, a recipient of federal aid prefer the purchase of items produced or manufactured in the United States over items produced or manufactured outside of the country. The bulletin introduces North Carolina’s counties and municipalities to these types of “Buy American” and “Buy America” preferences—and this blog post summarizes some of the bulletin’s key points.
This is the last procurement-related publication that I plan to author, as my colleague Crista Cuccaro assumed responsibility for procurement and contracting matters at the School of Government in the summer of 2022.
“Buy American” vs. “Buy America”
Since its adoption of the Buy American Act of 1933 (the “BAA”), Congress has in most cases required the federal government to prefer the acquisition of American-made goods and materials over foreign-made items when it purchases goods or contracts for construction services. See Pub. L. No. 72-428, ch. 212, tit. III, 47 Stat. 1489, 1520 (1933); 41 U.S.C. §§ 8301–8305 and 48 C.F.R. Part 25 (“FAR”). Section I of the Bulletin outlines the BAA’s basic provisions, along with its implementing regulations in the Federal Acquisition Regulation or “FAR.”
The BAA and its “Buy American” preference do not apply to the expenditure of federal aid by non-federal entities, but Congress has often tied a similar “string” to certain federal aid that the federal government offers to non-federal entities, requiring many recipients of federal financial assistance to make comparable procurement preferences when spending federal money. Somewhat confusingly, the preferences that apply to federal aid are popularly known as “Buy America” preferences rather than “Buy American” preferences.
Congress has enacted varying forms of these Buy America preferences through distinct statutes that authorize the federal government to provide federal financial assistance. In turn, federal agencies have promulgated distinct sets of regulations that implement the terms of those statutory preferences. These statutes and regulations together authorize and condition the non-federal expenditure of federal aid ranging from the purchase of school lunches to the construction of water treatment facilities.[1]
To introduce how these “Buy America” preferences work in practice, Section II of the bulletin discusses one such preference that applies to the expenditure of Federal Transit Administration aid recently provided to three of North Carolina’s municipalities to purchase public buses and construct bus facilities. Each “Buy America” statute and agency regulation differs in its application, and local governments that receive federal aid to which a “Buy America” preference attaches should take care to carefully research and analyze the scope of any such preferences applicable to the aid received.
Local Government Authority to Implement Domestic Procurement Preferences
If a local government receives federal aid to which a Buy America preference applies, does North Carolina law permit it to implement that preference in its procurement processes? Section III of the Bulletin addresses that question.
Units of local government in North Carolina derive their powers from delegations of authority made by the North Carolina General Assembly. And although the General Assembly has broadly authorized municipalities and counties to “acquire and hold any property” (G.S. 153A-11; G.S. 160A-11) and enter into contracts “in order to carry out any public purpose” (G.S. 153A-449(a); G.S. 160A-20.1(a)), it also has restricted the manner in which these entities award certain contracts to purchase goods, materials, and construction services.
In particular, North Carolina counties and municipalities must award contracts to purchase personal property or construct or repair an improvement to real property—in each case, with a cost in excess of $30,000—to “the lowest responsible bidder . . . , taking into consideration quality, performance and the time specified in the proposals for the performance of the contract.” G.S. 143-129(b); G.S. 143-131(a). But does this “standard of award” permit a local government to exclude foreign-made items from consideration or expressly favor domestically-made items when awarding these types of contracts?
On its own, maybe. The fact that an item is made domestically does not necessarily affect its “quality” or “performance.”
But North Carolina law also permits municipalities and counties to accept grant funds from the federal government for the purpose of “constructing, expanding, maintaining, and operating any project or facility, or performing any function, which such city or county may be authorized by general law or local act to provide or perform.” G.S. 160A-17.1(a). In doing so, G.S. 160A-17.1(a)(3) permits these entities to“[a]gree to and comply with any lawful and reasonable conditions . . . imposed upon such grants.”
No court has analyzed the extent to which a condition imposed upon a federal grant by federal statute or regulation (e.g., the exclusive acquisition of domestically made materials) might be “lawful and reasonable” under G.S. 160A-17.1(a)(3). But a court faced with such an issue of first impression might broadly construe a federal grant condition imposed on a North Carolina city or county as “lawful and reasonable” whenever (1) Congress or a federal grantor agency has requisite constitutional and statutory authority, respectively, to impose the condition, and (2) the city or county has independent statutory authority to undertake the underlying activity. In such a case, G.S. 160A-17.1(a)(3) might be read to permit a municipality or county to comply with a federal law or regulation requiring a local government to expressly favor domestically manufactured or produced materials when spending federal monies.
Recent Attempts to Expand the Scope of Domestic Procurement Preferences
Section IV of the Bulletin addresses two broadly applicable legislative and regulatory attempts to expand the scope of domestic procurement preferences that apply to the expenditure of federal financial assistance.
The Uniform Guidance “Buy America” Provision – 2 C.F.R. 200.322
The first significant change occurred in November 2020, when the Office of Management and Budget (OMB) incorporated a domestic procurement preference into a set of government-wide grant administration standards known as the Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (2 C.F.R. Part 200) or “Uniform Guidance.” Subject to a great deal of agency-specific variation, most provisions in the Uniform Guidance apply to the expenditure of most federal grant monies.
The Buy America Provision that OMB released in November 2020—found in 2 C.F.R. 200.322 and copied below—lacks teeth and clarity. The bulletin explains why.
2 C.F.R. § 200.322 – The Uniform Guidance Buy America Provision
(a) As appropriate, and to the extent consistent with law, the non-Federal entity should, to the greatest extent practicable under a Federal award, provide a preference for the purchase, acquisition, or use of goods, products or materials produced in the United States (including but not limited to iron, aluminum, steel, cement, and other manufactured products). The requirements of this section must be included in all subawards including all contracts and purchase orders for work or products under this award.
(b) For purposes of this section:
(1) “Produced in the United States” means, for iron and steel products, that all manufacturing processes, from the initial melting stage through the application of coating, occurred in the United States.
(2) “Manufactured products” means items and construction materials composed in whole or in part of non-ferrous metals such as aluminum; plastics and polymer-based products such as polyvinyl chloride pipe; aggregates such as concrete; class, including optical fiber; and lumber.
The interpretive rules in the Uniform Guidance state that while the use of the word “must” indicates a “requirement,” the use of the word “should” indicates a “best practice or recommended approach rather than a requirement and permits discretion.” 2 C.F.R. § 200.101(b)(1). Read in this light, subsection (a) of this provision contains two substantive components, only one of which is mandatory.
The first substantive component of the Uniform Guidance Buy America Provision states that “[a]s appropriate, and to the extent consistent with law,” a non-federal entity should “to the greatest extent practicable, provide a preference for the purchase, acquisition, or use of goods, products, or materials produced in the United States (including but not limited to iron, aluminum, steel, cement, and other manufactured products).” While that preference appears at first blush to be very broad (extending to “the purchase, acquisition, or use of [all] goods, products, or materials”), the use of the word “should” rather than “must” indicates that imposition of a domestic content procurement preference is not in fact a requirement but is, rather, a suggested “best practice.”
In addition, the Uniform Guidance Buy America Provision fails to make clear how a non-federal entity could demonstrate compliance with the preference. Because neither OMB nor federal agencies have produced guidance indicating how a recipient should put a preference into practice, it is difficult to understand how an agency or an auditor could find that a non-federal entity failed to comply with this first substantive component. The Uniform Guidance Buy America Provision simply lacks the detail of the BAA, FAR, or other Buy America regulations—and OMB has failed to provide any guiding standards.
The second substantive component of the UG Buy America Provision contains the only clear requirement that local governments can follow. That component states that the “requirements” of this section “must be included in all contracts and purchase orders for work or for products under [an] award.” In other words, the only mandatory action that non-federal entities must take under the UG Buy America provision is to include a specific clause in each contract, subcontract, and subaward supported by a federal award to which the UG Buy America Provision applies (including those supported by Fiscal Recovery Funds) that encourages the contractor, subcontractor, and subrecipient to impose a domestic procurement preference.[2]
Build America, Buy America Act – BABAA
Section IV also discusses a much more significant change to domestic procurement preferences attached to federal financial assistance that occurred in November 2021, when Congress enacted the Infrastructure Investment and Jobs Act of 2021 (“IIJA”). One portion of the IIJA—the Build America, Buy America Act (“BABAA”)—greatly expanded the scope of domestic procurement preferences that apply to federally assisted “infrastructure” projects. See Pub. L. No. 117-58, div. G, tit. IX, §§ 70911–70953, 135 Stat. 429, 1294–1316 (2021).
BABAA attached a new domestic procurement preference—the BABAA Preference—to all federal funds obligated under federal financial assistance programs for “infrastructure” projects, not just those for which the IIJA appropriated funds. In particular, subject to three primary exceptions, the BABAA Preference prohibits a federal agency from obligating any available funds—not only funds appropriated under the IIJA—on or after May 14, 2022, under a “Federal financial assistance program for [an] infrastructure . . . project unless all of the iron, steel, manufactured products, and construction materials used in the project are produced in the United States.”
In analyzing the BABAA Preference, OMB and other agencies have faced two primary questions: (1) does a particular program of federal financial assistance make funds available for “infrastructure” (as defined in BABAA) and (2) if so, what actions must agencies and recipients of federal financial assistance take to implement the BABAA Preference.
OMB issued initial guidance (OMB Memorandum M-22-11) to federal agencies on these issues on April 18, 2022, and federal agencies have subsequently grappled with these questions in separately issued guidance documents. On February 9, 2023, OMB issued proposed regulations to support implementation of the BABAA Preference. It is not clear when OMB will issue final regulations.
Using OMB’s initial guidance, Section IV of the Bulletin addresses the application and scope of the BABAA Preference. As agency and program-specific guidance is produced in the coming months and years, local governments will need to work closely with federal funding agencies to comply with BABAA.
_________________________________________________________________________________________________________________________________________________________________________________
