As detailed in previous posts, all NC counties and municipalities received federal grant funding from the American Rescue Plan Act of 2021 Coronavirus State and Local Fiscal Recover Fund (ARP/CSLFRF). There are detailed expenditure guidelines, and compliance and reporting requirements for these grant funds. A local government’s auditor plays an important role in monitoring compliance with these requirements and flagging any issues during the annual audit process. Most NC local governments spent at least some of their ARP/CSLFRF funds this fiscal year, and it’s time to start preparing for the annual audit. The following is a summary of the ARP/CSLFRF grant and helpful resources for a local government and its auditor in preparing for this significant compliance check.

Brief Overview of ARP/CSLFRF

The ARP/CSLFRF is a federal grant program that provided funding to the state, counties, and municipalities for a mix of COVID-related and general government expenditures. Eligible projects are defined in four broad areas:

1. Responding to COVID-19 and Its Negative Economic Impact
2. Revenue Replacement
3. Premium Pay
4. Necessary Water, Wastewater, Stormwater, and Broadband Infrastructure

US Treasury has defined in detail what qualifies as lawful expenditures in each of these categories. And North Carolina local governments also must ensure that they have state law authority for the expenditures. (There are some expenditures authorized by the grant that are not authorized for NC local governments under state law.)

Local governments identify eligible projects within these areas and within more detailed subcategories listed in Appendix 1 here. A project is a group of expenditures towards a common purpose. The more detailed subcategories are referred to as Expenditure Categories or ECs. Each project must be associated with one, and only one, EC.

US Treasury is allowing local governments to expend up to their full allocation, or a maximum of $10 million, whichever is lower, in the Revenue Replacement category, without having to demonstrate any actual revenue loss. That category allows ARP/CSLFRF funds to be spent on almost anything a local government has state law authority to spend money on, including salaries/benefits and other general government expenses. And, as detailed below, US Treasury has waived several of the most complex compliance requirements for expenditures in this category. Local governments receiving between $0 and $10 million in ARP/CSLFRF funds should spend all of their funds in this category. (Here is a roadmap to guide you through the expenditure options and compliance requirements for the Revenue Replacement category.) Local governments receiving over $10 million may spend at least $10 million in this category or possibly more if a detailed formula reveals that the local government experienced actual revenue loss greater than $10 million due to the pandemic over the defined period.

Expenditures of ARP/CSLFRF are subject to detailed compliance and reporting requirements. These requirements come from three sources: (1) the ARP/CSLFRF Award Terms and Conditions; (2) the ARP/CSLFRF Final Rule provisions; and (3) the Uniform Guidance, which is a set of federal regulations that apply to federal grants. This graphic highlights the basic reporting and compliance requirements by source. And this graphic shows the modifications US Treasury has made to these requirements for the Revenue Replacement category. All ARP/CSLFRF funds must be obligated by December 31, 2024 and expended by December 31, 2026.

Audit Types

There are a few different audit types that a local government might trigger based on the expenditure of the ARP/CSLFRF funds:

1. Financial Audit. All NC local governments must have an independent financial audit each fiscal year. See G.S. 159-34.
2. Yellow Book Audit (aka Generally Accepted Government Auditing Standards (GAGAS) Audit). This audit is triggered if a local government EXPENDS $100,000 or more in combined state and federal funds in a fiscal year, and it includes the financial audit. The purpose of this audit is to provide an opinion on the financial statements, in accordance with GAGAS. It also assesses internal controls and compliance issues. GAGAS contains requirements relating to ethics, independence, auditors’ professional judgment and competence, quality control, performance of the audit, and reporting.
3. Single Audit. This is a federal programs audit. It is triggered if a local government EXPENDS $750,000 or more in federal funds only in a fiscal year. It includes the Yellow Book audit and financial audit and also assesses specific federal program controls, as specified in the compliance supplement. Single audits must be submitted to the Federal Audit Clearinghouse along with a data collection form, Form SF-SAC. As discussed here, there are specific federal procurement processes that must be used to select the auditor for a Single Audit.
4. [FOR ARP/CSLFRF ONLY] Alternative Compliance Examination Engagement. The federal government has authorized an alternative to the Single Audit related to ARP/CSLFRF funds only. If a local government received an allocation of $10 million or less in ARP/CSLFRF funds and the only reason for exceeding the $750,000 threshold in a fiscal year is because of the expenditure of the ARP/CSLFRF funds, a local government may substitute an Alternative Compliance Examination Engagement for the Single Audit. The local government does not need to follow federal procurement requirements for selecting the auditor for the Alternative Compliance Examination Engagement.

This will be the first time that some NC local governments trigger something more than just a financial audit. And the biggest difference between the financial audit and the other audits is the focus on compliance testing. A compliance audit is the process of independently evaluating an organization to ensure that external rules, regulations, and laws are being followed, as well as internal controls, policies, and procedures. A compliance audit reviews a local government’s adherence to regulatory guidelines. It also addresses the effectiveness of its internal controls to determine how the unit tracks and measures its performance against these external and/or internal requirements. It is important that a local government adopt required written policies and procedures and keep detailed records of compliance to allow for proper audit testing.

Know the Rules (and Make Sure Auditor Knows the Rules, Too)

The ARP/CSLFRF is a complex grant and the compliance guidelines have changed several times over the past few years. There are multiple documents issued by US Treasury (the granting agency) that flesh out and clarify all of the regulations. The following is a list and brief description of each. It may be helpful to provide these links to your auditor to make sure he/she has the latest guidance, too. (Note that these links always point to the most recent update by US Treasury. These updates occur periodically, sometimes without notice, so it is important to periodically check the date stamp on the document and look for any changes.)

• ARP/CSLFRF Terms and Conditions. These are the requirements that each local government agreed to as a condition of receiving the ARP/CSLFRF award. Some of these are discussed in more detail in other guidance documents, but there are several requirements that only appear in this document.
• Final Rule. These are the official regulations from US Treasury implementing the ARP/CSLFRF program.
• Final Rule Overview. This is a summary overview of the final rule. It is particularly helping in detailing the eligible expenditures for each category, including safe harbor expenditures in both the Responding to COVID-19 and Its Negative Economic Impacts and Necessary Infrastructure categories.
• Final Rule FAQs. US Treasury has fleshed out some of the nuances of the regulations in this Q&A guide. US Treasury has also used this guide to make several modifications to the default compliance provisions. Of particular importance is FAQ 13.15 which modifies certain Uniform Guidance provisions for any expenditures in the Revenue Replacement Category.
• Final Rule Compliance and Reporting Guide. This guidance describes some of the specific Uniform Guidance compliance regulations and other Award Terms and Conditions. It does not provide a comprehensive list of compliance provisions, though. It also details reporting requirements, including additional data elements that must be tracked and reported for certain ECs. Finally, it includes the list of ECs.
• ARP/CSLFRF Compliance Supplement. This is guidance for auditors on required compliance testing for the ARP/CSLFRF award for both the Single Audit and the Alternative Compliance Examination Engagement.
• Special Treasury Guidance for ARP/CSLFRF Subawards to ISPs (for Broadband Projects). US Treasury has altered some of the compliance requirements for broadband subawards. Those changes are detailed in this guidance.
• Federal Uniform Guidance Regulations. These are the federal regulations that apply to federal grant awards. As detailed in the Final Rule and Final Rule FAQs, many, but not all, of these regulations apply to the ARP/CSLFRF award.

The School of Government has also published several blog posts helping to explain the various eligibility requirements and regulations. They may be helpful to you and your auditor, particularly in identifying how the federal requirements intersect with state law requirements. We also continue to host free weekly ARP/CSLFRF Office Hours via Zoom to address eligibility, compliance, budgeting, and reporting questions. Feel free to email me at millonzi@sog.unc.edu for the dates/times and Zoom link.

Prepare the Documentation

There are actions a local government can take now to prepare for the upcoming audit.

(1) Select and contract with auditor according to provisions in G.S. 159-34 (and, for a Single Audit, according to federal procurement requirements).

(2) Check with the auditor for any specific guidance on how to prepare documents/information. Make sure the auditor has latest ARP/CSLFRF guidance documents (linked above).

(3) Adopt and implement the following basic federal policies related to ARP/CSLFRF (School of Government samples are linked for reference). These are all required by the Awards Terms and Conditions and applicable federal Uniform Guidance provisions.

• Eligible Use Policy
• Allowable Cost Policy (and explanatory blog post)
• Civil Rights Compliance Policy
• Records Retention Policy
• Conflict of Interest Policy

(4) Adopt and implement other general internal controls for financial management.

(5) For local governments receiving over $10 million that must expend ARP/CSLFRF funds outside of the Revenue Replacement category, adopt and implement the following additional federal policies (as applicable).

• Federal Procurement Policy (We do not currently have a sample policy, but here are guidelines to the required contract terms and conditions.)
• Program Income Policy
• Property Management Policy
• Subaward Policy and Implementation Tools

(6) Identify the project(s) that the local government obligated or expended ARP/CSLFRF funds for during the fiscal year.

(7) Ensure that all obligations and expenditures have been recorded for each project by reporting period. (Reporting periods for most local governments run from April 1 through March 31 each grant year. Reporting periods for local governments who received over $10 million in ARP/CSLFRF funds are quarterly.)

(8) Establish a project file for each project that contains the following (the project file can be hardcopy or digital but must be preserved for at least 5 years after the local government expends all of its ARP/CSLFRF funds, which may be through December 31, 2031).

• Budget documentation. Include copy of the grant project ordinance (or other appropriate budget ordinance) and any amendments showing specific appropriations of ARP/CSLFRF for the project. (Sample grant project ordinances, amendments, and journal entries are available here.)
• Eligible use documentation. Provide project description and identify the appropriate EC and state law authority. (Sample form here.)
• Allowable cost review documentation. For local governments spending ARP/CSLFRF funds in the Revenue Replacement category this is a simple review to ensure that project costs are necessary, reasonable in amount, and allocable to the grant. For expenditures in other ARP/CSLFRF categories, the review is more complex. A local government must ensure costs comply with the detailed Uniform Guidance cost item regulations, in accordance with the local government’s allowable cost policy. (Sample form to document that review here. It is the same form as for eligible use documentation.)
• Procurement documentation (if applicable). If the project involves a procurement subject to local, state, and/or federal competitive process requirements, include documentation that those processes were followed. (Note that federal procurement regulations do not apply to Revenue Replacement expenditures.)
• Property management documentation (if applicable). If the project involves purchase or renovations/repairs to real property, equipment, or supplies, include documentation of compliance with property management policy. (Note that federal property management regulations do not apply to Revenue Replacement expenditures.)
• Program income documentation (if applicable). If the local government generates program income from the ARP/CSLFRF-funded project it must segregate and separately track this revenue and add it to the total ARP/CSLFRF award. The program income must be expended for an authorized ARP/CSLFRF purpose in accordance with all the compliance requirements. (Note that program income regulations do not apply to Revenue Replacement expenditures.)
• Subaward documentation (if applicable). If a local government partners with another local government or private entity to carry out an ARP/CSLFRF project, the local government must follow a detailed subaward process, including conducting a risk assessment, executing a subaward agreement, and engaging in subrecipient monitoring. A local government must document all the steps in this process. (Note that federal subaward regulations do not apply to Revenue Replacement expenditures.)
• All other required documentation. The other required documentation will vary by project. At a minimum, include all contracts, invoices, payment records, performance details, and any other written information relating to the project implementation and payment. The more that is documented the better! Documentation requirements for expenditures outside of the Revenue Replacement category will typically be more extensive. (For example, if a local government uses Revenue Replacement ARP/CSLFRF to fund employee salaries and benefits, the only documentation required for this section is payroll records. But if a local government uses ARP/CSLFRF monies in another category to fund employee salaries and benefits, it must document its written pay schedule, written benefits plan, payroll records, timesheets for nonexempt employees, and effort certification forms for each employee.)