As detailed in previous posts, North Carolina counties and municipalities received funding from the American Rescue Plan Act of 2021 Coronavirus State and Local Fiscal Recovery Fund (ARP/CSLFRF). This federal grant funding has afforded local governments opportunities to make transformational investments in their communities. One of the unique features of the grant program is the authority to use the ARP/CSLFRF funds to reimburse a local government for past eligible expenditures, dating back to March 3, 2021.

The ability to reimburse for prior expenditures, particularly in the Revenue Replacement category, provides a simplified path to legally obligate and expend a local government’s ARP/CLSFRF funds, which effectively converts the cash to unrestricted fund balance. Once a proper reimbursement occurs, the former ARP/CSLFRF cash (now unrestricted fund balance), can be appropriated by the governing board through its normal budgeting process, for any purpose authorized by state law. The unrestricted fund balance is not subject to federal compliance and reporting requirements, including the obligation and expenditure timing restrictions. In short, the reimbursement process allows a local government to maximize the benefit of these one-time monies while minimizing their administrative burden. The governing board can then use ARP-enabled funds (the unrestricted fund balance) to make transformational capital and/or programmatic investments in its community on its own timeline and subject only to state law requirements.

This post explains how reimbursements work and addresses common budgeting, accounting, and compliance questions related to reimbursements.

What is a reimbursement of ARP/CSLFRF funds?

As the term suggests, a reimbursement occurs when a local government pays itself back for a prior expenditure. A local government may use ARP/CSLFRF funds to repay itself for prior eligible general fund and or enterprise fund costs. The reimbursement period dates back to March 3, 2021. Any eligible costs incurred by the local government on or after this date may be reimbursed. Importantly, a reimbursement is not a replacement or restatement of the revenues used to pay for the initial expenditure. It is simply a mechanism for the local government to repay itself. It is, thus, an internal transaction, the result of which is unrestricted fund balance. This is the hardest part to conceptualize. The local government is expending the ARP/CSLFRF funds in a legal sense, but the cash is still in the local government’s bank account. But once the local government appropriates the ARP/CSLFRF funds to reimburse itself for an eligible prior expenditure, the ARP/CSLFRF funds are considered obligated and expended and are no longer ARP/CSLFRF funds; they are unrestricted cash (fund balance). A reimbursement expenditure of ARP/CSLFRF is an actual expenditure, though. A local government must go through the required budgeting process (detailed below). It is not sufficient for the local government to simply park the ARP/CSLRF funds in fund balance.

When may a local government use ARP/CSLFRF funds to reimburse itself for a prior expenditure?

The ARP/CSLFRF allows expenditures on eligible projects in four broad categories:

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 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.)

The grant allows for reimbursements of eligible project expenditures in any of these categories for costs incurred on or after March 3, 2021. The reimbursement may occur at any time before December 31, 2024, the grant obligation deadline. But, as we know, 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. A local government must have followed all the applicable compliance requirements when it contracted and paid for the original expenditure to be able to reimburse that expenditure with ARP/CSLFRF funds. It will be tougher to meet this burden for eligible projects outside the Revenue Replacement category because they trigger many more compliance regulations that a local government likely did not follow when contracting or paying for the original expenditure. There are fewer compliance obligations for projects in the Revenue Replacement category, so most reimbursements will occur in this category. (An exception may be for reimbursements of certain salary/benefit costs in the Responding to COVID-19 and Its Negative Economic Impacts category. I discussed the authority for those project expenditures in a previous post.)

Reimbursements in Revenue Replacement Category

Because most reimbursements will occur with Revenue Replacement ARP/CSLFRF, let’s take a closer look at what’s allowed in this category. As discussed in detail here, a local government may expend up to its full allocation, or a maximum of $10 million, whichever is lower, in the Revenue Replacement category, without having to demonstrate any actual revenue loss. (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.) The Revenue Replacement 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 or public enterprise expenses. The only prohibited expenditures are (1) extra pension fund contributions; (2) borrowing costs or debt service (loan) payments; (3) financial reserves / rainy day fund contributions; (4) litigation costs, including settlements / judgements / consent decrees; (5) expenditures that undermine or discourage compliance with Centers for Disease Control (CDC) guidelines; (6) expenditures that violate federal conflict of interest provisions; (7) expenditures that violate state law or other federal laws and regulations, including applicable Uniform Guidance requirements; and (8) expenditures that the local government has or will receive other external funding to cover (in other words, no double dipping). Further, US Treasury has waived several of the most complex compliance requirements for expenditures in this category.

As reflected in this ARP Revenue Replacement Roadmap, there are three different ways to spend ARP/CSLFRF funds in the Revenue Replacement category. A local government may expend Revenue Replacement ARP/CSLFRF (1) for new projects or programs, (2) for future salaries/benefits or other internal expenditures, and/or (3) to reimburse the local government for prior qualifying expenditures dating back to March 3, 2021. We’re focusing on this third option.

            Qualifying Expenditures for Revenue Replacement Category Reimbursement

What is a prior qualifying expenditure for reimbursement? It is any local government expenditure that occurred on or after March 3, 2021, and that is not on the prohibited expenditures list (above). One additional criterion is that a local government must have sufficient documentation of the prior expenditure (e.g. contracts, pay records, performance documentation, etc.). Thus, any general government or enterprise fund expenditure that is not on the prohibited list and can be properly document qualifies for reimbursement.

            Reimbursement Process for Revenue Replacement Category

From a budgetary and accounting perspective, it is a fairly simple process to do a reimbursement. However, there are some additional general compliance requirements that apply to all ARP/CSLFRF expenditures. The following includes all the general compliance steps and the budget and accounting steps that are specific to a reimbursement.

STEP 1: ESTABLISH FINANCIAL MANAGEMENT SYSTEM AND ADOPT WRITTEN INTERNAL CONTROLS

Before making any specific Revenue Replacement expenditure, a local government must establish its general compliance framework. That includes the following:

Set up basic financial administration. 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. If a local government’s current financial management system does not allow for this level of tracking, staff may use one of these Excel Tracking Templates (Template 1 and Template 2).

Adopt and implement written internal controls. Additionally, a local government must adopt and implement 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. A local government should generally conform its internal controls to those that apply to federal agencies through what is known as the federal “Green Book” or the COSO framework. 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. The North Carolina Department of State Treasurer has a helpful guide on specific internal control considerations and processes for smaller units.

STEP 2: ADOPT AND IMPLEMENT GENERAL COMPLIANCE POLICIES

A local government must adopt and implement the following policies for all ARP/CSLFRF expenditures, including those in the Revenue Replacement category. I have included links to sample policies for each that a local government may use as templates.

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 all grant funds are expended or returned to US Treasury. (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 it is allocable, reasonable, consistently treated, and properly documented. (Sample policy here.) Note that 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: IDENTIFY ELIGIBLE REIMBURSEMENT PROJECT(S)

As stated above, a local government may use Revenue Replacement ARP/CSLFRF for any purpose authorized by state law, except for the prohibited items listed above. Examples include reimbursing salaries and benefits of local government employees, contracts with other local governments or nonprofits to provide community programs or services, real property purchases, supply and equipment purchases, and contracts for design, construction, repair, or renovation work. A local government may use ARP/CSLFRF funds to reimburse itself for a prior eligible expenditure if the costs were incurred on or after March 3, 2021.

STEP 4: DOCUMENT COMPLIANCE WITH REQUIRED POLICIES

The implementation of the Uniform Guidance policies related to a Revenue Replacement reimbursement requires some documentation.  A local government must include all the following in the project file:

• • Document eligibility determination and basic allowable cost review, according to procedures in the applicable policies. The review is done on the original project expenditure to determine if it is eligible for reimbursement.
  • Document that original expenditure (that is being reimbursed) would not have violated the local government’s conflict of interest policy that incorporates both state and federal requirements. Note that internal expenditures on salaries and benefits will not trigger conflict of interest issues, but external agreements with vendors, contractors, or nonprofits might.
  • If the original expenditure was part of an external contract, check Sam.gov to ensure that contracting party is not suspended or debarred and document findings.

All of these may be documented using this Eligibility and Allowable Cost Documentation Template or through a similar record created by the local government.

STEP 5: IDENTIFY AND RETAIN OTHER DOCUMENTAITON OF ORIGINAL EXPENDITURE

A local government also must retain any documentation associated with the original expenditure, including contracts, invoices, and pay records. (For example, a local government must retain all relevant payroll records to justify salary/benefit reimbursements with Revenue Replacement ARP/CSLFRF.)

STEP 6: ADOPT GRANT PROJECT ORDINANCE AUTHORIZNG REIMBURSEMENT 

ARP/CSLFRF funds must be budgeted before they can be obligated and expended. See G.S. 159-8. The only way to properly budget for a reimbursement expenditure in a prior fiscal year is through a grant project ordinance, pursuant to G.S. 159-13.2. And this is the best way to budget for a current year reimbursement, too. The grant project ordinance should state what is being reimbursed and when the original expenditure(s) occurred and appropriate ARP/CSLFRF funds to reimburse the expenditure(s). A sample grant project ordinance for a reimbursement is includes as Example 1 in this blog post.)

Once the board adopts the grant project ordinance (or amends an existing grant project ordinance) to appropriate ARP/CLSFRF funds for the reimbursement expenditure, that expenditure is both obligated and expended. There is no further budgetary action. That means there should not be any budget transfers from the grant project ordinance to the annual budget ordinance. The reimbursement ARP/CSLFRF funds were expended directly out of the grant project ordinance.

STEP 7: MAKE JOURNAL ENTRY TO MOVE EXPENDED ARP/CSLFRF MONIES FROM THE SPECIAL REVENUE FUND TO THE GENERAL FUND AND/OR ENTERPRISE FUND

Because the ARP/CSLFRF funds are obligated and expended with the adoption of the grant project ordinance, the finance officer should then do a journal entry to move the cash from the special revenue fund to the general fund and/or enterprise fund(s), depending on what expenditure is reimbursed. (A sample journal entry for a reimbursement expenditure is included in Example 1 in this blog post.) Once the cash is transferred it is unrestricted fund balance in the general and/or enterprise funds. It is available to be appropriated by the governing board for any purpose authorized by state law, according to state law processes. (No federal requirements apply.)

STEP 8: COMPLETE REQUIRED US TREASURY REPORTS

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 in the Revenue Replacement category, completing the Project and Expenditure Report is easy. All Revenue Replacement expenditures, including reimbursements, are reported as a single EC 6.1 project (or EC 6.2 project if the reimbursement is for the costs of a match for another federal grant), with a brief narrative to outline the specifics.

Example Reimbursement Project Expenditure

For purposes of this example, assume that in FY 2021-2022 annual budget ordinance, the Town of Tarheel expended $100,000 in supplies from BigBox Hardware, Inc. It also expended $670,000 in staff costs (salaries/benefits/payroll taxes and other costs) in the parks and recreation and law enforcement departments that fiscal year. In June 2023, the town’s governing board decides it wants to use ARP/CSLFRF funds to reimburse itself for these expenditures.

Assuming the Town completed the basic compliance requirements in Steps 1 & 2, it would need the following in the project files.

Project 1: Supply Reimbursement

• Documentation of eligible project, allowable cost, and conflict of interest reviews, and suspension/debarment check.
• Documentation of contract, purchase order, and/or invoice for original supply expenditures.
• Documentation of payment of original supply expenditures.
• Grant project ordinance and any amendments appropriating ARP/CSLFRF funds to reimburse the prior supply expenditure(s)
• Journal entry to move the cash from the special revenue fund to the enterprise fund

Project 2: Salaries/Benefits/Other Payroll Costs Reimbursement

• Documentation of eligible project, allowable cost, and conflict of interest reviews, and suspension/debarment check.
• Documentation of payroll records for each employee whose salaries/benefits/other payroll costs are being reimbursed.
• Grant project ordinance and any amendments appropriating ARP/CSLFRF funds to reimburse the salaries/benefits/other payroll costs
• Journal entry to move the cash from the special revenue fund to the general fund