The American Rescue Plan Act Coronavirus State and Local Fiscal Recovery Fund (ARPA/CSLFRF) provided significant funding to North Carolina counties and municipalities. As discussed in many previous posts, the ARPA/CSLFRF funds may only be spent for certain eligible purposes that are also consistent with state law authority. And the funding comes with many federal compliance strings. But what about the interest or investment proceeds earned on ARPA/CSLFRF funds—are they subject to the same grant requirements? The answer is no. The ARPA/CSLFRF grant is exempt from the federal regulations related to interest/investment earnings and the grant requirements do not apply to these earnings. But budgeting and expending these funds still requires a few steps under state law. This blog details how to allocate, budget, transfer, and expend interest or investment proceeds on ARPA/CSLFRF monies.

Earning Interest or Investment Proceeds on Public Monies

North Carolina local governments may deposit public monies in interest bearing accounts and may invest the monies in statutorily authorized investment vehicles. Public monies may be pooled from a local government’s various accounting funds for deposit or investment purposes. For example, monies from a unit’s general fund, water fund, and any special revenue funds may be combined and deposited into a single interest-bearing bank account (in an official depository approved by the governing board, of course (G.S. 159-31)). Similarly, the monies may be combined for investment purposes, and invested pursuant to G.S. 159-30 (unless a local act provides for a broader set of investment vehicles).

Allocating Interest or Investment Earnings by Fund

When monies are combined from multiple accounting funds for deposit or investment purposes, state law requires that the interest or investment proceeds be allocated back to each fund on a proportional basis to the principal amounts in each fund. G.S. 159-30(e). Allocations are calculated based on an average periodic balance.

To illustrate, assume that a unit invests $100,000 from its General Fund; $50,000 from its Water Fund; and $300,000 from its ARPA/CSLFRF Special Revenue Fund. At the end of the quarter, total investment earnings from the pooled monies are $6,700. Of this amount, 22.2% ($1,487.40) is allocated to the General Fund; 11.1% ($743.70) is allocated to the Water Fund; and 66.7% ($4,468.90) is allocated to the ARPA/CSLFRF Special Revenue Fund.

ARPA/CSLFRF Treatment of Interest or Investment Proceeds

The ARPA/CSLFRF grant is NOT subject to 2 CFR 200.305(b)(8) and (9) (related to Federal Payments). See Coronavirus State and Local Fiscal Recovery Funds Assistance Listing Number 21.027; see also Compliance and Reporting Guidance, State and Local Fiscal Recovery Funds (v. 6.0, March 28, 2024), pg. 10; Coronavirus State and Local Fiscal Recovery Funds Frequently Asked Questions 10.1. That means that local governments are allowed to place the ARPA/CSLFRF funds in interest-bearing accounts, or other investment vehicles authorized by state law, and DO NOT need to remit the interest to US Treasury. Further, interest or investment proceeds earned on ARPA/CSLFRF funds are not considered part of the grant award and are not subject to its eligibility restrictions or compliance requirements. The interest or investment proceeds are, thus, unrestricted revenues.

Properly Budgeting and Expending ARPA/CSLFRF Interest or Investment Proceeds

The interest or investment proceeds may be expended for any purpose authorized by state law, but they must first be properly budgeted. The budgeting process will depend on how the local government intends to spend the monies.

Option 1: Even though it is not required to do so, a local government may appropriate the interest or investment proceeds towards one or more ARP/CSLFRF projects. For this option, the governing board will simply amend the Grant Project Ordinance authorizing the ARP/CSLFRF project(s) to recognize the investment/interest proceeds as additional revenue and appropriate that revenue for the specific ARPA/CSLFRF project(s). The investment/interest cash will remain in the ARP/CSLFRF special revenue fund until it is obligated, expended, and disbursed. It will be spent directly out of the special revenue fund, which requires no budget transfer or journal entries. Here is a sample amended grant project ordinance for Option 1. (The governing board re-adopted the entire grant project ordinance with the amendment.)

Option 2: Alternatively, a local government may choose to spend the investment/interest proceeds for other general government or enterprise expenditures. This option involves a few more steps. First, the governing board must amend its Grant Project Ordinance authorizing the ARP/CSLFRF project(s) to recognize the investment/interest proceeds as additional revenue and appropriate the same amount as a budget transfer to the general fund or an enterprise fund, depending on the purpose for which the board wants to spend the monies. Most local governments will transfer to the general fund. Once the transfer has been budgeted, the local unit’s finance officer will do a journal entry to move the cash. The monies are then unrestricted fund balance. The governing board will need to amend the annual budget ordinance to recognize the transferred investment/interest revenue and appropriate for any general fund or enterprise fund expenditure, according to normal budgeting processes. Here is a sample grant project ordinance, amendment to the grant project ordinance, journal entry, and amendment to the annual budget ordinance for Option 2. 

Correcting Budgeting Error

What if a local government did not properly allocate the interest or investment earnings back to the ARPA/CSLFRF special revenue fund and instead allocated it directly to the general fund? This is a statutory violation, but it can be fixed. First, the finance officer must estimate how much of the interest/investment proceeds should have been allocated to the ARPA/CSLFRF special revenue fund. Second, if the interest/investment proceeds have not yet been appropriated, the finance officer will do a journal entry to move the amounts from the general fund fund balance to the special revenue fund. The finance officer should document the reason for the journal entry. If, however, the interest/investment proceeds have already been appropriated in the annual budget ordinance, the governing board will need to do a budget amendment to transfer those proceeds to the ARPA/CSLFRF special revenue fund. The finance officer will perform the corresponding journal entry. Once the error is corrected, the local government can proceed to one of the budgeting options detailed above.