As they say, time flies when you are having fun dealing with lots of federal grant compliance requirements. The American Rescue Plan Act Coronavirus State and Local Fiscal Recovery Fund’s (ARP/CSLFRF) obligation deadline is December 31, 2024. That means that all counties and municipalities must ensure that all their own ARP/CSLFRF funds are obligated within the next month. That includes any program income (if applicable) that the unit estimates it may earn between January 1, 2025 and December 31, 2026. (It does not include investment or interest proceeds on ARP/CSLFRF funds, as these are not subject to the grant.) As with everything with ARP/CSLFRF, what it means to obligate the funds is complicated. I summarize the options below and detail the bare minimum steps each unit must take before the end of this calendar year. Consider this the last call….

What does it mean to Obligate the ARP/CSLFRF funds? 

The ARP/CSLFRF funds are considered obligated if any of the following occurs on or before December 31, 2024 (Note that a local government may use a combination of several or even all these obligation methods.):

TRADITIONAL OBLIGATION: A traditional obligation is when a local government makes a legal commitment to spend the ARP/CSLFRF funds. A local government does this by executing a purchase order (PO), contract, or other legal agreement committing the local government to pay money to another. This includes employment agreements, even for at-will employment. 

REIMBURSEMENT OBLIGATION: The easiest way to incur an obligation is to use ARP/CSLFRF funds to reimburse a past expenditure. With a reimbursement the local government is paying the money to itself. It is not restating the revenues used to make the original expenditure; it is replenishing the funds with ARP/CSLFRF monies. Every local government can do this with their Revenue Replacement funds. The eligible reimbursement period dates all the way back to March 3, 2021. And with the Revenue Replacement funds, almost any prior expenditure (including salaries and benefits, supplies, and other contracts) can be reimbursed. (See this blog post for the specific details.) 

There are some opportunities for reimbursement outside of the Revenue Replacement category but these tend to be more challenging because of the additional compliance requirements for those categories. However, many units can take advantage of the expansion position eligible cost to reimburse salary and benefit costs outside of the Revenue Replacement category. (See this blog post for the specific details.) 

Procedurally, all it takes to accomplish a reimbursement obligation is for the local government’s governing board to adopt or amend its grant project ordinance to specifically authorize each reimbursement. It should include what was reimbursed, the date or date range of the original expenditure, and the specific amount being reimbursed. (See this example.) Once the board does this the funds are both obligated and expended. They are no longer ARP/CSLFRF funds; instead, they are converted into unrestricted fund balance. The unit’s finance officer can then do a journal entry to move the cash from the ARP/CSLFRF special revenue fund to the general fund or an enterprise fund. Some units refer to the resulting fund balance as “ARP-enabled monies.” These funds are not subject to the ARP/CSLFRF grant requirements. The term “ARP-enabled” simply means that the funds became available due to the reimbursement of expenditures made with the grant funds.

SUBAWARD OBLIGATION: A subaward is a process that is authorized by federal regulations. A local government executes a subaward with a subrecipient for the subrecipient to carry out an ARP/CSLFRF-eligible project for the local government. (Click here for more information on subawards.) The ARP/CSLFRF funds are deemed obligated once the subaward is executed. The obligation deadline does not apply to subrecipients. That means, for example, that the obligation deadline does not apply to local governments who received state ARP/CSLFRF funds from DEQ or another state entity because the local governments are subrecipients (or beneficiaries) for purposes of these state funds.

POSITION OBLIGATION: There are several different types of positions a local government may fund between January 1, 2025 and December 31, 2026 with ARP/CSLFRF funds. First, it may use its Revenue Replacement funds to pay for any employee or official’s salary and benefits, if it is not receiving other external funds to specifically cover these costs. Second, a local unit may use ARP/CSLFRF funds to pay the portion of employees’ salaries and benefits that match the specific effort on ARP/CSLFRF-eligible projects. Third, a local unit may choose to use direct cost recovery for grant administration, using ARP/CSLFRF funds to pay for a grant administrator and other specific overhead expenses. Fourth, it may fund the portion of law enforcement, public health, and social services employees’ salaries and benefits to the extent that they are focused on COVID-specific work. And fifth, it may fund the salaries and benefits of certain replacement or expansion positions. (More on that option here.) 

US Treasury is allowing a local government to lock in eligible positions on December 31, 2024, for the remainder of the grant term. That means that a local government may use ARP/CSLFRF funds to pay the salaries and benefits of individuals in those positions, even if the persons occupying the positions change and even if the nature of the positions change (for example if someone in an obligated position receives a promotion). A local unit may lock in position obligations only if ALL the following criteria are met:

• The position or portion of the position is eligible under the grant;
• The position or portion of the position is being paid for with ARP/CSLFRF funds on December 31, 2024; AND
• The position or portion of the position is filled on December 31, 2024.

All three criteria must be met for it to be a valid position obligation. A local government will report on its position obligations in its next Project and Expenditure Report. The following graphic summarizes the position obligation option.

MANDATED FUTURE GRANT COMPLIANCE COSTS OBLIGATION: A local government may hold some ARP/CSLFRF funds back to cover future mandated compliance costs. It may enter into a new contract/agreement for costs related to “a requirement under federal law or regulation or a provision of the [ARP/CSLFRF] award terms of conditions to which the [local government] becomes subject as a result of receiving or expending the [ARP/CSLFRF] funds” after December 31, 2024. These costs include personnel costs to manage the grant (e.g., reporting, documentation, internal controls, subrecipient monitoring) between January 1, 2025 and December 31, 2026. They also include audit costs attributable to the ARP/CSLFRF grant and mandated close-out costs. Additionally, if a local government chose the indirect cost allocation method, it may continue to apply the indirect cost recovery formula to its ARP/CSLFRF projects through the end of the grant term..

In its next Project and Expenditure Report (January 2025 for quarterly reporters and April 2025 for annual reporters), the local government will provide detailed estimates and justifications of the amount of funds it is holding back for the future mandated grant compliance costs. Note that this estimate will only include amounts that are not otherwise obligated through one of the other obligation methods. At award closeout the local government will report on the final amount expended for these costs.

The following graphic summarizes what qualifies for the mandated future compliance cost option.

[MAYBE] INTERNAL OBLIGATION: US Treasury allows a final way to incur an obligation, but it’s not clear that it is authorized under North Carolina law. I would consider this an option of last resort and consult with your unit’s attorney before relying on it. It allows a local governing board to make a budget appropriation and then enter an internal contract with the manager, department head, or other staff member. The Obligation Interim Final Rule and accompanying SLFRF FAQs specify that the internal agreement may impose conditions on the use of funds by the department, govern the provision of funds to carry out an eligible use of ARP/CSLFRF funds, or govern procurement of goods or services by the department. The agreement must:

• set forth specific requirements, such as scope of work and project deliverables;
• Be signed by both the governing board designee and the department head/staff member that will carry out agreement; AND
• NOT include language that disclaims any binding effect or state that it does not create rights or obligations.

It is that last requirement that may prove problematic under state law because generally a local governing board cannot make a binding internal commitment in this way. An internal contract does not create any rights or obligations. It’s not clear if Treasury’s requirements are met as long as there is not an explicit disclaimer or if the agreement itself must represent a binding commitment. If it’s the latter, then NC local governments cannot take advantage of this option for most internal agreements.

There may be a few exceptions, though. A county board of commissioners may be able to execute a binding internal agreement with the local board of elections. NC courts have held that the local board of elections, although part of county government for budgeting purposes, can be treated as a separate legal entity that has the authority to contract with and sue and be sued by the county. There may be similar exceptions for contracts between the county board of commissioners and the Sheriff or Register of Deeds. But generally a local governing board cannot make a binding internal commitment with its manager, other department heads, or staff.

What happens if a local government does not meet the obligation deadline? 

A local government forfeits any grant funds that are not obligated through one of the above methods by December 31, 2024. Treasury will likely provide further instructions for returning the unobligated funds. 

What happens if an obligated project does not proceed as planned? 

Even if a local government obligates all its ARP/CSLFRF by the obligation deadline, if there are still projects outstanding after this date there is a risk that things will not go as planned. A local government has until December 31, 2026 to fully expend its ARP/CSLFRF funds, which means that there will be a two-year potential financial exposure. A project might come in under budget or fall through completely. A contractor or vendor may quit or be terminated. Replacement employees occupying obligated positions may earn less than the unit originally budgeted for the positions. Or a local government might be forced to eliminate obligated positions. A local government may earn more program income that it anticipated. There are lots of ways things can go sideways and a local unit could end up with extra ARP/CSLFRF funds and no way to re-obligate them. 

Treasury recognizes this reality and has authorized some limited movement of ARP/CSLFRF funds among projects after the obligation deadline. Specifically, Treasury has provided for the following use of ARP/CSLFRF funds after the obligation deadline that are no longer needed for a project that was obligated before the deadline:

1. Substitute Project. A local government may substitute ARP/CSLFRF monies for local funds (or reimburse local funds) on an ARP/CSLFRF-eligible project that was obligated by December 31, 2024, but that the unit originally used other funds to pay for. The replacement project would have to have met all the grant compliance requirements to be eligible as a substitute.

2. Change Order or Contingency. A local government may use ARP/CSLFRF monies to cover a cost increase on an ARP/CSLFRF obligated project due to change orders or contract contingencies that were expressly provided for in the original contract executed by December 31, 2024.

3. Contract Amendment. A local government may use ARP/CSLFRF monies to fund a cost increase on an ARP/CSLFRF obligated project due to contract amendments, as long as the original project was obligated by December 31, 2024, and the amended contract is of substantially the same scope and for substantially the same purpose as original contract.

4. Substitute Contractor or Subrecipient. A local government may use ARP/CSLFRF monies to pay for a substitute contractor or subrecipient for a previously ARP/CSLFRF obligated contract or subaward if any of the following occur:

• The local government terminates a contract or subaward because of the contractor or subrecipient’s default, because the contractor or subrecipient goes out of business, or because the recipient otherwise determines that the contractor or subrecipient will not be able to perform under the contract or carry out the subaward; 
• The local government and contractor or subrecipient mutually agree to terminate the contract or subaward for convenience (As part of required federal contract terms, all contracts greater than $10,000 must include provisions for termination for cause and convenience by the contractor.); or
• The local government terminates the contract or subaward for convenience if the contract or subaward was not properly awarded (such as if the contractor was not eligible to receive the contract), there is clear evidence that the contract or subaward was improper, the local government documents its determination that the contract or subaward was not properly awarded, and the original contract or subaward was entered into by the recipient in good faith.

The new contract or subaward must be for substantially the same purpose and of substantially the same scope as the original agreement. The local government must follow all applicable state laws and federal regulations to select and contract with the new contractor or subrecipient. A local unit may use ARP/CSLFRF monies to fund the new contract or subaward, even if it imposes higher costs.

The following chart summarizes the types of new or increased costs that may be covered with excess ARP/CSLFRF funds after the obligation deadline. (LG stands for local government.)