Update: On January 6, 2022, the U.S. Department of the Treasury issued the Final Rule, which governs the eligible uses of Coronavirus State and Local Fiscal Recovery Funds (“SLFRF”) under the American Rescue Plan Act (“ARPA”). The Final Rule makes several key changes to the Interim Final Rule, including expanding the eligible uses of CSLFRF and easing the administrative burden for some program requirements. Please review the Final Rule to learn more about the updated CSLFRF program requirements. (Treasury has also published these helpful resources: overview of the Final Rule and a Compliance and Reporting Guidance (updated 11/15/21).) As always, consult your local attorney with questions.
Note that the information below has not been updated since the release of the Final Rule and some of it may no longer be accurate. Please visit our main category page to access more recent posts.
As detailed in a previous post, the federal American Rescue Plan Act of 2021 (ARP) includes substantial aid for state and local governments. See Part 8, Subtitle M—Coronavirus State and Local Fiscal Recovery Funds of H.R. 1319 American Rescue Plan Act of 2021. This post includes some important updates about the funding process and expenditure parameters. (Note that many entities refer to these provisions as the Coronavirus State and Local Fiscal Recovery Funds, CSFRF, CLFRF, or Fiscal Recovery Funds. For consistency with my previous post, I refer to them as ARP Funds. All of these references are to the same federal grant funds.)
Process for Receiving ARP Funds
The process for receiving ARP funds varies based on type and size the of local government. Counties and Metropolitan Municipalities (municipalities with over 50K population) will receive their distributions directly from the federal government. They are authorized to apply now for their first tranche (1/2 of the allocation). That application is available here.
All other municipalities (referred to as non-entitlement local governments) will receive their distribution from the State within the next few months. The NC Pandemic Recovery Office (NCPRO) has provided pre-contract guidance for the non-entitlement local governments here.
Note that for all local governments, the unit’s governing board must accept the grant funds (either from the federal government directly or from the state). The state law that allows a local government to accept the ARP grant funds, G.S. 160A-17.1, states that
the governing body of any city or county is hereby authorized to make contracts for and to accept grants-in-aid and loans from the federal and State governments and their agencies for 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.
As discussed by my colleague Frayda Bluestein here, when a statute expressly directs the governing board to undertake an action, only the board may take that action. The board need not adopt a formal resolution, but it must vote to authorize the receipt of the funds and then delegate authority to the manager, mayor, or another employee or official to execute any necessary agreements on behalf of the board. Additionally, the governing board will need to amend the applicable budget ordinance or grant project ordinance to both recognize the grant proceeds and authorize their expenditure, by department, function, or project. The board also may not delegate its authority to amend the budget/grant ordinance to recognize the grant revenue.
The federal law specifies that the funds will remain available through December 31, 2024. (According to US Treasury guidance, ARP funds must be obligated by this date.) Although there are certainly many continuing pressing financial needs due to the pandemic, this deadline allows sufficient time for local government officials to carefully consider how best to appropriate the monies for maximum short- and long-term benefit to their communities. In anticipation of the funds, many local government officials are convening internal and external stakeholders and devising processes for local appropriation decisions. Any unallocated ARP funds will comprise restricted fund balance until they are budgeted by the unit’s governing board. (As stated below, local officials are well advised to wait to spend any proceeds until we receive final guidance from the applicable federal and state agencies on compliance requirements.)
Allowable Expenditures of ARP Funds
As of May 10, 2021, we have additional guidance from the federal government on how ARP funds may be spent. Specifically, the US Treasury has published the Interim Final Rule to implement the Coronavirus State Fiscal Recovery Fund and the Coronavirus Local Fiscal Recovery Fund established under the American Rescue Plan Act (Interim Final Rule). (Due to a waiver of the normal 60-day delayed effective period, the Interim Final Rule is effective immediately.) A memo and FAQ document from the US Treasury helpfully summarize the substance of the Interim Final Rule. The Interim Final Rule suggests that local governments will have wide-berth in determining how best to spend the ARP funds to address pandemic-related issues. Under the ARP, allowable funding comprises four main expenditure categories, although the Interim Final Rule breaks the first category into two categories. As stated in the Interim Final Rule, the categories are:
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- Support public health expenditures, by funding COVID-19 mitigation efforts, medical expenses, behavioral healthcare, and certain public health and safety staff;
- Address negative economic impacts caused by the public health emergency, including economic harms to workers, households, small businesses, impacted industries, and the public sector;
- Replace lost public sector revenue, using this funding to provide government services to the extent of the reduction in revenue experienced due to the pandemic;
- Provide premium pay for essential workers, offering additional support to those who have borne and will bear the greatest health risks because of their service in critical infrastructure sectors; and,
- Invest in water, sewer, and broadband infrastructure, making necessary investments to improve access to clean drinking water, support vital wastewater and stormwater infrastructure, and to expand access to broadband internet.
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Much of what is in the Interim Final Rule merely fleshes out what we already knew about these categories. It provides helpful examples of allowable programs, projects and services. These examples are not exclusive. The Interim Final Rule also provides guidelines to help local officials evaluate other potential expenditures. As such, local officials should review the Interim Final Rule in detail. Below are some highlights based on questions I’ve received from local officials since my last post.
Water and Wastewater Infrastructure. The Interim Final Rule aligns eligible uses of ARP monies for water and wastewater infrastructure with the wide range of projects that would be eligible to receive financial assistance through the Environmental Protection Agency’s Clean Water State Revolving Fund (CWSRF) or Drinking Water State Revolving Fund (DWSRF). To illustrate that breadth of authority, the Interim Final Rule states that “water infrastructure projects may include building or upgrading facilities and transmission, distribution, and storage systems, including the replacement of lead service lines.” ARP monies also may be used to consolidate or establish drinking water systems. Eligible wastewater projects include “constructing publicly-owned treatment infrastructure, managing and treating stormwater or subsurface drainage water, facilitating water reuse, and securing publicly-owned treatment works.” See Interim Final Rule, pages 66-67. Significantly, “wastewater” is defined to include stormwater and subsurface drainage. That opens up a multitude of potential local government infrastructure projects. Finally, ARP monies may be used for “cybersecurity needs to protect water and sewer infrastructure…” Id.
The ARP requires that the grant funds be used for “necessary” water and wastewater infrastructure investments. According to the Interim Final Rule, “necessary” investments “are designed to provide an adequate minimum level of service and are unlikely to be made using private sources of funds. Necessary investments include projects that are required to maintain a level of service that, at least, meets applicable health-based standards, taking into account resilience to climate change … and that are unlikely to be met with private sources of funds.” See Interim Final Rule, page 62.
Further, the US Treasury encourages local governments to ensure that water and sewer projects “use strong labor standards, including project labor agreements and community benefits agreements that offer wages at or above the prevailing rate and include local hire provisions, not only to promote effective and efficient delivery of high-quality infrastructure projects but also to support the economic recovery through strong employment opportunities for workers.” Id. The Interim Final Rule indicates that Treasury will provide further guidance on reporting instructions that will include information on workforce plans and practices to ensure public transparency that projects funded with ARP monies are using such practices that promote on-time and on-budget delivery.
Salaries and Benefits for Pandemic-Related Employees. Another frequent question from local officials relates to using ARP funds to cover certain local government employees’ salaries and benefits. The Interim Final Rule makes clear that ARP monies may be used to fund full payroll and benefit expenses for local government public health, healthcare, human services, public safety, and similar employees, to the extent that they work on the COVID-19 response.
A local government may consider “public health and safety employees to be entirely devoted to mitigating or responding to the COVID-19 public health emergency, and therefore fully covered, if the employee, or his or her operating unit or division, is primarily dedicated to responding to the COVID-19 public health emergency. Recipients may consider other presumptions for assessing the extent to which an employee, division, or operating unit is engaged in activities that respond to the COVID-19 public health emergency, provided that the recipient reassesses periodically and maintains records to support its assessment, such as payroll records, attestations from supervisors or staff, or regular work product or correspondence demonstrating work on the COVID-19 response. Recipients need not routinely track staff hours.” See Interim Final Rule, pages 20-21.
Covered benefits include “costs of all types of leave (vacation, family-related, sick, military, bereavement, sabbatical, jury duty), employee insurance (health, life, dental, vision), retirement (pensions, 401(k)), unemployment benefit plans (federal and state), workers compensation insurance, and Federal Insurance Contributions Act (FICA) taxes (which includes Social Security and Medicare taxes).” See Interim Final Rule, page 20, footnote 46.
Comparison to Coronavirus Relief Fund (CRF) Eligible Uses. Some local government officials have asked whether eligible uses of the ARP Funds are the same as allowable uses of the CRF monies. The short answer is that there are many additional eligible uses for ARP funds. According to the Interim Final Rule, “eligible uses listed under this section build and expand upon permissible expenditures under the CRF, while recognizing the differences between the ARPA and CARES Act, and recognizing that the response to the COVID-19 public health emergency has changed and will continue to change over time.” See Interim Final Rule, page 17. There are some CRF uses that are not appropriate for ARP funds. For example, the standard for covering the salaries and benefits of local government public health and safety personnel has changed (see above), and ARP Funds may not be used to issue debt, including short-term debt (see below). A local government should rely on the ARP Interim Final Rule to determine allowable expenses, instead of CRF guidance.
Rebuilding Public Sector Capacity. According to the Interim Final Rule, ARP funds may be used to rebuild public sector capacity by rehiring local government staff, up to pre-pandemic levels. See Interim Final Rule, pages 35-36. Funds also may be used to build internal capacity to implement economic relief programs, such as investments in data analysis, targeted outreach, technology infrastructure, and impact evaluations. See Interim Final Rule, page 34.
Addressing Disproportionate Public Health and Economic Impacts on Low Income Communities. The Interim Final Rule allows ARP funds to be used to fund special programs to address the disproportionate public health and economic impacts of the crisis on the hardest-hit communities, populations, and households, specifically targeting services within a Qualified Census Tract (low-income area), to families living in a Qualified Census Tract, or to other populations, households, or geographic areas disproportionately impacted by the pandemic. See Interim Final Rule, pages 21-23 and 38-41. That means that there is authority to spend ARP monies on a broader range or projects, programs, and services that directly serve low income citizens or to others who have been disproportionately impacted by COVID-19, consistent with state law authority, of course.
These additional eligible uses include:
Addressing health disparities and the social determinants of health, including: community health workers, public benefits navigators, remediation of lead paint or other lead hazards, and community violence intervention programs;
Building stronger neighborhoods and communities, including: supportive housing and other services for individuals experiencing homelessness, development of affordable housing, and housing vouchers and assistance relocating to neighborhoods with higher levels of economic opportunity;
Addressing educational disparities exacerbated by COVID-19, including: early learning services, increasing resources for high-poverty school districts, educational services like tutoring or afterschool programs, and supports for students’ social, emotional, and mental health needs; and
Promoting healthy childhood environments, including: child care, home visiting programs for families with young children, and enhanced services for child welfare-involved families and foster youth.
Replacing Lost Local Government Revenue. The Interim Final Rule clarifies that ARP funds may be used to replace lost local government revenues due to the pandemic, according to a specified formula. The impetus is to use ARP funds to “avoid costs to government services and, thus, enable [local governments] to continue to provide valuable services and ensure that fiscal austerity measures do not hamper the broader economic recovery.” See Interim Final Rule, page 53.
To calculate the amount of lost revenue that may be replaced with ARP funds, the Interim Final Rule first provides a definition of “general revenues,” see Interim Final Rule, pages 54-57, which attempts to capture “revenues collected by a [local government] and generated from its underlying economy….” A local government should look closely at this definition, but it roughly correlates to the unit’s general fund revenues, with some adjustments. General revenues are calculated on a unit-wide basis, not by individual revenue source. They include revenues from property, sales, and other taxes, current charges, and miscellaneous general revenues. They exclude refunds, debt proceeds, agency or private trusts, and revenue generated by utilities. General revenues also include intergovernmental transfers between state and local governments, but exclude intergovernmental transfers from the Federal government, including CRF and ARP funds (even if these funds are passed through the State).
To calculate the “loss” in revenue due to the pandemic, the local government will take its actual “general revenues” (as defined in the Interim Final Rule) from the “last full fiscal year prior to” the pandemic (FY2018-2019), and then apply a growth adjustment of “either 4.1 percent per year or the [local government’s] average annual revenue growth over the three full fiscal years prior to the COVID-19 public health emergency, whichever is higher.” This calculation will be done for four points in time — December 31, 2020; December 31, 2021; December 31, 2022; and December 31, 2023. See Interim Final Rule pages 56-60. For ease of calculation, the Interim Final Rule allows a local government to attribute all decline in general revenues during this period to the pandemic.
The “lost revenue” ARP funds may be used “for the provision of government services.” According to the Interim Final Rule, “government services can include, but are not limited to, maintenance or pay-go funded building of infrastructure, including roads; modernization of cybersecurity, including hardware, software, and protection of critical infrastructure; health services; environmental remediation; school or educational services; and the provision of police, fire, and other public safety services.” See Interim Final Rule, page 60. However, these “lost revenue” monies may not be used for debt issuance or debt service, legal settlements or judgements, or to make deposits to rainy day funds or other financial reserves. Id.
Disallowed Expenditures. The Interim Final Rule clarifies that ARP funds more generally may not be used for debt issuance or debt service, legal settlements or judgements, deposits to rainy day funds or other financial reserves, or general infrastructure spending outside of necessary water, sewer, and broadband investments, and special infrastructure projects that are necessary to deal with pandemic-specific issues. See Interim Final Rule, pages 42-43. Although the “lost revenue” ARP monies may be used for general government infrastructure projects, other ARP monies may not. ARP monies also may not be used as “non-Federal match for other Federal programs whose statute or regulations bar the use of Federal funds to meet matching requirements.” See Interim Final Rule, pages 96-97.
Clarification on Transferring ARP Monies to Other Entities. The ARP states that a recipient local government “may transfer funds to a private nonprofit organization (as that term is defined in paragraph (17) of section 401 of the McKinney-Vento Homeless Assistance Act (42 U.S.C. 11360(17)), a public benefit corporation involved in the transportation of passengers or cargo, or a special-purpose unit of State or local government.” See Sec. 603(c)(3). The Interim Final Rule clarifies that this is a non-exclusive list. See Interim Final Rule page 105-106. A local government may contract with other government or private entities and transfer ARP funds pursuant to those contractual arrangements, consistent with state law authority. The original recipient local government remains responsible for monitoring, overseeing, and reporting on the subrecipient’s use of the funds to ensure compliance with statutory and regulatory requirements.
Compliance Requirements. The Interim Final Rule makes clear that ARP monies are subject to “pre-existing limitations provided in other Federal statutes and regulations….” See Interim Final Rule, page 96. And ARP funds are subject to the “provisions of the Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (2 CFR 200) (the Uniform Guidance), including the cost principles and restrictions on general provisions for selected items of cost.” See Interim Final Rule, page 97.
Further, the Interim Final Guidance sets out the broad outlines of the reporting requirements. See Interim Final Rule, pages 110-112. US Treasury guidance and instructions on reporting requirements are forthcoming. Local governments also likely will receive guidance from the NC Department of State Treasurer and, at least for non-entitlement municipalities, from NCPRO. It is critical that local governments fully understand and comply with all of the compliance requirements.
Note, again, that these are just a select few highlights. The Interim Final Rule provides much more information on the specifics of funding allowances. I will post a more comprehensive overview of the Interim Final Rule based on additional local government questions.
State Law Authority
As a reminder, local governments must spend their ARP monies consistent with these federal requirements AND in accordance with state law authority. North Carolina’s state law authority does not currently allow local governments to expend their ARP funds for all the purposes allowed under federal law. Local government officials must ensure that any proposed expenditure fits within the allowable categories under the federal law AND is explicitly authorized by state law. So it is not sufficient to simply follow the spending guidance in the Interim Final Rule, a local government must also act within the parameters of state law authority when implementing any programs, services, projects, or activities, funded with ARP monies. A previous blog post walks through the state law authority (or lack of authority) as it relates to each of the ARP funding allowable expenditure categories.
Still Waiting on Further Reporting/Compliance Guidance
Finally, it cannot be emphasized enough that we are still awaiting guidance on a myriad of compliance issues. Local government officials are well advised to wait to appropriate any ARP funds until they are apprised of all the contracting, accounting, reporting, documentation, and other applicable federal and state compliance requirements. I will update this post as that information becomes available.
