Is a Community Development Financial Institution (“CDFI") an allowable use of Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”)for businesses considered impacted or otherwise eligible under CSLFRF?

Last Updated: March 04, 2024

A Community Development Financial Institution (“CDFI”) that is structured as a revolving loan fund, is likely an eligible use of funds as described by the U.S Department of Treasury (“Treasury”):

A recipient may contribute funds to a revolving loan fund if the loaned SLFRF funds are restricted to financing eligible uses under the public health emergency/negative economic impacts, premium pay, and necessary water, sewer, and broadband categories (or under the government services category if the contribution to the revolving fund is made using revenue loss funds). The funds contributed using SLFRF funds must be limited to the projected cost of loans made over the life of the revolving loan fund, following the approach described above for loans with maturities longer than December 31, 2026.[1]

It is important to note the difference between the eligibility of an entity to receive American Rescue Plan Act (“ARPA”) funds such as CSLFRF, and allowable use of funds.  When it comes to businesses, eligible impacted small businesses may receive loans if the funded activity is both eligible and has a reasonable nexus to COVID-19.^[2] Multiple factors can affect whether a small business can be identified as impacted. Factors to consider include, but are not limited to:

1. Decreased revenue or gross receipts; and 

2. financial insecurity;

3. increased costs;

4. capacity to weather financial hardship; and challenges covering payroll, rent or mortgage, and other operating costs.^[3]

The activity of the loan from an eligible revolving loan fund, or a CDFI structured as such, is limited to allowable activities under CSLFRF guidelines. This requires the funded activity to fall within one of the eligible use categories for CLSFRF funds. A CDFI structured as a revolving loan for small business likely falls under the negative economic and health impacts category.[4] This eligible use category requires that the CDFI functioning as a revolving loan to respond to identified negative economic or health impact from the COVID-19 Pandemic in a reasonable and proportional manner.[5]

The U.S. Department of Treasury maintains that CSLFRF uses for general economic development or uses that generally enhance the jurisdiction’s business climate is generally considered an ineligible use.[6] Furthermore, it is critical to ensure due diligence is performed relative to internal controls and city policy to include scrutiny around concepts such as conflicts of interest and general adherence to city policy in conformance with 2 CFR 200.303.

The municipality must ensure that proper documentation is kept for subrecipients, pass-through entities, and beneficiaries in conformance with 2 CFR 200.331-332.

All CSLFRF recipients who have entered into contracts and/or subawards, including entities which have elected to fund revolving loan programs such as the scenario summed above should review the following updated Treasury guidance concerning contracts and subawards.

Immediately effective with Treasury’s publication of the Obligation Interim Final Rule 2023 on Monday, November 20^th, 2023, is the institution of additional flexibility regarding the replacement of a contract or subaward entered into prior to the obligation deadline of December 31, 2024.[7]

While the general provision that that recipients may not re-obligate funds or obligate additional funds after the obligation deadline remains unchanged, Treasury is clarifying that after December 31, 2024, recipients would be permitted to replace a contract or subaward entered into prior to December 31, 2024 under three distinct circumstances:[8]

(1) the recipient terminates the contract or subaward because of the contractor or subawardee’s default, because the contractor or subawardee goes out of business, or because the recipient otherwise determines that the contractor or subawardee will not be able to perform under the contract or carry out the subaward

(2) the recipient and contractor or subrecipient mutually agree to terminate the contract or subaward for convenience

(3) the recipient 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 recipient 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.

A contract will be considered made in good faith for purposes of clause (3) above if the parties followed standard procurement or subaward practices, as applicable, and the contract or subaward was not entered into for the purpose of evading the obligation deadline.

A recipient that re-obligates funds to a new contractor or subrecipient after the obligation deadline will be considered to have used its funds to cover an obligation incurred prior to the obligation deadline if any of the three situations above is present and if the original contract or subaward being replaced was entered into by December 31, 2024.

If a recipient enters into a replacement contract or subaward, the recipient still must expend all funds by the expenditure deadline.[9]

Finally, Treasury states:

Recipients should maintain documentation to justify their determinations, which should include an analysis of the factors discussed above. Treasury may ask recipients to provide this information in their periodic reports.[10]

Treasury has updated the CSLFRF Compliance and Reporting Guidance to allow for a means to report any activities which result from the updated contract and subaward guidance cited above.[11]  While the Treasury FAQs document for the 2023 Interim Final Rule (”IFR“) has not yet been released,[12] recipients should review the State and Local Fiscal Recovery Funds: Obligation IFR Quick Reference Guide,[13] in addition to the IFR.[14]

What is an effective method to calculate the federal share on an affordable housing project?

When calculating the federal share of an affordable housing project, municipalities should consider what each project hopes to achieve and the various federal and non-federal funding that might be available for each project. The federal share of an affordable housing project will often depend upon multiple factors, including but not limited to the goal of the affordable housing project, the number of federal and non-federal funding sources available, and federal, state, and local guidance that will affect how funding sources can be used, and the extent of funding that can be applied to a given project.

Local governments have several funding streams to consider when calculating local and federal shares on an affordable housing project. The structure of federal financing for affordable housing allows for the “braiding” of multiple streams of federal, state, and local funding for the same project (multiple funding sources are used while each individual source used is separately tracked and reported), and in some cases, multiple federal and non-federal funding sources can be “blended” for a single project (multiple funding sources are comingled together and may be tracked and reported on as a single stream of funding).[1] The following steps can be used by a municipality as guidance to determine which federal funding to pursue:

1. Assess local housing needs and establish clear priorities.
2. Take inventory of existing housing programs and local partners. This step includes confirming project eligibility as not all funding streams will support particular projects. While most federal funding will require some form of a 25% match, that too, can vary. It is critical to document the scope of the project and its components and if needed, reach out to funders to ask for confirmation of funding requirements to build out a project budget with match requirements.

These steps may determine which federal funding programs are best suited to the affordable housing project being pursued.[2] Each locality has different housing needs that are affected by numerous factors such its population composition, and current housing supply.[3] Municipalities should review the following non-exhaustive list of federal funding programs for housing with their unique concerns in mind:

• Low-income housing tax credit (LIHTC)
• Mortgage Revenue Bonds
• Community Development Block Grants (CDBG)
• HOME Block Grants
• Housing Trust Funds
• Homeless Assistance Grants
• Housing Opportunities for Persons with AIDS (HOPWA)
• Native American Housing Block Grants (NAHBG)[4]

The various grant programs have a shared goal of providing affordable housing and a suitable living environment for low and moderate-income persons but differ in what benefits and target populations they cover.[5] The programs also offer significant opportunities for collaboration between state and local governments.

In addition to traditional federal housing financing programs, Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) may potentially be utilized to further invest in affordable housing. According to the Final Rule:

[d]evelopment, repair, and operation of affordable housing and services or programs to increase long-term housing security” is an enumerated eligible use to respond to the negative economic impacts of the pandemic on households and communities.[6]

To assist recipients in the utilization and maximization of funds, the U.S. Department of the Treasury and the U.S. Department of Housing and Urban Development (“HUD”) developed an Affordable Housing How-to Guide summarizing the guidance in the final rule around investing in affordable housing as well as recommendations for layering CSLFRF with longstanding federal affordable housing programs, and state funding streams.[7] Potential project categories include but are not limited to flexible funding for new construction and substantial rehabilitation of affordable housing, rehabilitation and adaptive reuse, and predevelopment work.[8]

Recipients utilizing multiple federal funding streams must comply with all related statutory and regulatory requirements and policies of each program used including the requirement that if a project is only partially funded with CSLFRF, the portion of the project funded must be an eligible use under the CSLFRF program. Grants may include specific federal cost share percentages or local match requirements – these vary by grant, federal awarding agency, and recipient. Refer to the Final Rule and other grant specific documents for requirements on cost-sharing and matching when blending and braiding funds for complementary purposes.[9]

Last Updated: March 20, 2023

May a municipality use ARP funds to establish a revolving loan fund?

Under the American Rescue Plan Act (“ARP”), Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) may be used to make loans including in the form of a revolving loan fund, provided that certain requirements are met, which include but are not limited to:

1. The loan supports an activity that is an eligible use of funds;
2. The CSLFRF funds used to make the loan are obligated by December 31, 2024 and expended by December 31, 2026; and
3. The cost of the loan is tracked and reported in accordance with Treasury guidelines.[1]

Amongst other things, CSLFRF funds must be used to cover costs incurred within the ARP period of performance (March 3, 2021 through December 31, 2024) and expended by December 31, 2026. Per the Final Rule, loans or grants to support affordable housing projects[2], impacted small businesses[3], and impacted nonprofits[4] are eligible uses of CSLFRF funds.

Contributions to Revolving Loan Funds

Pursuant to Treasury guidance, a recipient may likely contribute funds to a revolving loan fund if the loaned CSLFRF funds are restricted to financing eligible uses under one of the following categories:

• public health emergency/negative economic impacts,
• premium pay,
• necessary water, sewer, and broadband categories, and
• government services (this category must be used if the revolving loan fund is made using revenue loss funds).[5]

CSLFRF funds contributed to the revolving loan must be limited to the projected cost of loans made over the life of the revolving loan fund, following the approach described below for loans with maturities longer than December 31, 2026.[6] Municipalities should carefully consult the underlying rules, regulations and guidance. 

• For loans with maturities longer than December 31, 2026, the recipient may use funds for only the projected cost of the loan. Per Treasury guidance, there are two approaches for measuring the projected cost:
  • Recipients can project the cost of the loan by estimating the subsidy cost. The subsidy cost is the estimated present value of the cash flows from the recipient (excluding administrative expenses) less the estimated present value of the cash flows to the recipient resulting from a loan, discounted at the recipient’s cost of funding and discounted to the time when the loan is disbursed. The cash flows are the contractual cash flows adjusted for expected deviations from the contract terms (delinquencies, defaults, prepayments, and other factors). A recipient’s cost of funding can be determined based on the interest rates of securities with a similar maturity to the cash flow being discounted that were either (i) recently issued by the recipient or (ii) recently issued by a unit of state, local, or Tribal government similar to the recipient.[7]
  • Alternatively, recipients may treat the cost of the loan as equal to the expected credit losses over the life of the loan based on the Current Expected Credit Loss (CECL) standard. Recipients may measure projected losses either once, at the time the loan is extended, or annually over the period of performance.[8]

For loans with maturities longer than December 31, 2026, “recipients would not be subject to restrictions under 2 CFR 200.307(e)(1) and need not separately track repayment of principal or interest.”[9] regardless of measurement approach. Additionally, recipients may use funds for eligible administrative expenses incurred in the period of performance, which include the reasonable administrative expenses associated with a loan made in whole, or in part, with funds. See section IV.E of the final rule”.[10]

Loans Funded with CSLFRF Funds under the Revenue Loss Eligible Use Category

Per Treasury, if a recipient uses revenue loss funds to fund a loan, whether or not the maturity of the loan is after December 31, 2026, the loaned funds may be considered to be expended at the point of disbursement to the borrower, and repayments on such loans are not subject to program income rules. Similarly, any contribution of revenue loss funds to a revolving loan fund may also follow the approach of loans funded under the revenue loss eligible use category.[11]

Loans to Fund Investments in Affordable Housing Projects

Treasury also included additional requirements on loans to fund investments in affordable housing projects.[12] Recipients may potentially use CSLFRF funds, under the “public health and negative economic impacts” eligible use category to fund the full principal amount of the loan if the loan and project meet the following requirements:

• The loan has a term of not less than 20 years;
• The affordable housing project being financed has an affordability period of not less than 20 years after the project or assisted units are available for occupancy after having received the CSLFRF investment; and
• For loans to finance projects expected to be eligible for the low-income housing credit (LIHTC) under section 42 of the Internal Revenue Code of 1986 (the Code),
  • the project owner must agree, as a condition for accepting such a loan, to waive any right to request a qualified contract (as defined in section 42(h)(6)(F) of the Code); and the project owner must agree to repay any loaned funds to the entity that originated the loan at the time the project becomes non-compliant, including if such project ceases to satisfy the requirements to be a qualified low-income housing project (as defined in section 42(g) of the Code) or a qualified residential rental project (as defined in section 142(d) of the Code), or if such project fails to comply with any of the requirements of the extended low-income housing commitment that are described in section 42(h)(6)(B)(i)-(iv) of the Code.[13]Loans to fund investments in affordable housing projects have the following additional  

Loans under the above criteria “may be considered to be expended at the point of disbursement to the borrower, and repayments on such loans are not subject to program income rules.”[14] Additionally, “loan modifications are permitted if the modifications do not result in repayment of all or substantially all funds to the lender prior to the end of the affordability period.” [15]And for the purpose of reducing administrative complexity, “the start date of the 20-year affordability covenant may conform to the start date of other covenants on the same project or units that are required by another source of federal or state funding associated with the project or units.”[16]

In summary, loans, including revolving loans, are eligible to be funded with CSLFRF funds if the loan supports an activity that is an eligible use of ARP funds. This includes but is not limited to, affordable housing, assistance to impacted small businesses and nonprofits. Using a loan for government services is an eligible use if it uses revenue replacement funds. Finally, for additional non-enumerated uses, refer to the Treasury “Framework for Eligible Uses Beyond Those Enumerated” to determine eligibility.[17]

Recipients should refer to Treasury guidance in the Final Rule and FAQs for details on how to account for and track the funding based on the loan maturity, purpose, and structure.

Last Updated: March 20, 2023

What steps should a community applying for funding under the FEMA Hazard Mitigation Assistance Programs (HMGP, BRIC, FMA, and PDM) take in preparation for application?

The Federal Emergency Management Agency’s (“FEMA”) Hazard Mitigation Assistance (“HMA”) programs fund eligible mitigation measures to reduce disaster losses. Within FEMA, there are presently at least four mitigation programs that interested jurisdictions can apply to:

• Hazard Mitigation Grant Program (“HMGP”);
• Building Resilient Infrastructure and Communities (“BRIC”);
• Flood Mitigation Assistance (“FMA”); and
• Pre-Disaster Mitigation (“PDM”)

With respect to the nationally competitive programs (BRIC and FMA), jurisdictions are encouraged to review the Notice of Funding Opportunities (“NOFO”) for application requirements specific to each fiscal year.[1] The NOFOs for BRIC and FMA are typically released each year in August. The PDM program was revived in fiscal year 2022 as appropriations to 68 congressionally directed projects. Only these projects were eligible to submit sub-applications for PDM funding.[2] At this time, FEMA has indicated that PDM funding will be available annually.

HMGP is available when authorized under a presidentially declared major disaster. States then issue a NOFO to alert jurisdictions of available funding. States generally have one year after the disaster declaration to submit HMGP subapplications to FEMA. 

For all FEMA HMA programs, eligible jurisdictions apply as subapplicants[3] through a state, territory, or federally recognized tribe. The state, territory, or federally recognized tribe is the applicant and pass-through entity. The applicants review, approve, and prioritize subapplications before they are submitted to FEMA for federal review and approval. Jurisdictions interested in applying are encouraged to reach out to their State or Tribal Hazard Mitigation Officer to learn about mitigation priorities, application processes and deadlines, and upcoming webinars and workshops.[4]

The following list addresses the steps a municipality may consider taking in applying for any of the FEMA HMA programs, among other things:

HMGP

1. Be aware of available HMGP following a major disaster declaration

The amount of HMGP funding available varies by disaster. Applicants (e.g., states, territories, and tribes) mayhost a briefing or a kick-off workshop to let potential subapplicants know of available funds and state priorities. Following a major disaster declaration, jurisdictions are encouraged to sign up for state email notifications, establish a point of contact with their state emergency management office, and review the state issued NOFO, if one is released.

2. Review application process requirements and deadlines

Each individual state, territory, and tribe is responsible for setting up the process to receive and review subapplications for its HMGP funding ceiling. Subapplicants are responsible for adhering to the state deadlines and application process. This process may include, but is not limited to:

• A Notice of Interest (“NOI”), Letter of Intent (“LOI”), or pre-application that provides preliminary information about a subapplicant’s project. States use this document to check for eligibility and alignment with state priorities, and to set the overall budget for the available HMGP funds.
  • This document may require a tight turnaround deadline after the declaration. States will notify those entities whose NOI/LOI/pre-applications were selected when it is time to move forward with a subapplication.
• Each state develops their own HMGP application and the process by which it is submitted to the state. Some states use online grant management systems to receive subapplications and others require PDF or printed versions that are then submitted via email or other electronic means.
  • Some states require physical copies of subapplications be mailed to the state office. Interested subapplicants must pay close attention to their state’s process and allow enough time to meet those requirements.
• Each state, territory, or tribe establishes its own deadlines for HMGP subapplications. Typically, these deadlines are set two to three months before subapplications are due to FEMA to allow the state enough time to review subapplications and issue a Request for Information (“RFI”) if needed.
• The state will issue RFIs if a subapplication is incomplete or does not meet the state or FEMA documentation requirements. Subapplicants must respond to these RFIs as quickly and as completely as possible to minimize future RFIs. 

3. Understand the state mitigation funding priorities for each presidential major disaster declaration and submit projects that align with those priorities

States, territories, and tribes with HMGP funds typically establish specific funding priorities. Many states will prioritize the jurisdictions that were impacted by the disaster. States may also prioritize projects that address the type of hazard that caused the major disaster declaration. For example, if the disaster declaration was the result of wildfires, the state may prioritize projects that address wildfire mitigation, such as soil stabilization in burn scars or vegetation management.

State project priorities can include but are not limited to the following types of projects: 

• Projects that will benefit communities with high social, economic, and/or environmental vulnerability
• Projects that incorporate climate adaptive solutions or nature-based approaches
• Projects that will benefit a whole community rather than only a small portion of the community
• Projects that address critical infrastructure
• Projects that address one of the critical hazards in the state

Please note that these priorities may change for each individual disaster declaration. Jurisdictions must pay attention to the State-issued NOFO for HMGP funds when this funding is available. 

 BRIC and FMA

1. Review the August 2022 Notices of Funding Opportunity (NOFOs)[5]

FEMA released its most recent NOFOs for the BRIC and FMA programs on August 12, 2022. These NOFOs outline important funding information such as:

• The date the application period opens and the FEMA deadlines to submit applications
• Available funding under state allocations, tribal set-aside, and national competition
• The funding priorities and how project applications for competitive funding will be scored and prioritized
• Other administrative information pertaining to the grants

2. Attend FEMA and State sponsored webinars

To supplement the release of the NOFOs, FEMA hosted a series of webinars in the last two years to review key components of the funding programs.[6]

In addition to the FEMA webinars, many states host webinars to review the NOFOs with interested jurisdictions. These webinars provide a chance for potential subapplicants to become acquainted with the state team managing the FEMA mitigation programs and establish points of contact to discuss project ideas. States may also discuss requirements and deadlines specific to their state.

3. Be aware of state subapplication requirements and register in FEMA Grants Outcomes (“FEMA GO”) Management System

As with HMGP, many states set subapplication deadlines well before the FEMA application deadline. The deadline for NOIs for FEMA funding is typically early in the application process — in some cases, within one month from when FEMA releases the NOFO.

As soon as the state approves a subapplicant’s NOI, the subapplicant must register in the FEMA GO grants management system.[7] FEMA GO is a system utilized to receive, review, and approve both BRIC and FMA applications. States will often request that subapplicants start drafting their subapplications in FEMA GO as soon as possible as there may be troubleshooting required when first registering in the system.

The subapplication process for BRIC and FMA is more expedited than the subapplication process for HMGP. Several states set deadlines for submission to the state in late November or early December. This provides states enough time to review the subapplications for eligibility, competitiveness, and completeness before submitting the state application packets (i.e., all subapplications plus the state management cost subapplication) to FEMA. As with HMGP, the state will issue RFIs when necessary to submit eligible and complete subapplications.

4. Obtain a Unique Entity Identifier (UEI) if the municipality does not have a pre-existing UEI 

The federal government transitioned from the Data Universal Numbering System (DUNS)[8] to the UEI as the official entity identifier in April 2022.[9] In order to apply for BRIC and FMA grants, a jurisdiction must obtain a UEI. This process may take several weeks, so starting early is recommended.

Some other key considerations for each program are as follows:

BRIC

• The BRIC program allots technical criteria points to subapplicants with a Building Code Effectiveness Grading Schedule (“BCEGS”) rating between one and five.[10] If a jurisdiction is interested in applying for BRIC, it should obtain its BCEGS rating as soon as possible. Interested parties should reach out to the municipal or county building department to ask if one has been completed for the jurisdiction. If not, the community may contact the BCEGS Program Manager, Dale Thomure, at Dale.Thomure [at] verisk.com (Dale[dot]Thomure[at]verisk[dot]com).
• Jurisdictions interested in applying for the Capability and Capacity Building funds must contact their State Hazard Mitigation Officer to discuss the state’s priorities for the state allocation dollars ($2 million in fiscal year 2022). For example, many states will choose to put all allocation dollars towards a particular activity type (e.g., project scoping) or a single subapplication. The state allocation funding is limited and tend to be very competitive.  
• Jurisdictions must understand and address FEMA’s Technical and Qualitative Evaluation Criteria in their subapplication narratives to be competitive for BRIC funding.[11] Subapplications that fail to meet these criteria will likely not be selected to receive BRIC funding.

FMA

• To be competitive for the FMA funding, subapplicants must protect Repetitive Loss (“RL”) and Severe Repetitive Loss (“SRL”) properties. It is critical for jurisdictions applying for this funding to obtain the RL and SRL data as soon as possible and crosscheck the data with National Flood Insurance Program (“NFIP”) policy claims information. FEMA currently utilizes the NFIP PIVOT system to store NFIP claims information.[12]
• For Individual Mitigation Projects (e.g., property acquisitions, structure elevations, mitigation reconstruction), jurisdictions are encouraged to conduct community outreach early to gauge property owner interest. This outreach can be conducted prior to the release of the FEMA announcement. In some cases, jurisdictions with high rates of RL and SRL properties conduct outreach to property owners throughout the year to ensure they have an up-to-date list of interested property owners ready for a subapplication.
• Similarly, jurisdictions preparing subapplications with large numbers of properties are encouraged to build an in-house team or procure professional services to assist with property owner data collection and management.

General Good Practices  

The following are general good practices when developing a FEMA mitigation subapplication under all HMA programs (HMGP, BRIC, FMA, and PDM)

1. Utilize and Request Pre-Award Costs

Pre-award costs are a mechanism in the FEMA HMA programs that allow subapplicants to incur costs before FEMA has issued an award. These are soft costs needed to prepare a complete subapplication packet and may include costs for activities including: design and engineering, environmental and historic studies and data collection, community outreach, and subapplication and BCA preparation. No groundbreaking may take place before award so pre-award costs are constrained to the technical body of work needed to support the subapplication. A subapplicant requests pre-award costs by including them as a line item within their subapplication cost estimate. The activities listed above may require support from contractors, and subapplicants are encouraged to begin the procurement process early if they anticipate requiring assistance to develop these materials.

To be eligible for reimbursement, should the project be awarded, any procured services for pre-award activities must comply with 2 CFR Part 200.[13] If using in-house staff to complete these activities, subapplicants are encouraged to keep a robust accounting of staff hours and tasks completed. Importantly, because pre-award costs are incurred prior to FEMA award, these costs are incurred at the subapplicant’s risk. If FEMA does not award the project, these costs will not be reimbursed.

2. Frontload Environmental and Historic Preservation (“EHP”)  

It is important in the early stages of project identification and development to identify any EHP concerns or questions that may impact project approval by FEMA or project implementation. These are important considerations during the project development stage, as EHP compliance requirements may:

• impose time and cost implications for the project;
• include additional award conditions imposed by FEMA; or
• require the subapplicant to consider alternatives, identify alternate locations, and other project modifications.[14]

Subapplicants are urged to conduct environmental planning and historic preservation tasks prior to award (utilizing pre-award costs as discussed above). This may include consultations with various local, state, and federal agencies, as well as interested parties, to gauge what, if any, impacts the project may have on environmental, historical, and cultural resources. The consultations and data collection must inform the project scope of work, budget, and schedule and the resulting documentation should be included in the subapplication packet.

This data collection and consultation process is helpful in two ways:

• creates a more thorough project subapplication with increased viability for implementation; and
• assists in expediting FEMA’s EHP review and the award timeline for the project.

3. Phasing Projects

Another mechanism available under the FEMA HMA programs is project phasing. This mechanism is available in situations where a subapplicant does not have the technical or financial resources to provide the complete technical body of work needed for the state and FEMA to perform a complete eligibility, feasibility, and EHP review. Phasing allows a subapplicant to submit a whole project (engineering/design through construction) as one subapplication, but the funding is awarded in two parts. The project is split into two phases as described below.  

• Phase I typically includes:
  • Finalization of feasibility studies
  • Advanced design and engineering studies
  • Reassessment of the benefit-cost analysis (“BCA”)
  • Project site data collection. For example, if the project involves individual property retrofits, data on each structure may be collected during Phase I. 
  • Collection and finalization of EHP data and consultation. The project must meet EHP requirements before Phase II approval.
• Phase II is only awarded if the Phase I studies demonstrate that the project is eligible, technically feasible, cost-effective, and compliant with EHP regulations. Phase II consists of project implementation including:
  • construction;
  • project monitoring and inspections; and
  • project closeout.

Last Updated: March 16, 2023

How can a municipality use grants or federal funding to support professional development opportunities?

While there are no known federal grants which specifically fund professional development opportunities for municipal employees, some federal funding sources may allow professional development expenses as either a direct or indirect cost. For example, recipients of Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) could potentially use these funds as a direct cost to “support public sector employment” by offering “worker retention incentives.”[1] Additionally, municipal staff professional development can be an eligible expense under Expenditure Category 6: Revenue Replacement as this may qualify as a government service provision.[2]

Professional development opportunities may also potentially be supported by allocating these expenses as indirect costs of a new or existing grants. However, municipalities should understand the Federal Uniform Guidance standards related to indirect costs.

All costs are subject to, among other things, 2 CFR Part 200 Subpart E which, among other pertinent guidance, addresses fundamental cost considerations to determine whether the indirect cost meets tests for:

• Allowability (§200.403),
• Reasonableness (§200.404), and
• Allocability (§200.405).[3]

Awardees such as a municipality should evaluate contemplated costs to determine if it meets the definitions under each applicable section. Regarding the classification of indirect costs, Section 200.412 of the Uniform Guidance states:

There is no universal rule for classifying certain costs as either direct or indirect (F&A) under every accounting system. A cost may be direct with respect to some specific service or function, but indirect with respect to the Federal award or other final cost objective. Therefore, it is essential that each item of cost incurred for the same purpose be treated consistently in like circumstances either as a direct or an indirect (F&A) cost in order to avoid possible double charging of Federal awards. Guidelines for determining direct and indirect (F&A) costs charged to Federal awards are provided in this subpart.[4]

Section 200.412 of the Uniform Guidance does not provide explicit criteria for determining direct or indirect costs. Rather, it emphasizes that municipalities must be consistent in their classification of indirect or direct for incurred costs of the same purpose.[5]

Last Updated: March 16, 2023

How should a municipality approach mandatory participation in grant administration? Are there good practices to ensure the best engagement outcomes after requiring or incentivizing grant administration in similar funding opportunities?

As municipalities approach grant administration, it is important to incentivize participation rather than to mandate participation. It is critical for municipalities to have robust grant management infrastructure to comply with the terms of the grant and take advantage of the available opportunities.

A solid grants management infrastructure will allow an organization to develop strategic plans and programs, identify grant opportunities, streamline proposals, evaluate projects, and avoid complications and penalties. Each new funding opportunity is unique and has its own challenges to navigate. Organizations may benefit from capacity building through technical assistance programs. A community organization that has sufficient capacity can identify and secure stable, consistent, and long-term priorities for funding, and deliver grant-funded services in compliance with grant requirements. Communities with limited capacity miss out on opportunities and carry elevated risk.

The following list of non-exhaustive good practices may build community capacity by leveraging technical assistance:

• Invest in human capital, technology, and administrative and financial capacity;
• Provide expert advisory panels, trainings, conferences, and technical resources through a variety of channels (in-person, virtual, etc.);
• Distribute resources and training on (1) grant writing and administration, (2) program planning, implementation, and evaluation, and (3) leveraging community partnerships;
• Simplify compliance, provide administrative templates, and set expectations around grant compliance, reporting, and documentation;

Last Updated: March 9, 2023

What are the best ways for municipalities to avoid negative audit findings and the potential return of CSLFRF funds to Treasury?

Although there is no single solution and municipalities should carefully consult the underlying regulations and rules, to avoid negative audit findings and the potential return of Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) to the U.S. Department of the Treasury (“Treasury”), a municipality should, among other things, become familiar with the award terms and conditions outlined in the award agreement, and take steps to ensure compliance with applicable laws and regulations. For example, recipients of federal funds often must comply with the accounting guidelines and award management principles set forth in the Federal Office of Management and Budget’s (“OMB”) CFR Part 200 - Uniform Administrative Requirements, Cost Principles, and Audit Requirements guidance (“Uniform Guidance”), among other things.[1]

Many provisions contained in the Uniform Guidance apply to the CSLFRF[2] program under assistance listing number 21.027,[3] including the Cost Principles and Single Audit Act requirements. Noncompliance with the Uniform Guidance could ultimately lead to an audit finding in areas such as Internal Controls, Reporting, Cash Management, Procurement, Subrecipient Monitoring, and Allowable Costs/Cost Principles, or others.  Implementing comprehensive internal compliance policies, procedures, and controls may help prevent a potential audit finding.

Recipients may consider referring to the Assistance Listing for details on the specific provisions of the Uniform Guidance that do not apply to this program.[4] Relevant provisions of the Uniform Guidance applicable to the CLSFRF are cited below, and we reiterate that municipalities should carefully conduct their own due diligence of the applicable rules, regulations and guidance in this sensitive area.

Uniform Guidance Provisions Applicable to CSLFRF[5]

Meeting Compliance Requirements

When an auditor is developing audit procedures to test a municipality’s compliance with the requirements applicable to the CSLFRF program, the auditor may determine from the non-exhaustive list below which of the compliance requirements have been identified as subject to the audit:

• Activities Allowed or Unallowed

• Allowable Costs/Cost Principles
• Eligibility
• Period of Performance
• Procurement Suspension & Debarment
• Reporting
• Subrecipient Monitoring[6]

The auditor may then determine which requirements are likely to have a direct and material effect on the federal program at the auditee.

A municipality should prepare for the audit by, at a minimum, reviewing the 2021 Audit Compliance Supplement guidance to ensure their procedures and processes are compliant and will reduce the risk of an audit finding.^[7]

Although an audit can be an exhaustive process that includes an organizational-wide review of financial and compliance components, it may have a positive outcome for the municipality. Developing and implementing policies, procedures, and internal controls that standardize the grants management process may position a municipality against receiving an audit finding.

Last Updated: March 9, 2023

What are some of the specific roles that both community members and local governments can play in community-engaging partnerships? How can a municipality ensure that their communities are benefiting from these partnerships?

Community engagement is a key factor in federal grant programs. When communities are engaged “the likelihood that projects or solutions will be widely accepted” increases, and citizens are more committed to the projects’ success.[1] Some federal programs require reporting on a recipient’s community engagement efforts. For example, Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) guidance notes that to satisfy annual reporting related to community engagement, Recipients may describe completed or planned community engagement strategies specifically focused on their SLFRF program and projects or community engagement strategies that included SLFRF among other government programs[2].

Strategies for effectively engaging the community and generating buy-in from community members include but are not limited to:

• Implementing advisory boards
• Encouraging community engagement in budgeting
• Using mobile apps and web-based engagement platforms
• Deploying community surveys,
• Implementing focus groups
• Hosting open houses, workshops, forums, and
• Hosting public meetings and hearings.

These strategies encourage open communication between the public and local officials, engaging members of the public in projects by providing feedback and informing the government on the community’s priorities.[3] It is a good practice to set milestones or metrics for the initiative to ensure that engagement is meeting the target goal. There is no one best practice for community engagement; instead, there is a range of engagement options and roles that can be tailored to fit the needs of the specific government program or of the community.  

Community engagement can be achieved by drawing from a diverse group to develop creative, effective, practical solutions informed by local knowledge. This also includes empowering and integrating people from different backgrounds. Both lead to better outcomes, a more comprehensive program, and greater community engagement.

Establishing open communication between the local government or municipality’s leaders can also facilitates community engagement and solutions for issues affecting a diverse range of constituents. [4]

One example of an engagement platform is Connect Sammamish, a website used by the city of Sammamish in Washington State.[5] The website allowed the city to conduct surveys, communicate with the community about the city’s Transportation Master Plan, and build trust with community members by providing a centralized source for key updates.[6] Residents of Sammamish can use Connect Sammamish to view current and upcoming projects that the city is undertaking, learn about prior projects, and keep up to date with important information happening in the city.

Another example of a local government’s incorporation of open communication and community partnership good practices is the Housing Authority of the City of Austin’s (“HACA”) Digital Ambassador Program.[7] The Digital Ambassador Program leverages the knowledge of resident leaders to increase technological literacy and to make digital tools accessible to all HACA residents.[8]

HACA selects as digital ambassadors, residents with different levels of technology experience so that all levels of unconnected or technologically disadvantaged residents can be reached. HACA Digital Ambassadors received training on diverse topics, including adult technology learning principles, digital equity policies and programs, outreach strategies, civic engagement, and the use of digital tools for transportation, education, workforce development, energy efficiency, and social services.[9] HACA’s interaction with its digital ambassadors and the insight gleaned from the residents these ambassadors influenced also informed HACA’s digital communication plan.[10]

What are best practices for local governments (particularly rural communities), to consider so that they have a greater chance of receiving SLCGP funding from state leadership?

The State and Local Cybersecurity Grant Program ("SLCGP") is a grant program established by the Infrastructure Investment and Jobs Act ("IIJA") to help state, local, territorial, and tribal ("SLTT") governments effectively manage and reduce systemic cyber risk.[1]

The Department of Homeland Security ("DHS") is responsible for implementing the SLCGP grant program through the Cybersecurity and Infrastructure Security Agency ("CISA") and the Federal Emergency Management Agency ("FEMA").[2] The implementation of the SLCGP will occur over the period of performance of 48 months spanning from September 1, 2022, to August 31, 2026.[3]

For fiscal year 2022, $185 million was appropriated by Congress.[4] State-by-state SLCGP allocations can be found on pages 10 through 13 of the notice of funding opportunity ("NOFO").[5] As to SLCGP, CISA provides the following:

The established SAA for states and territories will be the only entities that can apply for grant awards under the SLCGP. Local entities receive sub-awards through states. The legislation requires states to distribute at least 80% of funds to local governments, with a minimum of 25% of the allocated funds distributed to rural areas.[6]

Rural local governments will receive a guaranteed minimum of 25% of the 80% allocated funds.[7] A rural area is an "area encompassing a population of less than 50,000 people that has not been designated in the most recent decennial census as an "urbanized area" by the Secretary of Commerce."[8]

It is vital to note that DHS will implement the SLCGP through collaboration with CISA and FEMA.[9] CISA will operate as the subject-matter expert regarding cybersecurity related issues, whereas FEMA will function in a grant administration and oversight function regarding appropriated funds.[10] This includes SLCGP award, allocation disbursement to eligible entities, and overarching financial management funding implementation oversight.[11]

The State Administrative Agency (“SAA”) is the only entity eligible to apply for and submit the application for the Homeland Security Grant Program (“HSGP”) and its component programs.[12]

Please refer here for a complete listing of each state's respective SAA point of contact.[13]

Good Practices

Listed below is a non-exhaustive survey of good practices local governments and rural communities can consider creating successful outcomes and increase their awareness of the SLCGP and their state's respective efforts regarding this grant program.

First, Rural communities can take preemptive steps to be ready to act on the SLCGP funds that pass through to them. These steps could include, among others:

1. Increasing staff capacity for SLCGP implementation and being prepared to act on their respective state's Cybersecurity Plan
2. Ensuring adequate internal controls are in place for the smooth facilitation of federal funds
3. Assembling a grant team and ensuring all individuals know their respective roles in supporting the grant
4. Including staff with prior grant management experience on the designated SLCGP grant management team
5. Regularly review the grant agreement to ensure all requirements are being met
6. Account for indirect costs and follow the appropriate steps for their negotiated indirect cost rate agreement with the cognizant agency or contact FEMA if they do not have a current negotiated indirect cost rate and wish to charge the de minimis rate.[14]

Second Rural communities are encouraged to review their state's overarching Cybersecurity Plan as CISA notes that:

Local governments will be part of the eligible entity's Cybersecurity Plan. These plans are meant to guide development of cybersecurity capabilities across the state or territory. The plans are not meant to be agency specific.[15]

With local governments reviewing their state's respective Cybersecurity Plan per the above, the aim is for these local governments to obtain a better awareness of how their state is planning to execute its cybersecurity and, consequently, SLCGP projects as well as better understand how their SAA will be coordinating and engaging with said local governments.

Each state's SAA will be responsible for “managing the grant application and award,” and as such, rural communities need to communicate closely with their SAAs regarding the grant funding pass-through process.[16] Local governments and rural communities are considered subapplicants to their respective SAAs, and thus must work with their state's Cybersecurity Planning Committee to receive subawards.[17]

Rural communities are encouraged to work closely with the state's Cybersecurity Planning Committee(s).[18] It is ultimately up to the state to determine, with the permission of the relevant local governments, where and how to pass-through funds if passing through items or services in lieu of funding.[19]

There are several aspects of the SLCGP that State SAAs must ensure rural communities are aware of. States' adherence to these elements will promote the smooth facilitation of this grant program. The various elements are as follows:

• Establishment of and composition of the Planning Committee;
• Cybersecurity Plan(s) or request for exception;
• Proposed projects that are consistent with the Cybersecurity Plan(s), or will be consistent with the Cybersecurity Plan if requesting a grant to develop a Plan, and SLCGP program objectives and requirements;
• Proposed projects are feasible and effective as reducing the risks the project was designed to address; and
• Proposed projects will be completed within the period of performance.[20]

All local government information technology directors or chief information officers should coordinate with their respective state SAA as quickly as possible regarding the next steps for their state's plans for applying for the SLCGP.[21]

Resources

For further applicable grant information and resources regarding the SLCGP, please reference the following:

1. SAA Contacts are located here.[22]
2. DHS Notice of Funding Opportunity Fiscal Year 2022 State and Local Cybersecurity Grant Program is located here.[23]
3. CISA SLCGP Grant Program is located here.[24]
4. FEMA Fiscal Year 2022 SLCGP Fact Sheet is located here.[25]
5. CISA SLCGP Frequently Asked Questions are located here.[26]

Last Updated: March 9, 2023

When a contractor, vendor, or supplier of a municipality’s CSLFRF grant award commits fraud, is the municipality required to establish new internal oversight controls for future award?

Recipients and subrecipients are the first line of defense and responsible for ensuring that Coronavirus State and Local Fiscal Recovery Fund (“CSLFRF”) award funds are not used for ineligible purposes, and there is no fraud, waste, or abuse associated with their CSLFRF award.[1] A municipality is not necessarily required to establish new internal controls when a contractor, vendor, or supplier of a municipality’s CRF grant award commits frauds; however, an assessment of the facts should be conducted to determine if deficient internal controls made it easier for the fraud to be committed. If so, a municipality should implement additional oversight controls to prevent the reoccurrence of the same or similar fraud schemes.

Federal awarding agencies are initially responsible for ensuring that specific Federal award conditions are consistent with the program design and include clear performance expectations of recipients. In addition, the Federal awarding agency or pass-through entity may adjust specific Federal award conditions as needed, based on a risk analysis. If the analysis indicates the possibility of noncompliance, including fraud, waste or abuse, the federal awarding agency, the U.S. Department of the Treasury (“Treasury”), may impose additional award conditions as outlined in the Uniform Guidance section 200.208, which include:

(1) Requiring payments as reimbursements rather than advance payments;

(2) Withholding authority to proceed to the next phase until receipt of evidence of acceptable performance within a given performance period;

(3) Requiring additional, more detailed financial reports;

(4) Requiring additional project monitoring;

(5) Requiring the non-Federal entity to obtain technical or management assistance; or

(6) Establishing additional prior approvals.[2]

If Treasury subsequently determines that noncompliance with the specific Federal award conditions has occurred, Treasury may take additional actions, outlined in the Uniform Guidance section 200.339, which include:

(a) Temporarily withhold cash payments pending correction of the deficiency by the non-Federal entity or more severe enforcement action by the Federal awarding agency or pass-through entity.

(b) Disallow (that is, deny both use of funds and any applicable matching credit for) all or part of the cost of the activity or action not in compliance.

(c) Wholly or partly suspend or terminate the Federal award.

(d) Initiate suspension or debarment proceedings as authorized under 2 CFR part 180 and Federal awarding agency regulations (or in the case of a pass-through entity, recommend such a proceeding be initiated by a Federal awarding agency).

(e) Withhold further Federal awards for the project or program.

(f) Take other remedies that may be legally available.[3]

Treasury’s Reporting and Compliance Guidance provides internal controls and good practices with descriptions and examples. These include implementing an “enhance[d] eligibility review of subrecipient with imperfect performance history” and a “higher degree of monitoring for projects that have a higher risk of fraud, given program characteristics.”[4] Ultimately, the best strategy to prevent fraud, waste, and abuse is to regularly review internal controls for areas of vulnerability and improvement.[5]

Last Updated: March 6, 2023

When fraud occurs, what liability exists for the recipient distributing the funds, for example, fraud relating to unemployment insurance payments?

Consequences of fraud and non-compliance with the Uniform Guidance could include, among other things, fines, debarment from receiving future funding, administrative recoveries of funds, civil lawsuits and criminal prosecution, or a combination of all or some of these remedies. While funds for beneficiaries and subrecipients are tracked differently, pass-through entities of award funds may ultimately be held liable for fraudulent activities.

Recipients and subrecipients are the first line of defense for ensuring the Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) are not used for ineligible purposes and there is no fraud, waste, abuse, or mismanagement associated with their CSLFRF award.[1] According to the Government Accounting Office (“GAO”), “fraud is attempting to obtain something of value through willful misrepresentation.”[2] Pass-through entities, or “non-Federal entities that provide a subaward to a subrecipient to carry out part of a Federal program” are responsible for ensuring protection against fraud and that federal awards are used properly.[3]

Federal fund distribution is susceptible to fraud which can occur in many ways. Some of the most common fraud scenarios include:

• Charging personal expenses as business expenses to the award;
• Charging for costs that have not been incurred or are not attributable to the award;
• Charging for inflated labor costs or hours, or categories of labor that have not been incurred (for example, fictitious employees, contractors, or consultants);
• Falsifying information in grant applications or contract proposals;
• Billing more than one grant or contract for the same work;
• Falsifying test results or other data;
• Substituting approved materials with unauthorized products;
• Misrepresenting a project's status to continue receiving government funds;
• Charging higher rates than those stated or negotiated for in the bid or contract; and
• Influencing government employees to award a grant or contract to a particular company, family member, or friend.[4]

Pass-through entities of award funds should develop and implement preventative measures and processes to decrease the risks of fraud. Treasury’s Reporting and Compliance Guidance provides internal controls recommendations with descriptions and examples. Examples include:

• Enhance eligibility review of subrecipient with imperfect performance history; and
• Higher degree of monitoring for projects that have a higher risk of fraud, given program characteristics.[5]

Good Practices for Reducing the Risk of Fraud

Listed below are various other non-exhaustive good practices local governments and rural communities can use to foster success and reduce any potential of fraud regarding CSLFRF awards:

• Examine existing operations and internal controls to identify if they are vulnerable to fraud, such as: 
• Lack of separation of duties,
• Unclear authorization for transactions,
• Outdated or ineffective accounting systems,
• Improperly collected and stored documentation, and,
• Incomplete, unclear, or not implemented conflict of interest policies. 
• Implement fraud prevention measures and have regular trainings to educate staff and/or volunteers on risks;
• Review and test internal control systems regularly for vulnerabilities and areas of improvement;
• Verify that all financial and progress reports are sufficiently supported with the required documentation;
• Develop and implement procurement processes that are reasonable, fair, and transparent; and,
• Conduct monthly bank reconciliations to identify errors or irregularities in bank statements and detect fraud.[6]

Ultimately, a good strategy to prevent fraud and ensure funds are used properly is to regularly review internal controls for areas of vulnerability and improvement to ensure adequate safeguards of CSLFRF funds.[7]

Additional Resources

For more information pertaining to fraud allegations, reach out to the awarding agency’s Office of Inspector General (“OIG”). Allegations of fraud can and should be made directly to your awarding agency's OIG or a designated hotline office within many of the OIG offices for further investigation.[8

Last Updated: March 6, 2023

Under reporting requirements established by Expenditure Category 1.8 and 2.29, how can a municipality submit reporting data for a small business beneficiary that has been awarded over $50,000 when the small business does not have an EIN or TIN?

If a small business beneficiary has been awarded over $50,000 and does not have an Employer Identification Number (“EIN”) or Tax Identification Number (“TIN”), the awarding municipality should encourage the small business beneficiary to request an EIN from the Internal Revenue Service (“IRS”) to satisfy reporting requirements.

The Final Rule adopts the Uniform Guidance definition of a beneficiary specifying “that households, communities, small businesses, nonprofits, and impacted industries are all potential beneficiaries of projects carried out with [Coronavirus State and Local Fiscal Recovery Funds “CSLFRF”)] funds.”[1]

Expenditure categories 1.8 COVID-19 Assistance to Small Businesses and 2.29 Loans or Grants to Mitigate Financial Hardship [to Small Businesses] have additional reporting requirements. Both require the recipient to report whether projects are primarily serving disproportionately impacted communities[2] as well as the number of Small Businesses served.[3]

Treasury’s Project and Expenditure Report User Guide clarifies reporting requirements for beneficiaries by explaining that “similar to reporting under the Coronavirus Relief Fund (“CRF”), information on both beneficiaries and subrecipients will be collected in a single form in the Project and Expenditure Report.”[4] In the Subrecipients, Beneficiaries, or Contractor section of the Report, information is collected “about each subrecipient, contractor or beneficiary that has received at least one Subaward or Direct Payment obligation of federal funding greater than or equal to $50,000 to execute projects supporting the CSLFRF program.”[5] This includes “at least one of the following two identifiers for a subrecipient: a UEI (Unique Entity Identifier), or TIN.”[6]

Generally, a business also needs an Employer Identification Number (“EIN”), also known as a Federal Tax Identification Number (“TIN”) if it does any of the following:

• Pays employees;
• Operates as a corporation of partnership;
• Files tax returns for employment, excise, or alcohol, tobacco, and firearms;
• Withholds taxes on income, other than wages, paid to a non-resident alien;
• Uses a Keogh Plan (a tax-deferred pension plan); and
• Works with certain types of organizations.[7]

If the company is operating as a sole proprietorship the Internal Revenue Service (IRS) states:

A sole proprietor without employees and who doesn't file any excise or pension plan tax returns doesn't need an EIN (but can get one). In this instance, the sole proprietor uses his or her social security number (instead of an EIN) as the taxpayer identification number.[8]

Per Federal requirements, “eligible recipients are required to have an active registration with the System for Award Management (“SAM”) (https://www.sam.gov) pursuant to 2 CFR Part 25. The “UEI” is the identification number given to an entity when registering in SAM.gov.”[9] Recipients must also evidence “a given beneficiary, subrecipient, or contractor’s eligibility, including a valid SAM.gov registration (except with respect to individuals or households for which a SAM.gov registration is not required).”[10] As such, the Small Businesses receiving assistance under this program must have a UEI.

As the Treasury reporting requirements only require a UEI or a TIN, the UEI may be used in place of the TIN. In either instance, it is recommended to encourage the business to apply for an EIN through the IRS website.[11] It is a free service, and the EIN is assigned immediately.

Last Updated: March 6, 2023