Can a municipality use American Rescue Plan Act (“ARP”) funds to pay lost revenue for a partner organization, like the City's Parking Authority, even where the partner organization is a separate entity?

What are some good practices municipalities can follow to ensure that subrecipients meet all compliance requirements?

May a municipality use non-CSLFRF fiscal support to fund loan principal? Can CSLFRF fiscal support only pay for projected costs incurred? Is the loan principal qualified as a projected cost?

Can revenue streams from water and sewer funds be included in utility revenue for the purposes of revenue loss calculation?

Under the Coronavirus Local Fiscal Recovery Funds (“CLFRF”) program, water and sewer revenue streams are treated differently for the purposes of calculating a municipality’s revenue losses due to COVID-19. Municipalities can include sewer revenues as “general revenue” in their respective calculations of lost revenue but must exclude revenues derived from water services. 

The U.S. Department of the Treasury’s (“Treasury”) CLFRF Final Rule allows municipal governments to include or exclude recipient-owned utility revenue in their revenue loss calculation.[1] The Final Rule states the following:  

Treasury has adjusted the definition to allow recipients that operate utilities that are part of their own government to choose whether to include revenue from these utilities in their revenue loss calculation. This change responds to comments from recipients indicating that revenue from utilities is used to fund other government services and that utility revenues have declined on aggregate.[2]Furthermore, for utilities or other entities (e.g., certain service districts) that are not part of the recipient government, a transfer from the utility to the recipient constitutes an intergovernmental transfer and therefore is included in the definition of “general revenue.”[3]

Sewer systems do not generate utility revenue but rather generate general revenues and are therefore allowable in the loss calculation as confirmed in Treasury’s Frequently Asked Questions (“FAQ”)[4].

Treasury guidance generally adopts the Census Bureau’s Government Finance and Employment Classification Manual’s definition of “utility revenue” as the standard for identifying the various utility-generated revenue streams that must be excluded from the municipality’s general revenue. Notably, this definition includes revenue from operations of “publicly-owned and controlled water supply systems, electric power systems, gas supply systems, and public mass transit systems.”[5]  In contrast, sewer revenues are not part of utility revenues and may be included in the revenue loss calculation.[6]

Treasury’s FAQ includes a chart in the appendix delineating several revenue streams that municipalities should include or exclude for purposes of the revenue loss calculation; the chart examples  indicate that sewer and solid waste system revenues should be included, while water supply systems revenues should be excluded (see Revenue → General Revenue → Own Sources → Current Charges → Examples)  and (see Revenue → Utility Revenue → … water supply systems).[7]

Likewise, the Census Bureau Government Finance and Employment Classification Manual indicates that “[f]or combined water-sewer system,” municipalities should “include [as general revenue from own sources] segregable amounts derived from sewerage activities” when determining the amount of revenue derived from sewage.[8]

Last Revised: January 31, 2022

Under the American Rescue Plan Act (“ARP”), how close of a nexus must be demonstrated to show that services provided are directly tied to a person impacted by the pandemic or a person within a vulnerable population?

The American Rescue Plan Act of 2021 (“ARP”) authorizes municipalities to use Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) to respond to the negative economic consequences of the COVID-19 pandemic. Neither the ARP nor the U.S. Department of the Treasury’s (“Treasury”) Final Rule precisely defines what nexus must be demonstrated between the pandemic and a proposed project or service.

Treasury guidance indicates that municipalities must make a threshold determination as to whether the COVID-19 public health emergency. With respect to eligibility requirements, the Final Rule considers the following:

First, there must be a negative economic impact, or an economic harm, experienced by an individual or a class. The recipient should assess whether, and the extent to which, there has been an economic harm, such as loss of earnings or revenue, that resulted from the COVID–19 public health emergency. A recipient should first consider whether an economic harm exists and then whether this harm was caused or made worse by the COVID–19 public health emergency… Second, the response must be designed to address the identified economic harm or impact resulting from or exacerbated by the public health emergency. In selecting responses, the recipient must assess whether, and the extent to which, the use would respond to or address this harm or impact.[1]

With respect to eligibility in disproportionally impacted households and communities, the Final Rule states:

the final rule presumes that an expanded set of households and communities are “impacted” or “disproportionately impacted” by the pandemic, thereby allowing recipients to provide responses to a broad set of households and entities without requiring additional analysis. Further, the final rule provides a broader set of enumerated eligible uses available for these communities as part of COVID-19 public health and economic response, including making affordable housing, childcare, and early learning services eligible in all impacted communities and making certain community development and neighborhood revitalization activities eligible for disproportionately impacted communities.[2]

Therefore, there is a presumption of eligibility when CSLFRF assistance is used in households and communities which are “impacted” or “disproportionally impacted” by the pandemic.

The Final Rule maintains the presumption that low- and moderate-income households were negatively impacted by the pandemic. The Final Rule states that:

The final rule defines a household as low income if it has (i) income at or below 185 percent of the Federal Poverty Guidelines (FPG) for the size of its household based on the most recently published poverty guidelines by the Department of Health and Human Services (HHS) or (ii) income at or below 40 percent of the Area Median Income (AMI) for its county and size of household based on the most recently published data by the Department of Housing and Urban Development (HUD).

The final rule defines a household as moderate income if it has (i) income at or below 300 percent of the FPG for the size of its household based on the most recently published poverty guidelines by HHS or (ii) income at or below 65 percent of the AMI for its county and size of household based on the most recently published data by HUD.[3]

In addition, Treasury authorizes recipients of CSLFRF to determine whether to measure income by household or geographic area depending on the scope of services provided.[4]

Treasury further indicates in the Final Rule that:

Recipients may identify classes of households, communities, small businesses, nonprofits, or populations that have experienced a disproportionate impact based on academic research or government research publications, through analysis of their own data, or through analysis of other existing data sources . . . In designing a program or service that responds to a disproportionately impacted class, a recipient must first identify the impact and then identify an appropriate response.[5]

To provide assistance to small business owners using CSLFRF funds, municipalities may use the funds to assist small business owners who have experienced a “negative economic impact from the public health emergency,”[6] or small business owners who operate their business in a Qualified Census Tract (“QCT”) or otherwise-defined disproportionately impacted community.[7]

Treasury identifies “businesses in need” of CSLFRF assistance as:

businesses facing financial insecurity, substantial declines in gross receipts… or other economic harm due to the pandemic, as well as businesses with less capacity to weather financial hardship, such as the smallest businesses, those with less access to credit, or those serving disadvantaged communities.[8] 

In addition, Treasury considers some services and economic assistance automatically eligible for CSLFRF funding when provided in a QCT. These services include:

• Building stronger communities through investments in housing and neighborhoods;
• Addressing educational disparities; and
• Promoting healthy childhood environments.[9]

The Final Rule further clarifies the restrictions on use for CSLFRF for mitigating negative economic impacts: “While economic impacts may either be immediate or delayed, individuals or classes that did not experience a negative economic impact from the public health emergency would not be eligible beneficiaries under this category.”[10]

In addition to these provisions of the Final Rule, Treasury has addressed in its CSLFRF Frequently Asked Questions ("FAQ") whether recipients must demonstrate that each individual or business that benefits from the use of CSLFRF assistance experienced a negative impact from the pandemic. Treasury’s response states in pertinent part:

Not necessarily. The Interim Final Rule allows recipients to demonstrate a negative economic impact on a population or group and to provide assistance to households or businesses that fall within that population or group. In such cases, the recipient need only demonstrate that the household or business is within the population or group that experienced a negative economic impact.[11]

The response to this question describes the flexibility that recipients have in demonstrating negative impacts within their communities.

Additional information may be provided when Treasury issues new FAQs specific to the Final Rule.[12] Treasury also encourages municipalities to consider the guidance issued in the Statement Regarding Compliance with the Coronavirus State and Local Fiscal Recovery Funds Interim Final Rule and Final Rule.[13]

Last Revised: February 3, 2022

How should a municipality document and support expenditures of American Rescue Plan Act (ARP) funds outside of Qualified Census Tracts (QCTs)?

The U.S. Department of Treasury (“Treasury”) Treasury has not yet released specific guidance regarding requirements for documentation and reporting of ARP funds outside of Qualified Census Tracts (“QCT”s). Treasury has stated it will presume that a wide range of equity-focused services are eligible uses of CSLFRF when provided within a QCT (as defined by the Department of Housing and Urban Development (“HUD”).[1] Treasury’s Interim Final Rule (“the Rule”) indicates that recipients may also provide equity-focused services outside of QCTs in other populations, households, or geographic areas disproportionately impacted by the pandemic, provided recipients can demonstrate their decision-making processes and rationale for their conclusions..[2]

Municipalities must maintain documentation demonstrating that its expenditures meet eligibility requirements. The Rule provides four eligible CSLFRF funding uses:

• strengthening the response to the COVID-19 public health emergency and its economic impacts;
• easing fiscal pressure on State, local, and Tribal governments that might otherwise lead to harmful cutbacks in employment or government services;
• providing premium pay to essential workers; and
• making necessary investments in certain types of infrastructure.[3]

A municipality should gather at least the following information regarding any equity-focused services or projects:

• the number of COVID-positive patients;
• the number of COVID-19 related deaths; and
• the number of hospitalizations due to COVID-19.

In each case, this data should be compared to the corresponding data for other populations, households or geographies to demonstrate if there is disproportionate impact from community to community.

In making its determinations, municipalities should consider utilizing, among other factors: (i) unemployment figures; (ii) taxable sales; (iii) business closures; (iv) increases in food insecurity; (v) increases in housing insecurity; (vi), the number and extent of arrears in utility bills and property tax bills; and (vii) increases in childcare needs. These data points might demonstrate that the pandemic resulted in disproportionate public health or economic outcomes to specific populations, households, or geographic areas.

Notably, the Rule permits funds to be used to cover costs incurred beginning on March 3, 2021.[4] Recipients may use CSLFRF to provide assistance to households, businesses, and individuals within the eligible use categories described in the Rule for economic harm experienced by those households, businesses, and individuals prior to March 3, 2021.[5]

Demonstration of compliance and validation that the municipality met the rules and requirements of the different programs:

Failure to meet documentation requirements, or documentation that does not adequately support a municipality’s claim under any given funding source, could result in recoupment of funds. Municipalities should be prepared to demonstrate a nexus to COVID in accordance with the eligible uses listed in the text of the ARP and the Rule. As such, municipalities should record and save all relevant documentation, including but not limited to: (i) the decision to make the expenditure; (ii) invoices; (iii) proofs of payments; and (iv) procurement methodologies.  Documentation should be detailed, stored centrally and electronically, and organized logically.

On April 6, 2021, the Federal Emergency Management Agency (“FEMA”) released a Fact Sheet titled “Audit Related Guidance for Entities Receiving FEMA Public Assistance Funds.” The Fact sheet provides the below recommendations on documenting and accounting disaster costs:[6]

• Designate a person to coordinate the accumulation of records (i.e., receipts, invoices, etc.);
• Establish a separate and distinct account for recording revenue and expenditures and a separate identifier for each distinct FEMA project. (This same thought process can be used for separating CARES and ARP funds and the individual projects within each.);
• Ensure that the final expenditures for each project are supported by the dollar amounts recorded within your accounting system of record;
• Ensure that each expenditure is recorded and linked to supporting documentation (i.e., checks, invoices, etc.) that can be easily retrieved; and
• Ensure that expenditures claimed are necessary to respond to the COVID-19 pandemic, reasonable pursuant to federal regulations and federal cost principles, and conform to standard program eligibility and other federal requirements.[7]

Last Revised: August 10, 2021

Are there any sample templates for contracting with subrecipients of ARP funds to help ensure that subrecipients are compliant with all program requirements?

May a municipality use funds obtained through the ARP to close funding gaps for the construction of income-restricted housing?

The Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) established by the American Rescue Plan Act of 2021 (“ARP”) permits the use of its funds for “permanent supportive housing or other programs or services to improve access to stable, affordable housing among individuals who are homeless, and the development of affordable housing to increase supply of affordable and high-quality living units.”[1] However, the U.S. Department of the Treasury’s (“Treasury”) Final Rule stipulates that these eligible use categories must be responsive to individuals and households that were impacted by the pandemic in addition to those that were disproportionately impacted, as defined in the Final Rule.[2]

Congress designed the CSLFRF to provide flexibility for governments to meet local needs, including the provision of individual rental assistance, addressing the housing and health needs of persons experiencing homelessness, and building and preserving affordable housing in impacted and disproportionately impacted communities. The CSLFRF provides opportunities for local governments to alleviate the immediate economic impacts of the COVID-19 pandemic on housing insecurity while addressing conditions that contributed to poor public health and economic outcomes during the pandemic; namely, concentrated areas with limited economic opportunity and inadequate or poor-quality housing.[3] The Final Rule lists several eligible services related to housing security and affordable housing, including:

• Emergency housing assistance: rental assistance, mortgage assistance, utility assistance, assistance paying delinquent property taxes, counseling, and legal aid to prevent eviction and homelessness & emergency programs or services for homeless individuals, including temporary residences for people experiencing homelessness.
• Programs or services to support long-term housing security: including development of affordable housing and permanent supportive housing.[4]

The Final Rule further notes that it:

• presumes that an expanded set of households and communities are “impacted” or “disproportionately impacted” by the pandemic, thereby allowing recipients to provide responses to a broad set of households and entities without requiring additional analysis. Further, the final Rule provides a broader set of enumerated eligible uses available for these communities as part of COVID-19 public health and economic response, including making affordable housing, childcare, and early learning services eligible in all impacted communities and making certain community development and neighborhood revitalization activities eligible for disproportionately impacted communities.[5]

In addition to the above-stated eligible services, the Final Rule also specifies that affordable housing development operating expenses, rehabilitation, and repair of public housing are eligible uses of CSLFRF funds.[6] The Final Rule states that all affordable housing projects must be responsive and proportional to the harm identified. Notably, Treasury has determined that affordable housing projects that are eligible under the National Housing Trust Fund (“HTF”) or the Home Investment Partnerships Program (“HOME”) are eligible uses of CSLFRF funds.[7] Additionally, Treasury has stated in the Final Rule that grants provided for the development of low-income housing through the Low-Income Housing Tax Credit (“LIHTC”) are eligible uses of CSLFRF; however, it should be noted that Treasury has not changed the guidance on providing loans or grants to for-profit entities.[8]

Last Revised: January 31, 2022

Regarding the principal of loans/revolving loans with maturities longer than December 31, 2026: Can Fiscal Recovery Funds (FRF) be used to fund the principal?

The U.S. Department of the Treasury’s (“Treasury”) American Rescue Plan Act (“ARP”) Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) Final Rule states that in the case of loans that will mature or are forgiven on or before December 31, 2026, Fiscal Recovery Funds may fund the principal of the loan. However, the municipality must track repayment of principal and interest. In addition, the principal of the loan must be reported as an expense at origination. For loans maturing after December 31, 2026, funds may be used for the projected cost of extending the loan over the life of the loan. Projected cost may be estimated by either estimating “the subsidy cost (i.e., net present value of estimated cash flows) or the discounted cash flow under current expected credit losses (i.e., the Current Expected Credit Loss (‘CECL’) method).”[1]

Treasury’s CSLFRF Frequently Asked Questions (“FAQs”) state that funds must be spent to cover a municipality’s “costs incurred” for eligible uses between March 3, 2021, and December 31, 2024, and must be expended by December 31, 2026. Consequently, recipients have the burden to determine the amount of funds used to make a loan.[2] This guidance applies to the use of ARP funds to issue loans or other extensions of credit as well as interest earned on such credit programs.[3] Additional information may be provided when Treasury issues new FAQs specific to the Final Rule.[4]

As discussed, Treasury identifies two different approaches for measuring the cost of the loan. Under the first approach, the cost of the loan “equals the expected cash flows associated with the loan discounted at the recipient’s cost of funding.”[5] Expected cash flows may include principal. Under the second approach, municipalities would utilize the CECL accounting standard. Under the CECL accounting standard, municipalities may “treat the cost of the loan as equal to the CECL-based expected credit losses over the life of the loan.”[6]

FAQ #4.11 provides important detail regarding recipients that are not subject to restrictions under 2 CFR 200.307(e)(1) and are not required to track repayment of principal or interest for loans that mature after December 31, 2026.[7] Pursuant to Treasury FAQ #4.11, principal and interest may only be expended for uses that would be eligible for direct CSLFRF funding.[8] Municipalities may not use CSLFRF funds to provide a loan where the interest or principal will be used for an ineligible purpose.

Municipalities may find Treasury’s Appendix to the FAQs helpful in identifying eligible uses, as it provides a chart of government expenses that may qualify for reimbursement of lost revenue using ARP funds.[9] Notably, Treasury’s Final Rule specifically excludes the following:

contributions to rainy day funds, financial reserves, or similar funds; payment of interest or principal on outstanding debt instruments; fees or issuance costs associated with the issuance of new debt; and satisfaction of any obligation arising under or pursuant to a settlement agreement, judgment, consent decree, or judicially confirmed debt restructuring plan in a judicial, administrative, or regulatory proceeding, except to the extent the judgment or settlement requires the provision of services that would respond to the COVID-19 public health emergency.[10]

Accordingly, principal or interest from a CSLFRF-funded loan cannot be used for those purposes.

Last Revised: January 28, 2022

Is the receipt of the second tranche of ARP funding contingent on the municipality spending the entire first tranche?

Based on current guidance, local governments that qualify as “metropolitan cities” are not obligated to spend the first tranche as a condition precedent for receiving the second tranche of funding through the American Rescue Plan Act of 2021’s (“ARP”) Coronavirus Local Fiscal Recovery Funds (“CLFRF”). Specifically, section 603(b)(7) of the ARP provides that the United States Department of the Treasury (“Treasury”) will make payments to local governments in two tranches, with the second tranche being paid twelve months after the first payment.[1]

Allocations to Non-Entitlement Units of Local Government (“NEUs”) will be made through their state governments. Treasury has indicated that guidance regarding the second tranche of funding will be released closer to May 2022.[2] The text of the ARP indicates that the measure of state unemployment[3] and the NEU operating budget limitation are the only limitations to receiving the second tranche of CLFRF funds. In the specific case of NEUs, the municipality will not be eligible to receive more than 75 percent of its respective operating budget.[4]

Last Revised: August 2, 2021

Should refunds of the prior year’s expenses be included in revenue loss calculations?

Refunds of a previous year’s expenses should not be included in the Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) revenue loss calculation.

The U.S. Department of the Treasury’s (“Treasury”) Final Rule defines “general revenue” as follows:

General revenue means money that is received from tax revenue, current charges, and miscellaneous general revenue, excluding refunds and other correcting transactions and proceeds from issuance of debt or the sale of investments, agency or private trust transactions, and intergovernmental transfers from the Federal Government, including transfers made pursuant to section 9901 of the American Rescue Plan Act.[1]

Can American Rescue Plan Act (“ARP”) funds be used to provide public information regarding a parks levy to improve the outdoor spaces in our community?

U.S. Department of the Treasury (“Treasury”) guidance does not indicate that Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) can be used to provide public information for new taxes or levies within a municipality. However, a public information campaign for a parks levy may be eligible for CSLFRF funding up to the extent of revenue reduced by the COVID-19 pandemic if it constitutes a government service. Additionally, there are other ways to use CSLFRF to improve outdoor spaces in a community directly.

The municipality should take steps to understand when outreach and the dissemination of information are eligible to receive CSLFRF funding. The Final Rule describes the continued need for governments to provide public health efforts, such as public communications, to prevent and address the spread of COVID-19.[1] At first glance, a parks levy does not appear to relate directly to the prevention of COVID-19 or related public health efforts; thus, expenses related to corresponding communications likely would not be a permissible use of CSLFRF under the eligible use categories for addressing the COVID-19 emergency.

However, a public information campaign for a parks levy might be considered eligible if it qualifies as a government service to citizens. Treasury generally provides states and local governments broad latitude to use funds to provide government services. While CSLFRF guidance does not explicitly permit funding communications relating to a parks levy, the Final Rule does not explicitly preclude it. Funds can generally be used for provision of government services up to the amount of revenue lost due to the public health emergency.[2] A municipality should first perform its revenue loss calculation as set forth in Treasury guidance to determine the amount available for this use.[3] Next, a municipality should consider what constitutes a government service and the restrictions on use that apply to all uses of funds that include paying down debt or satisfying settlements or judgments:

Government services generally include any service traditionally provided by a government, unless Treasury has stated otherwise. Here are some common examples, although this list is not exhaustive:

• Construction of schools and hospitals
• Road building and maintenance, and other infrastructure
• Health services 
• General government administration, staff, and administrative facilities
• Environmental remediation
• Provision of police, fire, and other public safety services (including purchase of fire trucks and police vehicles) 

Government services is the most flexible eligible use category under the [CSLFRF] program, and funds are subject to streamlined reporting and compliance requirements. Recipients should be mindful that certain restrictions, which are detailed further in the Restrictions on Use section and apply to all uses of funds, apply to government services as well.[4]

If the municipality determines that communications regarding a park levy fall under the definition of “government services,” using CSLFRF funds for that purpose could be permissible. If, when reviewing the details surrounding such costs, a municipality is uncertain whether a park levy qualifies as a government service, it would be advisable to request feedback from Treasury and await further guidance.

Lastly, even if a municipality decides that costs relating to the dissemination of public information to improve outdoor spaces may not be covered by any category of CSLFRF, the improvements to the parks themselves may still be covered. Investments in improving outdoor spaces, such as parks, may be an eligible use of funds to respond to the public health emergency and/or its negative economic consequences. These investments are an enumerated use and presumed eligible when these investments serve disproportionately impacted communities.[5] Treasury encourages recipients to consider the disproportionate negative economic impacts on specific communities and populations.

Recipients may also provide these services to other populations, households, or geographic areas disproportionately impacted by the pandemic. Such programs and services include services designed to build stronger communities and to address health disparities and the social determinants of health.[6] For example, Treasury cites investments in parks, public plazas, and other public outdoor recreation spaces that may respond to the needs of disproportionately impacted communities by promoting healthier living environments and outdoor recreation and socialization to mitigate the spread of COVID-19.[7]

Moreover, many governments saw significantly increased use of parks during the pandemic that resulted in damage or increased maintenance needs and associated costs. As such, Treasury allows the use of CSLFRF funds to “address administrative needs of recipient governments that were caused or exacerbated by the pandemic.”[8] These administrative needs include “increased repair or maintenance needs to respond to significantly greater use of public facilities.”[9]

While municipalities may be limited in the extent that CSLFRF can be used for public information efforts related to taxes and levies, a municipality can use CSLFRF to improve outdoor spaces or repair parks and public facilities, generally presumed eligible in disproportionately impacted communities, that may have experienced damage or increased maintenance needs due to the pandemic.[10]

Treasury may provide additional information when it issues new Frequently Asked Questions (“FAQs”) associated with the Final Rule.

Last revised: March 31, 2022