When calculating loss, should we include “gross earnings tax” also called “utility tax”?

On January 6, 2022, the U.S. Department of the Treasury ("Treasury") issued the Coronavirus State and Local Fiscal Recovery Funds ("CSLFRF") Final Rule as part of the American Rescue Plan Act of 2021 ("ARP").

The Final Rule allows recipients to include revenue from government-operated utilities in general revenue if they so choose.[1] However, "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 must be included in the definition of 'general revenue.'"[2] Therefore, recipients may choose to include or not include government-operated utilities as general revenue, but non-government-operated utilities must be included as general revenue.

Last Updated: February 1, 2022

How can cities balance the need to move with urgency while also ensuring that awarded funds are allocated in a manner that ensure the greatest level of flexibility with respect to spending?

In order to move quickly and maximize flexibility in spending funds, municipalities should have well-qualified leadership teams. The teams must have the ability to:

1. understand available funding streams;
2. ensure compliance with the applicable rules and regulations; and
3. monitor program goals and update them as necessary.

Below are some good practices for municipalities to consider:

Expert involvement: Consider hiring or contracting a grant administrator with the experience needed to lead the grant management effort, including relevant federal grant administration experience and familiarity with relevant provisions of the Code of Federal Regulations.[1]

Needs assessment: Consider performing a needs assessment prior to the actual receipt of funds or to help disburse funds already received. The assessment can help identify the critical projects which address economic recovery, revenue replacement, infrastructure, and community recovery aid, with an emphasis on reaching those most in need so that they are addressed as soon as funds are available. The municipality might consider engaging community groups, not-for-profits, or other local organizations to help prioritize its needs.

Cost tracking protocols: If possible, establish COVID-19-specific cost codes to identify and track COVID-19-related expenses within the municipality’s financial management system(s) and any associated anticipated funding source. Cost tracking protocols allow municipalities to identify costs still in need of a funding source and avoid duplication of benefits. Additionally, should funding regulations and eligibility criteria change, municipalities can more easily identify costs that could be funded under a more suitable alternative source.

Educating staff: Understanding and setting expectations regarding the scope and eligibility of each funding source is important for a municipality’s grant management team. Funding source eligibility requirements may include a variety of factors and timeline considerations and may also impose reporting, compliance, and monitoring requirements. Understanding key rules and regulations will help the municipality prioritize more restrictive funding over more flexible funding. For example, prioritizing the use of The Coronavirus Aid, Relief, and Economic Security Act (“CARES”) Coronavirus Relief Fund when reasonable over American Rescue Plan Act of 2021 (“ARP”) Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) may be appropriate in some instances. Further, some eligible grant categories under the CSLFRF are less restrictive than others, with “government services” being the least restrictive.[2] As a result, grant managers may want to consider reserving government services for expenditures not covered by more restrictive categories.

Also, these funding sources have strict deadlines. CARES funds must be incurred by December 30, 2021, while ARP funds must be incurred (obligated) from March 3, 2021, through December 31, 2024.[3], [4], [5], [6]

As a result, staff should be assigned to regularly review regulations and guidance that have been issued in connection with the different funding sources. Keeping well-informed on the latest guidance should help the municipality maximize the flexibility allowed in spending. Below are links to sources of information that can be helpful to grant management staff and where grant managers may continually monitor for updates:

• https://home.treasury.gov/policy-issues/coronavirus/assistance-for-state-local-and-tribal-governments
• https://home.treasury.gov/system/files/136/CRF-Guidance-Federal-Register_2021-00827.pdf 
• https://oig.treasury.gov/cares-act-reporting-and-record-keeping-information
• https://www.naco.org/resources/naco-analysis-american-rescue-plan-act 
• https://www.nlc.org/covid-19-pandemic-response
• https://www.ncsl.org/ncsl-in-dc/publications-and-resources/american-rescue-plan-act-of-2021.aspx

Oversight: Typically, programs making use of federal funds are required to maintain specific documentation showing that the program meets the eligibility requirements for the relevant federal funds.[7] As municipalities attempt to meet the urgent needs of their communities and disburse money as quickly as possible, it will be important to maintain oversight and adequate internal controls to ensure compliance with federal and state statutes, regulations, and the terms and conditions of the awards.[8] If a municipality fails to provide oversight and cannot meet the relevant documentation requirements to adequately support the municipality’s claim under any given source, it could result in recoupment or disallowance of federal funds.

Last Updated: February 2, 2022

Can a municipality deduct federal aid (e.g., FEMA funds) for COVID relief from revenue totals in 2020?

Yes, a municipality can deduct federal aid for COVID relief from revenue totals in 2020. The U.S. Department of the Treasury’s (“Treasury”) Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) Final Rule discusses the topic of federal aid and COVID-19 relief funds in the context of the definition of “general revenue” for the purpose of revenue loss calculations.

The Final Rule’s definition of “general revenue” states in pertinent part that the term excludes “intergovernmental transfers from the Federal Government, including transfers made pursuant to section 9901 of the American Rescue Plan Act.”[1] Treasury indicated that it was “maintaining the exclusion of all payments from the Federal Government (including payments for services) from general revenue in order to avoid substantial dilution of the definition of revenue, particularly in light of extraordinary fiscal support provided during the pandemic.”[2] To properly calculate revenue loss, municipalities should exclude funds received from the federal government.

However, municipalities should note that according to the Final Rule, “Treasury is maintaining the inclusion of intergovernmental transfers other than from the federal government” in its definition of general revenue, so any funds received from state and local governments should not be deducted from revenue totals.[3]

Treasury is currently revising its Frequently Asked Questions (“FAQ”) for the Final Rule. As of January 2022, the FAQs further state that “[g]eneral revenue also includes intergovernmental transfers between state and local governments, but excludes intergovernmental transfers from the Federal government, including Federal transfers made via a state to a locality pursuant to the CRF or the [CSLFRF].”[4]

In summary, the Final Rule and other Treasury guidance indicates that states and municipalities should deduct intergovernmental transfers from the federal government, including federal aid such as FEMA disaster assistance, in their calculation of revenue losses.

Last Updated: March 4, 2022

Are development impact fees recoverable under the revenue replacement provision of ARP?

Section 9901 of the American Rescue Plan Act of 2021 (“ARP”) specifies that Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) may be used, among other purposes,

for the provision of government services to the extent of the reduction in revenue of such [government entity] due to the COVID–19 public health emergency relative to revenues collected in the most recent full fiscal year of the State, territory, or Tribal government prior to the emergency.[1]  

Treasury’s Final Rule uses “General Revenue from Own Sources” as the standard to calculate the reduction of revenue eligible for replacement. The Final Rule defines general revenue as:

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.[2]

Because of the breadth of the Final Rule’s definition of general revenue, it appears that development impact fees would be considered “money that is received from tax revenue, current charges, and miscellaneous general revenue.”[3] Therefore, it seems likely that development impact fees may be considered a component of a municipality’s general revenue calculation.

Municipalities may refer to Treasury’s Overview of the Final Rule for guidance on calculating revenue loss.[4] When using these funds, municipalities must calculate their lost revenue by summing all general revenue and comparing the total figure to the baseline case. Municipalities need not calculate revenue lost through individual revenue streams (i.e., development impact) separately.[5]

The Final Rule also allows recipients to select a one-time standard allowance of up to $10 million for the provision of government services.[6]

Last Updated: March 31, 2022

How can municipalities determine income eligibility in order to best leverage federal funding for vulnerable populations?

The American Rescue Plan Act of 2021’s (“ARP”) Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) prioritize programs, services, or assistance for communities disproportionately affected by COVID-19.[1] In the CSLFRF Final Rule, the U.S. Department of the Treasury (“Treasury”) maintains the presumption that “a household or population that experienced unemployment, experienced increased food or housing insecurity, or is low- or moderate-income”[2] was negatively affected by the pandemic and may be provided appropriate services by the recipient. In addition, families living in Qualified Census Tracts (“QCT”) or receiving services from Tribal governments are presumed to be disproportionately impacted by the pandemic.[3] The Final Rule further assists in determining what populations have been presumably impacted by defining low- and moderate-income.

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.[4]

When determining whether to measure income levels by specific households or geographic areas, and between actual household size and default household size, recipients should consider the type of service being provided.[5] The Final Rule also provides guidance on identifying other eligible populations.[6]

The U.S. Department of Housing and Urban Development (“HUD”) defines a QCT as an area in which 50 percent or more of the households are income-eligible, with the population of all census tracts satisfying this criterion not to exceed 20 percent of the total population of the respective area.[7] A low-income QCT must have 50 percent of households with incomes below 60 percent of the Area Median Gross Income (“AMGI”).[8] For a complete list of metropolitan and nonmetropolitan QCTs, municipalities may consult the referenced HUD website on QCTs.[9]

Moreover, according to the Final Rule:

In identifying other disproportionately impacted classes, recipients should be able to support their determination that the pandemic resulted in disproportionate public health or economic outcomes to the specific populations, households, or geographic areas to be served.[10]

In addition, the Social Vulnerability Index (“SVI”) provides municipalities with a means of identifying vulnerable populations. It uses U.S. Census data to determine the relative social vulnerability of every census tract. The SVI ranks each tract on 14 social factors and groups them into four categories:

• Socioeconomic Status
• Household Composition and Disability
• Minority Status and Language
• Housing and Transportation[11]

The SVI is used by emergency response planners, public health officials, and municipalities to identify and map communities that will most likely need support before, during, and after a natural disaster or public health emergency.[12]

It should be noted that additional information may be provided when Treasury issues new Frequently Asked Questions ("FAQ") specific to the Final Rule, as indicated in the Interim Final Rule FAQ, updated simultaneously with the issuance of the Final Rule.[13] In addition, Treasury 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.[14]

Last Updated: March 11, 2022

How should a municipality calculate revenue loss associated with reductions in state level funding?

On January 6, 2022, the U.S. Department of the Treasury (“Treasury”) issued the Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) Final Rule as part of the American Rescue Plan Act of 2021 (“ARP”). The Final Rule takes effect on April 1, 2022. Regarding timing, Treasury states the following:

the interim final rule remains in effect; funds used consistently with the IFR while it is in effect are in compliance with the SLFRF program. However, recipients can choose to take advantage of the final rule’s flexibilities and simplifications now, even ahead of the effective date. Treasury will not take action to enforce the interim final rule to the extent that a use of funds is consistent with the terms of the final rule, regardless of when the SLFRF funds were used.[1]

Municipalities must note that “The Secretary of the Treasury (Treasury) is adopting as final the interim final rule published on May 17, 2021, with amendments. This rule implements the Coronavirus State Fiscal Recovery Fund and the Coronavirus Local Fiscal Recovery Fund established under the American Rescue Plan Act.”[2] As such, municipalities must use both the Interim Final Rule and the Final Rule when determining eligibility criteria for CSLFRF funds.

The Interim Final Rule defines general revenue as including “revenue collected by a recipient and generated from its underlying economy, and it would capture a range of different types of tax revenues, as well as other types of revenue that are available to support government services.”[3] The Final Rule keeps this definition with two changes: (a) giving recipients the option to include revenue from utilities that are part of the recipient government in their revenue loss calculation and (b) including liquor store revenue in the definition of general revenue.[4] According to the Final Rule, state funding is included in the definition of general revenue:

Treasury is maintaining the inclusion of intergovernmental transfers other than from the federal government for the reasons provided in the Supplemental Information to the interim final rule; to do otherwise would be to significantly distort the revenue calculations for local governments that regularly receive revenue sharing payments, for example, from their state governments.[5]

Municipalities should note that this inclusion of revenue from the state does not include those funds being passed through the state but originating from the federal government or any federal program.[6]

The Final Rule adds an option for recipients to use a standard allowance as an alternative to calculating revenue loss. This fixed amount of loss is set at $10 million total for the entire period of performance. Treasury intends to amend its reporting forms to provide a mechanism for recipients to make a one-time, irrevocable election to utilize either the revenue loss formula or the standard allowance.[7]

The Eligible Uses section of the Final Rule describes how to determine if the activities being considered are allowable using CSLFRF. The categories described in this section include public health and negative economic impacts, premium pay, revenue loss, and investments in water, sewer, and broadband infrastructure.[8]

Treasury has stated that offsetting a reduction in net tax revenue, paying interest or principal on outstanding debt, replenishing rainy day or other reserve funds, or paying settlements or judgments will not be considered a provision of a government service (and thus would not be an authorized use of ARP funds).[9]^,[10]

Additional information may be provided when Treasury issues new Frequently Asked Questions ("FAQ") specific to the Final Rule, as indicated in the Interim Final Rule FAQ updated simultaneously with the issuance of the Final Rule.[11] 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.[12]

Last Revised: February 1, 2022

Should a state’s failure to provide “Payment in Lieu of Taxes” funds at the full formula level be included in a municipality’s revenue loss calculation?

To the extent that the reduction in revenue occurred due to the COVID-19 public health emergency, recipients may use payments from the Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) for the provision of government services. Pursuant to the American Rescue Plan Act of 2021 (“ARP”), a recipient’s reduction in revenue is measured relative to the revenue collected in the most recent full fiscal year prior to the emergency.[1]

Treasury defines “general revenue” for the purposes of this provision in the CSLFRF Frequently Asked Questions (“FAQs”) as:

based on, but not identical, to the Census Bureau’s concept of “General Revenue from Own Sources” in the Annual Survey of State and Local Government Finances.

General Revenue includes revenue from taxes, current charges, and miscellaneous general revenue. It excludes refunds and other correcting transactions, proceeds from issuance of debt or the sale of investments, agency or private trust transactions, and revenue generated by utilities and insurance trusts. General revenue also includes intergovernmental transfers between state and local governments, but excludes intergovernmental transfers from the Federal government, including Federal transfers made via a state to a locality pursuant to the CRF or the Fiscal Recovery Funds.[2]

The Final Rule clarified the definition of general revenue 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 calculations.[3] The Final Rule also added liquor store revenue to the definition of general revenue.[4]

The Final Rule confirmed Treasury’s guidance in terms of intergovernmental transfers. Assuming that “Payment in Lieu of Taxes” by the state qualifies as an “intergovernmental transfer between state and local governments,” the failure of the state to provide a “Payment in Lieu of Taxes” at the full formula level could potentially qualify as “general revenue.” If that were indeed the case, a municipality could likely offset “Payment in Lieu of Taxes” with CSLFRF under the lost revenue provision.   

Last Updated: March 31, 2022

What are some of the purposes and sources of federal funds that cities may use to hire outside consultants? Are project management, grant writers, or data support roles eligible uses?

The U.S. Department of the Treasury’s (“Treasury”) Final Rule on the Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) provides guidance on the use of consultants to support management and oversight of CSLFRF. The Final Rule’s Supplementary Information states the following:

Treasury issued Compliance and Reporting Guidance that provided that “recipients may use funds for administering the [CSLFRF] program, including costs of consultants to support effective management and oversight, including consultation for ensuring compliance with legal, regulatory, and other requirements.[1]

In summary, this Treasury guidance clarifies that recipients of CSLFRF assistance can use some of those funds to hire consultants to support management and oversight of eligible projects.

Additionally, the Final Rule identifies eligible uses for Public Sector Capacity and Workforce.[2] These uses include:

• Costs to improve the design and execution of programs responding to the COVID-19 pandemic and to administer or improve the efficacy of programs addressing the public health emergency or its negative economic impacts.[3]

These costs, intended to support effective service delivery, include program evaluation, data, and outreach and administrative expenses.[4]

Further, the Final Rule clarifies several categories of eligible administrative expenses, providing examples of acceptable uses of CSLFRF funding for outside consultants:

• Administrative costs to improve the efficacy of public health or economic relief programs through tools like program evaluation, data analysis, and targeted consumer outreach.
• Administrative costs associated with programs to respond to the public health emergency and its negative economic impacts, including programs that are not funded by CSLFRF or not federally funded.
• Funds for direct and indirect administrative costs for administering the CSLFRF program and projects funded by the CSLFRF program.[5]

Treasury has also indicated that program evaluation, data, and outreach projects could be eligible in some cases, noting that it “recognizes that collecting high-quality data and developing community-driven, evidence-based programs requires resources to hire and build the capacity of staff, adopt new processes and systems, and use new technology and tools in order to effectively develop, execute, and evaluate programs.”[6] The Final Rule provides a non-exhaustive list of eligible uses to address the data, evidence, and program administration needs of recipients. These include:

• program evaluation and evidence resources,
• data analysis resource,
• technology infrastructure,
• community outreach and engagement; and
• capacity building.[7]

Capacity building includes “hiring public sector staff, contractors, academics, consultants, and others with expertise in evaluation, data, technology, and community engagement as well as technical assistance support for public sector staff, staff of subrecipients, and community partners.”[8]

Treasury’s Compliance and Reporting Guidance states that “[r]ecipients may use funds for administering the [CSLFRF] program, including costs of consultants to support effective management and oversight, including consultation for ensuring compliance with legal, regulatory, and other requirements.”[9] The Final Rule upholds this use of funds.[10]

Last Updated: February 1, 2022

Can a municipality use CRF or ARP funds to establish a Financial Empowerment Center, which provides free financial counseling to low-income residents?

The U.S. Department of Treasury’s (“Treasury”) Final Rule on the Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) does not expressly identify Financial Empowerment Centers (“FECs”) as an eligible use of CSLFRF funds. However, FECs may be considered an eligible use of Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”), provided that the center’s services and operation comply with Treasury guidance. Municipalities may also consider using other funds, such as the U.S. Coronavirus Relief Funds (“CRF”), or the Department of Housing and Urban Development (“HUD”) Community Development Block Grants (“CDBG”), to support the development of a FEC.

Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”)

The American Rescue Plan Act of 2021(“ARP”) authorizes the use of CSLFRF funds “to respond to the public health emergency [with COVID-19] or its negative economic impacts, including assistance to households, small businesses, and nonprofits.”[1] Treasury’s Final Rule on CSLFRF provides guidance regarding eligible programs that provide such assistance to households, including:

• Food assistance and food banks;
• Emergency housing assistance: rental assistance, mortgage assistance, utility assistance, assistance paying delinquent property taxes, counseling and legal aid to prevent eviction and homelessness, and emergency programs or services for homeless individuals, including temporary residences for people experiencing homelessness;
• Health insurance coverage expansion;
• Benefits for surviving family members of individuals who have died from COVID-19;
• Assistance to individuals who want and are available for work, including job training, public jobs programs and fairs, support for childcare and transportation to and from a jobsite or interview, incentives for newly employed workers, subsidized employment, grants to hire underserved workers, assistance to unemployed individuals to start small businesses, and development of job and workforce training centers;
• Financial services for the unbanked and underbanked;
• Burials, home repair, and home weatherization;
• Programs, devices and equipment for internet access and digital literacy, including subsidies for costs of access;
• Cash assistance;
• Paid sick, medical, and family leave programs;
• Assistance in accessing and applying for public benefits or services;
• Childcare and early learning services, home visiting programs, services for child welfare involved families and foster youth and childcare facilities;
• Assistance to address the impact of learning loss for K-12 students (e.g., high quality tutoring, differentiated instruction);
• Programs or services to support long-term housing security: including development of affordable housing and permanent supportive housing; and
• Certain contributions to an Unemployment Insurance Trust Fund.[2]

For programs providing assistance to households that qualify as “disproportionately impacted,”[3] the Final Rule expands the list of eligible uses to include:

• Pay for community health workers to help households access health and social services;
• Remediation of lead paint or other lead hazards;
• Primary care clinics, hospitals, integration of health services into other settings, and other investments in medical equipment and facilities designed to address health disparities;
• Housing vouchers and assistance relocating to neighborhoods with higher economic opportunity;
• Investments in neighborhoods to promote improved health outcomes;
• Improvements to vacant and abandoned properties, including rehabilitation or maintenance, renovation, removal and remediation of environmental contaminants demolition or deconstruction, greening/vacant lot cleanup and conversion to affordable housing;
• Services to address educational disparities, including assistance to high-poverty school districts and educational and evidence-based services to address student academic, social, emotional, and mental health needs; and
• Schools and other educational equipment and facilities.[4]

Treasury has stated that the eligible programs listed in the Final Rule are non-exhaustive and provides award recipients with broad flexibility to both simplify the program and meet the needs of a recipient’s community.

Municipalities must assess and ensure that programs respond to negative economic impacts resulting specifically from the COVID-19 pandemic.[5] A recipient would likely satisfy the Final Rule’s threshold requirement of a “negative economic impact” by:  (i) considering whether an economic harm exists and then whether this harm was caused or made worse by the COVID–19 public health emergency and (ii) designing the response to address the identified economic harm or impact resulting from or exacerbated by the public health emergency.[6]

CSLFRF costs must be incurred on or after March 3, 2021, and before December 31, 2024; however, the fund’s period of performance extends through December 31, 2026.[7] In considering whether a cost is incurred, Treasury indicates that a cost must be obligated and adopts the definition of “obligation” as included in the Uniform Guidance.[8] Treasury has clarified that for eligible assistance provided to households, businesses, and individuals to address the negative economic impacts of the public health emergency, CSLFRF funds may cover expenses incurred by a household, business, or individual prior to March 3, 2021, so long as this cost was not incurred by the municipality prior to March 3, 2021.[9]

Coronavirus Relief Funds (“CRF”)

The period of performance for the CARES Act of 2020 Coronavirus Relief Funds (“CRF”) ended on December 31, 2021. 

Prior to that date, municipalities who qualified for CRF of the CARES Act could consider using those funds to cover the establishment of an FEC. To be eligible for CRF funding, proposed expenditures were required to meet three requirements: (i) be necessary and incurred due to the public health emergency with respect to COVID–19; (ii) not be accounted for in the budget most recently approved as of March 27, 2020, (the date of enactment of the CARES Act) for the State or government; and (iii) be incurred during the period that begins on March 1, 2020, and ends on December 31, 2021.[10]

Generally, Treasury places the responsibility of determining whether a cost is necessary in responding to the COVID-19 public health emergency on the relevant government official.[11] Guidance from Treasury further stated that funds could be used to cover expenses associated with the provision of economic support in connection with the COVID–19 public health emergency and any other COVID–19-related expenses reasonably necessary to the function of government that satisfy the Fund’s eligibility criteria.[12] A municipality could have been able to consider an FEC as provision of economic support in connection with the public health emergency if they were able to justify the connection of the public health emergency response. While the CRF did not provide specific considerations for this justification, municipalities may wish to use the considerations outlined above in relation to the CSLFRF as a starting point for establishing this connection. In some instances, CRF funds had been used by municipalities to create economic support programs such as small business grant programs, programs to help hotels hire new employees, veteran business programs, and more.

Other Sources of Funding and Multiple Sources of Funding

Additionally, a municipality may consider leveraging HUD CDBG dollars to assist in establishing and sustaining an FEC. CDBG funds “supports development of low-cost and affordable housing as well as work to improve and sustain infrastructure in disadvantaged regions and neighborhoods, and to support economic development and community service projects within communities.”[13]  According to the Cities for Financial Empowerment Fund Report,

…cities raised close to $1 million in federal funds for 2016 program operations. Cities also learned from one another in pursuing federal funding: they shared their experiences of leveraging different types of federal funding and were able to point to one another as examples when working in their own local context.  While not without challenges, including additional reporting burdens, these federal funds were important sustainability sources, especially as they represented new uses of federal funding streams for these cities.[14]

A municipality may amend its current CDBG Action Plan to realign existing CDBG dollars and/or apply new CDBG funds received to this activity; however, the activities must be eligible under CDBG.  

If municipalities are deciding between funding programs to cover costs, they should ensure that expenses are covered by one source or the other to prevent duplication of benefits.[15]  A municipality may in certain circumstances use different support funds to cover costs related to the establishment of an FEC; however, specific expenses may only be covered by one funding source. For example, a municipality could use CRF funding to cover eligible equipment and utility costs prior to December 31, 2021, but could switch to using CSLFRF funding to cover equipment and utility costs after January 1, 2022.

Last Updated: March 25, 2022

Can a municipality spend funds from the second tranche of the Emergency Rental Assistance Program (“ERAP2”) before depleting all funds from the first tranche (“ERAP1”)?

Guidance from the U.S. Department of the Treasury (“Treasury”) does not indicate whether ERAP1 funding must be depleted before beginning to use funds from ERAP2.

To maximize the use of ERAP funding, to the extent that an activity is eligible under ERAP1, a municipality may choose to utilize ERAP1 funds until ERAP1 funds are exhausted. Additionally, ERAP1 funds are available until September 30, 2022, while ERAP2 funds are slated to remain available until September 30, 2025. Further, on October 25, 2021, Treasury announced guidance on the reallocation of ERAP1 funds to ensure “additional funds are made available to grantees with a proven capacity to deliver ERA in jurisdictions where families remain at serious risk of eviction or housing instability.”[1] Notably, grantees should consider prioritizing ERAP1 to prevent jeopardizing funding for reallocation.   

Each ERAP program is intended to support low-income households at risk for homelessness and affected by the COVID-19 pandemic and its economic impacts by helping make rent and utility payments.[2] There are differences, however, between ERAP1 and ERAP2, some of which may make certain activities or costs assignable to one program but precluded from the other. A non-exhaustive list of differences includes:

• ERAP1 and ERAP2 require that eligible households demonstrate financial hardship due, directly or indirectly, to the pandemic; and one or more individuals within the household can demonstrate a risk of experiencing homelessness or housing instability.[3]
• ERAP1 requires the household has income at or below 80% of area median income, while ERAP2 requires the household is a low-income family (as such term is defined in section 3(b) of the United States Housing Act of 1937 (42 U.S.C. 1437a(b)))[4].
• ERAP2 can be offered directly to renters when landlords do not accept ERAP payments.[5]
• ERAP1 requires contact first be made with landlords and utilities before funds are offered to renters, while ERAP2 does not include this requirement.[6]
• ERAP1 limits household eligibility to 12 months (with 3-month extensions available under certain circumstances), while ERAP2 sets a cap of 18 months of household support combined between ERAP1 and ERAP2.[7]

Additional resources for ERAP include:

• Treasury's ERAP Resources Site;
• Treasury's ERAP2 Fact Sheet (May 7, 2021);
• Treasury's FAQ sheet regarding the ERAP1 and ERAP2 programs (May 7, 2021);
• The National Association of Counties’ list of county ERAP programs;
• Questions and Answers on ERA Reporting v 1.0 (September 27, 2021);
• ERA Reporting Guidance v 2.0 (October 7, 2021);
• Addendum to ERA Reporting Guidance – Clarifications and Guidance for Financial Reporting on Recipient and Subrecipient Activities (October 28, 2021); and
• Deputy Secretary of Treasury letter outlining guidance on reallocation of funds (October 25, 2021).

Last Updated: December 27, 2021

What happens if cities commit funds relying on the Interim Final Rule and the guidance changes in the Final Rule?

On January 6, 2022, the U.S. Department of the Treasury (“Treasury”) released the Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) Final Rule[1], accompanied by a Statement Regarding Compliance with the CSLFRF Interim Final Rule and Final Rule (the “Statement”).[2]

The Statement addresses the need to reconcile the scopes of the Interim Final Rule and the Final Rule, clarifying critical areas of flexibility to prevent undue administrative burden and the potential retroactive ineligibility of projects initiated and substantially begun under the Interim Final Rule. It states:

State, territorial, local, and Tribal governments (together, recipients) must comply with the final rule beginning on April 1, 2022, when the final rule takes effect. Prior to April 1, 2022, recipients may take actions and use funds in a manner consistent with the final rule, and Treasury will not take action to enforce the interim final rule if a use of funds is consistent with the terms of the final rule, regardless of when the [CSLFRF] funds were used.[3]

Prior to April 1, 2022, the interim final rule remains in effect. Accordingly, recipients may obligate and expend funds in a manner consistent with the interim final rule prior to April 1, 2022.  In addition, Treasury recognizes that recipients have taken steps to use [CSLFRF] funds for projects in a manner consistent with the interim final rule. To the extent that a recipient has taken significant steps toward obligating [CSLFRF] funds in a manner consistent with the interim final rule prior to January 6, 2022, Treasury will generally not take action to enforce provisions contained in the final rule, to the extent that they are more restrictive than those in the interim final rule. Such significant steps include initiation of procurement or grantmaking actions, detailed planning of projects or programs, appropriation of funds, and other significant planning steps.[4]

To document any decisions made with reference to the scope of the Interim Final Rule, municipalities should consider developing an audit narrative. An audit narrative may include:

• any policy and eligibility decisions made to fund a program under CSLFRF;
• sections of the Interim Final Rule referenced to make an eligibility decision;
• timelines associated with eligibility decisions;
• supporting documentation requirements;
• reporting requirements; and a formal authorization to appropriate CSLFRF funding by the municipality’s Board or senior leadership.

Municipalities should also consider performing regular compliance audits to ensure its audit narrative contains the information above. Proactive compliance audits focusing on the audit narrative and other key documents may help identify gaps in record-keeping that, if gone unnoticed, could result in sanctions from the federal government. It is also a good practice to save copies of all versions of Treasury’s CSLFRF guidance. This allows a municipality to refer to the specific guidance that informed each funding and allocation decision.

Last Updated: January 28, 2022

What is the audit period for federal funds?

Guidance published to date does not set a clear temporal limitation on government clawbacks. The U.S. Department of the Treasury’s (“Treasury”) Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) Final Rule, which goes into effect on April 1, 2022, does not address this question but states that “the Office of Management and Budget's (OMB) Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (commonly called the ‘Uniform Guidance’) generally applies to” CSLFRF.[1] In light of this guidance, municipalities should review 2 CFR 200 in its entirety to understand audit requirements and scope of audits.

Audits under the Uniform Guidance are typically based on “[f]inancial records, supporting documents, statistical records … pertinent to a Federal award.” These documents must be retained for a period of three years from the date of submission of the final expenditure report (2 CFR 200.334). However, the three-year clock does not start until the grant is complete and a final report is submitted. This could extend the document retention requirement for several years.

Aside from audits that may be conducted by Treasury or the Office of Inspector General, municipalities and its subrecipients should review the annual audit requirements stated in 2 CFR § 200.501: 

(a) Audit required. A non-Federal entity that expends $750,000 or more during the non-Federal entity's fiscal year in Federal awards must have a single or program-specific audit conducted for that year in accordance with the provisions of this part.

(b) Single audit. A non-Federal entity that expends $750,000 or more during the non-Federal entity's fiscal year in Federal awards must have a single audit conducted in accordance with § 200.514 except when it elects to have a program-specific audit conducted in accordance with paragraph (c) of this section.

(c) Program-specific audit election. When an auditee expends Federal awards under only one Federal program (excluding R&D) and the Federal program's statutes, regulations, or the terms and conditions of the Federal award do not require a financial statement audit of the auditee, the auditee may elect to have a program-specific audit conducted in accordance with § 200.507. A program-specific audit may not be elected for R&D unless all of the Federal awards expended were received from the same Federal agency, or the same Federal agency and the same pass-through entity, and that Federal agency, or pass-through entity in the case of a subrecipient, approves in advance a program-specific audit.[2]

The Final Rule indicates a major risk for funding recipients, noting that “[s]ections 602(e) and 603(e) of the Social Security Act provide the Secretary with the power to recoup ‘funds used in violation’ of the Social Security Act.”[3]  

Last Revised: January 25, 2022