How will the “use of funds” category authorizing spending of ARP funds “to respond to the public health emergency with respect to COVID–19 or its negative economic impacts, including assistance to households, small businesses, and nonprofits…” be defined?

In defining eligible use of funds, the American Rescue Plan Act of 2021 (“ARP”) permits use of payments from the Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) to respond to the public health emergency and negative economic impacts of COVID-19.[1] Generally, the U.S. Department of the Treasury (“Treasury”) places the burden of assessing whether a program meets this requirement on recipients.

Treasury’s Final Rule provides a non-exclusive list of how funds may be used to address the public health emergency, including: COVID-19 mitigation and prevention, medical expenses, behavioral health care, and preventing and responding to violence. Examples of eligible uses can be found in Treasury’s Overview of the Final Rule, and the public is considered impacted for the purposes of the above responses to the public health emergency.[2]

In considering whether a program or service responds to the negative economic impacts of the public health emergency, Treasury states that a recipient should consider whether: (i) economic harm exists; (ii) this harm was caused or made worse by the COVID-19 public health emergency; and (iii) the proposed program or service responds to this negative economic impact.[3] Negative economic impacts that are not related to the COVID-19 public health emergency are not eligible.[4] Treasury further notes that programs and services must be related and reasonably proportional to the extent and type of harm experienced.[5]

Treasury’s Final Rule includes various examples of programs that respond to the negative economic impacts of the public health emergency. It is important to note that these examples are clearly identified as non-exclusive and other programs may be considered eligible using Treasury’s evaluation criteria.[6] Examples include, but are not limited to:

• Assistance to households in addressing:
  • food assistance;
  • emergency housing assistance;
  • 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;
  • financial services for the unbanked and underbanked;
  • burials, home repair & home weatherization;
  • programs, devices & 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 & childcare facilities;
  • assistance to address the impact of learning loss for K-12 students;
  • programs or services to support long-term housing security; and
  • certain contributions to an Unemployment Insurance Trust Fund; [7]:
• Assistance to small businesses, nonprofits, or impacted industries, such as:
  • loans or grants to mitigate financial hardship such as by supporting payroll and benefits, costs to retain employees, and mortgage, rent, utility, and other operating costs;
  • support of operations and maintenance of existing equipment and facilities (impacted industries only);
  • technical assistance, counseling, or other services to support business planning;
  • rehabilitation of commercial properties, storefront improvements & façade improvements (disproportionately impacted small businesses only);
  • support for microbusinesses, including financial, childcare, and transportation costs (disproportionately impacted small businesses only); and
  • technical assistance, business incubators & grants for start-up or expansion costs for small businesses (disproportionately impacted small businesses only). [8]
• Expenses to improve the efficacy of economic relief programs, such as:
  • data analysis;
  • targeted consumer outreach;
  • improvements to data or technology infrastructure; and
  • impact evaluations.
  • administrative costs for programs responding to the public health emergency and its economic impacts; and
  • addressing administrative needs caused or exacerbated by the pandemic.[9]

Treasury will recognize a household or population as impacted by the pandemic if it has experienced unemployment, increased food or housing insecurity, or has low to moderate income.[10] Treasury provides a general criteria to determine if a household falls into the category of low to moderate income based on Federal Poverty Guidelines (FPG) or Area Median Income (AMI).[11] A population is also considered as impacted if it otherwise qualifies for:

• Children’s Health Insurance Program (CHIP);
• Childcare Subsidies through the Child Care and Development Fund (CCDF) Program;
• Medicaid;
• National Housing Trust Fund (HTF) (affordable housing programs only); or
• Home Investment Partnerships Program (HOME) (affordable housing programs only).[12]

Treasury will recognize a household as disproportionately impacted by the pandemic if they have low income, reside in a Qualified Census Tract, reside in the U.S. territories, or are receiving services from territorial or Tribal governments. Certain communities can also be designated as low income, if criteria are met.[13] The Final Rule also clarifies that Treasury will recognize a household as disproportionately impacted if it otherwise qualifies for certain federal benefits including:

• Temporary Assistance for Needy Families (TANF);
• Supplemental Nutrition Assistance Program (SNAP);
• Free and Reduced-Price Lunch (NSLP) and/or School Breakfast (SBP) programs;
• Medicare Part D Low-income Subsidies;
• Supplemental Security Income (SSI);
• Head Start and/or Early Head Start;
• Special Supplemental Nutrition Program for Women, Infants, and Children (WIC);
• Section 8 Vouchers;
• Low-Income Home Energy Assistance Program (LIHEAP);
• Pell Grants;
• For services to address educational disparities, Treasury will recognize Title I eligible schools as disproportionately impacted and responsive services that support the school generally or support the whole school as eligible. [14]

Disproportionately impacted households may qualify for the enumerated uses listed in the Final Rule under both the ‘Impacted’ and ‘Disproportionately Impacted’ categories.[15]

The Final Rule has expanded several uses of CSLFRF funds to apply to all of those “impacted” by the pandemic. These include but are not limited to:

• assistance applying for public benefits or services;
• programs or services that address or mitigate the impacts of the COVID-19 public health emergency on childhood health or welfare, including:
  • childcare;
  • early learning services;  
  • programs to provide home visits; and
  • services for families involved in the child welfare system and foster youth;
• programs to address the impacts of lost instructional time for students; and
• programs or services that address housing insecurity, lack of affordable housing, or homelessness.[16]

Additionally, Treasury has enumerated uses that are solely eligible for communities that have been disproportionately impacted by the pandemic:

• payment for community health workers to help households access health & 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 & facilities designed to address health disparities;
• housing vouchers & assistance relocating to neighborhoods with higher economic opportunity;
• investments in neighborhoods to promote improved health outcomes;
• improvements to vacant and abandoned properties;
• services to address educational disparities; and
• schools and other educational equipment & facilities.[17]

Treasury’s CSLFRF Frequently Asked Questions (“FAQs”) provide further guidance to recipients of CSLFRF funding on eligible uses of funds to address negative economic impacts.[18] The FAQs currently reflect the Interim Final Rule, and Treasury is planning to update the FAQ at a later date.

Last Revised: January 31, 2022

What types of broadband improvement projects are potentially eligible for ARP funding?

On January 6, 2022, the U.S. Department of the Treasury (“Treasury”) issued its Final Rule on the Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”). The Final Rule encourages recipients to consider the general affordability of broadband infrastructure projects and incorporate “at least one low-cost option offered without data usage caps and at speeds that are sufficient for a household with multiple users to simultaneously telework and engage in remote learning.”[1] This measure allows the focus of broadband projects to prioritize supporting underserved communities that have been disproportionately impacted by the pandemic.[2]

Further terms for the eligible use of funds for broadband infrastructure are defined in the Final Rule.[3] Treasury considers a necessary investment in broadband infrastructure to be one that is  “responsive to an identified need to achieve or maintain an adequate minimum level of service.”[4] Treasury considers a necessary investment in infrastructure – including broadband – to be one that will “establish or improve broadband service to underserved populations to reach an adequate level to permit a household to work or attend school, and that are unlikely to be met with private sources of funds,”[5] and also is:

1. responsive to an identified need to achieve or maintain an adequate minimum level of service, which may include a reasonable projection of increased need, whether due to population growth or otherwise and
2. a cost-effective means for meeting that need, taking into account available alternatives.[6]

Eligibility of use for broadband infrastructure is further addressed in the CSLFRF Fact Sheet as of May 10, 2021.[7] More specifically, Treasury notes that funds may be used to “help remedy [ ] shortfalls […] in broadband infrastructure”[8] in “unserved or underserved” areas.[9]

However, Treasury has also clarified its expectations regarding the target population for infrastructure or broadband projects—not all such projects will be considered eligible for CSLFRF. For instance, uses of funds intended to generally grow the economy and therefore enhance opportunities for workers and businesses would not be an eligible use, because such assistance is not reasonably designed to impact individuals or classes that have been identified as having experienced a negative economic impact.[10]

Further, municipalities that invest in broadband infrastructure projects should ensure that “water, sewer, and broadband projects use strong labor standards, including project labor agreements and community benefits agreements that offer wages at or above the prevailing rate and include local hire provisions, not only to promote effective and efficient delivery of high-quality infrastructure projects but also to support the economic recovery through strong employment opportunities for workers.”[11] Treasury recommends that municipalities consider fiber optic infrastructure projects where possible.[12] Municipalities may also use funds for related programs, such as modernization of cybersecurity for existing and new broadband networks.[13]

The Final Rule “further supports the expansion of affordable access to broadband service for households by requiring that recipients use a provider that participates in a qualifying affordability plan,”[14] such as the Federal Communications Commission’s (“FCC”) Affordable Connectivity Program (“ACP”).[15]

The Final Rule provides specific technical attributes and requirements for eligible broadband projects, stating that:

…eligible projects be designed to, upon completion, reliably meet or exceed symmetrical 100 Mbps download and upload speeds. As was the case under the interim final rule, in cases where it is not practicable, because of the excessive cost of the project or geography or topography of the area to be served by the project, eligible projects may be designed to reliably meet or exceed 100 Mbps download speed and between at least 20 Mbps and 100 Mbps upload speed and be scalable to a minimum of 100 Mbps download speed and 100 Mbps upload speed.[16]

Treasury encourages recipients to consider using CSLFRF money for infrastructure or broadband projects that focus on projects geared toward establishing or improving service connectivity to individual households. Specifically, Treasury states:

while recipients are permitted to make investments in “middle-mile” connections that otherwise satisfy the requirements of the final rule, Treasury continues to encourage recipients to focus on projects that will achieve last-mile connections—whether by focusing directly on funding last-mile projects or by ensuring that funded middle-mile projects have commitments in place to support new and/or improved last-mile service.[17]

Treasury also provides flexibility for recipients on broadband infrastructure eligibility, specifically for “recipients to determine eligible areas to be served, middle-mile projects, pre-project development costs, broadband connections to schools or libraries, and the applicability of the National Environmental Policy Act (NEPA) and the Davis-Bacon Act.”[18]

Additional information may be provided when Treasury issues new Frequently Asked Questions (“FAQ”) specific to the Final Rule. [19] 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.[20]

Last Updated: January 26, 2022

What are the restrictions placed on funds directed towards public sector revenue loss?

The U.S. Department of the Treasury (“Treasury”) provides examples of both qualifying and non-qualifying revenue loss under the Final Rule. The revenue loss provision is the broadest and most flexible category in the Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) program. Under this provision, recipients may spend funds on any service traditionally provided by governments. While Treasury provides a non-exhaustive list of enumerated eligible uses in the Final Rule, recipients must still comply with CSLFRF regulations and cannot spend funds on ineligible uses.

Calculating Revenue Loss

Generally, to calculate revenue loss for purposes of using funds from the American Rescue Plan Act’s (“ARP”) CSLFRF to replace lost revenue, municipalities may determine their jurisdiction’s specific revenue loss by “choosing a standard allowance of up to $10 million in aggregate, not to exceed their award amount, during the program,” or by “calculating their jurisdiction’s specific revenue loss each year using Treasury’s formula, which compares actual revenue to a [counterfactual] trend.”[1] The counterfactual trend “begins with the last full fiscal year prior to the public health emergency (as required by statute) and projects forward with an annualized growth adjustment.”[2]  Treasury’s Final Rule includes a four-step formula to calculate revenue loss:

• Step 1: Identify revenues collected in the most recent full fiscal year prior to the public health emergency (i.e., last full fiscal year before January 27, 2020), called the base year revenue.
• Step 2: Estimate counterfactual revenue, which is the amount of revenue the recipient would have expected in the absence of the downturn caused by the pandemic…
• Step 3: Identify actual revenue, which equals revenues collected over the twelve months immediately preceding the calculation date.
• Step 4: The extent of the reduction in revenue is equal to counterfactual revenue less actual revenue. If actual revenue exceeds counterfactual revenue, the extent of the reduction in revenue is set to zero for that calculation date.[3]

To the extent it has experienced a qualifying revenue loss, a municipality may use CSLFRF funds for the “provision of government services to the extent of the reduction in revenue experienced due to the COVID-19 public health emergency.”[4] Under the Revenue Loss Category, the Final Rule states that “recipients have broad latitude to use funds for government services up to their amount of revenue loss due to the pandemic.”[5] The Final Rule provides examples of qualified government services, including, but not limited to:

• 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).[6]

However, the Final Rule also describes a non-exhaustive list of items that do not qualify as government services or eligible use of funds, including:

• debt service and reserve replenishment costs;[7]
• contributions to rainy day funds and similar financial reserves constitute savings for future spending needs;[8]
• satisfaction of any obligation arising under or pursuant to a settlement agreement, judgment, consent decree, or judicially confirmed debt restructuring in a judicial, administrative, or regulatory proceeding, except if the settlement or judgment requires the recipient to provide services to respond to the COVID-19 public health emergency or its negative economic impacts or to provide government services;[9]
• for a program that undermines practices included in the CDC’s guidelines and recommendations for stopping the spread of COVID-19;[10]
• violative of the conflict of interest requirements contained in the Award Terms and Conditions or the Office of Management and Budget’s Uniform Guidance, including any self-dealing or violation of ethics rules;[11]
• violative of other background laws that limit the scope of activities that may be conducted as “government services,” including other state and federal laws;[12] and
• explicitly restricted use of ARP funds, such as:
  • pension deposits that are an extraordinary payment of an accrued, unfunded liability;[13] or
  • use of funds for non-federal match where barred by regulation or statute.[14]

Treasury published additional guidance related to revenue loss in their January 2022, Frequently Asked Questions (“FAQ”) document.[15] The document notes that recipients are not required to use audited financials when calculating revenue loss.[16] Where audited data is not available, recipients are not required to obtain audited data, but still must submit complete and accurate information.[17] Treasury also states “recipients should use their own data sources to calculate general revenue, and do not need to rely on published revenue data from the Census Bureau.”[18] Due to differences in timing, data sources, and definitions, recipients’ self-reported general revenue figures may differ somewhat from those published by the Census Bureau.[19] Recipients may provide data on a cash, accrual, or modified accrual basis, provided that recipients are consistent in their choice of methodology throughout the covered period and until reporting is no longer required.[20]

The Final Rule also offers a standard allowance for revenue loss of $10 million, allowing recipients to opt for either a standard amount of revenue loss or complete a full revenue loss calculation.[21] Recipients selecting the standard allowance may use that amount for government services as described above and discussed in the Final Rule.[22]

In addition, Treasury requires projects with total expected capital expenditures costs exceeding $1 million to undergo additional analysis and increased reporting requirements to justify the capital expenditure.[23] Recipients are expected to meet the substantive requirements of a written justification for the capital expenditures. The written justification should (i) describe the harm or need to be addressed; (ii) explain why a capital expenditure is appropriate to address the harm or need; and (iii) compare the proposed capital expenditure against alternative capital expenditures that could be made.[24]

Further, when preparing their written justification:

1. Recipients should provide a description of the specific harm or need to be addressed, and why the harm was exacerbated or caused by the public health emergency. 
2. Recipients should provide an independent assessment demonstrating why a capital expenditure is appropriate to address the specified harm or need. This should include an explanation of why existing capital equipment, property, or facilities would be inadequate to addressing the harm or need and why policy changes or additional funding to pertinent programs or services would be insufficient without the corresponding capital expenditures.
3. Recipients should assess the proposed capital expenditure against at least two alternative types or sizes of capital expenditures that are potentially effective and reasonably feasible.[25]

Last Revised: March 25, 2022

What are the parameters on using lost revenue funds?

The Final Rule identifies four categories of allowable uses for Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) funds:

• To respond to the public health emergency or its negative economic impacts, including assistance to households, small businesses, and nonprofits, or aid to impacted industries such as tourism, travel, and hospitality;
• To respond to workers performing essential work during the COVID-19 public health emergency by providing premium pay to eligible workers;
• For the provision of government services to the extent of the reduction in revenue due to the COVID–19 public health emergency relative to revenues collected in the most recent full fiscal year prior to the emergency; and,
• To make necessary investments in water, sewer, or broadband infrastructure.[1]

The Final Rule identifies non-exclusive examples of eligible use as well as certain prohibitions of use.[2] Municipalities should review the Final Rule and the associated Frequently Asked Questions (“FAQs”) as they begin to determine how to spend their funds. To aid in these determinations, the Final Rule also outlines restrictions on the use of CSLFRF funds. These restrictions include deposits into pension funds, offseting a reduction in net tax revenue, paying interest or principal on outstanding debt, replenishing rainy day or other reserve funds, or paying settlements or judgements.[3]

Recipients have a choice between two options to determine their amount of revenue loss. Once the choice is made, recipients cannot switch between these approaches.[4]

1. Recipients may elect a “standard allowance” of $10 million to spend on government services through the period of performance.

• Under this option, which is newly offered in the Final Rule, Treasury presumes that up to $10 million in revenue has been lost due to the public health emergency and recipients are permitted to use that amount (not to exceed the award amount) to fund “government services.” The standard allowance provides an estimate of revenue loss that is based on an extensive analysis of average revenue loss across states and localities, and offers a simple, convenient way to determine revenue loss, particularly for CSLFRF’s smallest recipients. All recipients may elect to use this standard allowance instead of calculating lost revenue using the formula below, including those with total allocations of $10 million or less. Electing the standard allowance does not increase or decrease a recipient’s total allocation.[5]

2. Recipients may calculate their actual revenue loss according to the formula articulated in the Final Rule.

• Under this option, recipients calculate revenue loss at four distinct points in time, either at the end of each calendar year (e.g., December 31 for years 2020, 2021, 2022, and 2023) or the end of each fiscal year of the recipient. Under the flexibility provided in the Final Rule, recipients can choose whether to use calendar or fiscal year dates but must be consistent throughout the period of performance. Treasury has also provided several adjustments to the definition of general revenue in the Final Rule.[6]

After recipients have determined their lost revenue, they can then use CSLFRF funds to pay for government services up to the revenue loss amount. Government services generally include any service traditionally provided by a government, unless Treasury has stated otherwise.[7] Examples provided by Treasury may include but are not limited to:

• Construction of schools and hospitals;
• Road building and maintenance, and other infrastructure;
• Health services;
• General government administration, staff, and administrative facilities;
• Environmental remediation, and;
• Provision of police, fire, and other public safety services (including purchase of fire trucks and police vehicles).[8]

The revenue replacement eligible use offers municipalities more flexibility than other CSLFRF eligible use categories. Funds are subject to streamlined reporting and compliance requirements. Recipients should be mindful that certain restrictions, which are detailed further in the Final Rule’s restrictions on use section and apply to all uses of funds, apply to government services as well.[9]

Notably, Treasury may provide additional information when it issues new FAQs specific to the Final Rule.[10]

What are the eligibility differences between CRF and ARP funding?

As stated in Question 6 of the Treasury’s FAQs,[1]  “[g]enerally, funding uses eligible under CRF as a response to the direct public health impacts of COVID-19 will continue to be eligible under CSFRF/CLFRF, with the following two exceptions: (1) the standard for eligibility of public health and safety payrolls has been updated; and (2) expenses related to the issuance of tax-anticipation notes are not an eligible funding use.”

What are the rules on subgrants to community partners?

While the Final Rule does not provide a specific definition of “community partners,” in terms of the transfer of Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) to other entities, the U.S. Department of the Treasury (“Treasury”) is aligning the definition of subrecipient with Uniform Guidance. Specifically, the Final Rule states:

Per 2 CFR 200.101 (b)(2) of the Uniform Guidance, the terms and conditions of federal awards flow down to subawards to subrecipients. Therefore, non-federal entities, as defined in the Uniform Guidance, must comply with the applicable requirements in the Uniform Guidance regardless of whether the non-federal entity is a recipient or subrecipient of a federal award. This includes requirements such as the treatment of eligible uses of funds, procurement, and reporting requirements.

The Uniform Guidance definitions for both subaward and subrecipient specify that payments to individuals or entities that are direct beneficiaries of a federal award are not considered subrecipients. [1]

To determine the relevant rules, recipients should assess the rationale for why they are providing funds to the individual or entity. If the community partner is carrying out a CSFLRF program for the subrecipient, all terms and conditions of CSFLRF would apply to the subaward.

However, if the community partner is receiving funds as a result of experiencing a public health impact or negative impact of the pandemic, then it is a beneficiary and not subject to subrecipient monitoring or reporting requirements.[2] If the community partner is a beneficiary, then the recipient should document the COVID-19 public health or economic impact and how the response is related and reasonably proportional to the harm identified.[3] For example, general economic development or workforce development that is not directly addressing an economic impact of COVID-19 would not be eligible under this funding.[4]

Last Revised: March 22, 2022

What are some innovative uses for the ARP funds?

On January 6, 2022, the U.S. Department of the Treasury (“Treasury”) released its Final Rule on the Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”).[1] This guidance permits flexibility in employing these funds to respond to the COVID-19 public health emergency and address its economic fallout. For example, the Final Rule provides an expanded set of households and communities that are presumed to be “impacted” and “disproportionately impacted” by the pandemic and broadens eligible water, sewer, and broadband infrastructure investments.[2] Treasury published a CSLFRF Fact Sheet on May 10, 2021, that lists the following objectives of the funding:

• support urgent COVID-19 response efforts to continue to decrease spread of the virus and bring the pandemic under control;
• replace lost public sector revenue to strengthen support for vital public services and help retain jobs;
• support immediate economic stabilization for households and businesses; and,
• address systemic public health and economic challenges that have contributed to the unequal impact of the pandemic.[3]

Recipients may refer to Treasury’s Overview of the Final Rule for examples of enumerated uses of CSLFRF funds.[4]

There are many examples of municipalities using or planning to use their CSLFRF funding allocations in innovative ways. A few examples include:

• assisting businesses with re-opening by allocating $100,000 to provide personal protective equipment (“PPE”) grants. The municipality has also allocated $7 million in CSLFRF to a Rent Rescue Grant Program to bolster small and medium-sized businesses that were most impacted by the economic downturn from the pandemic.[5]
• supporting small business resiliency by providing disaster loan and utility bill payment forgiveness. The municipality is also utilizing CSLFRF to support businesses adversely affected by COVID-19 with software upgrades, as well as digital marketing and strategic plan counseling.[6]
• supporting the construction of a community of transitional shelters designed to provide housing services for homeless veterans using a $100,000 investment from the county’s CSLFRF allocation.[7]
• providing the state tourism marketing authority with $12 million in CSLFRF to help tourism-related businesses recover and to promote health and safety for their patrons.[8]

Can a municipality use ARP funds to provide funds to residents who have applied for, but not received, unemployment benefits?

The U.S. Department of the Treasury (“Treasury”) does not explicitly address a municipality’s ability to provide funds to residents while waiting for unemployment benefits from a state. However, Treasury’s Final Rule, published on January 6, 2022, permits certain contributions to State Unemployment Trust Funds.[1] Further, the Final Rule reiterates “that responses to negative economic impacts should be reasonably proportional to the impact that they are intended to address. Uses that bear no relation or are grossly disproportionate to the type or extent of harm experienced would not be eligible uses.”[2]

Notably, the Final Rule states that assistance to households, particularly cash assistance, is an eligible use of funds.[3] Although the “Assistance to Households” eligible use category does not specifically discuss utilizing funds for unemployment while waiting on unemployment benefit payments from a state, it does consider specific types of “cash assistance” to individuals.[4] Several examples of assistance to households identified by Treasury include:

• food assistance;
• rent, mortgage, or utility assistance;
• counseling and legal aid to prevent eviction or homelessness;
• cash assistance (discussed in further detail below);
• emergency assistance for burials, home repairs, weatherization, or other needs;
• internet access or digital literacy assistance; or
• job training to address negative economic or public health impacts experienced due to a worker’s occupation or level of training.[5]

In the examples provided above, Treasury does not list unemployment benefits. However, the cash benefits component is worth considering, as the Final Rule states that cash transfers “must respond to the negative economic impacts of the pandemic on a household or class of households” and that “recipients may presume that low- and moderate-income households (as defined in the Final Rule), as well as households that experienced unemployment, food insecurity, or housing insecurity, experienced a negative economic impact due to the pandemic.”[6]

Last Revised: January 31, 2022

What are good practices for documenting and accounting for programs using federal funds?

As municipalities continue to spend aid and apply for additional grants and funding, they will find it helpful to regularly assess internal controls to ensure they have established measures sufficient to attempt to prevent mistakes or misconduct that might result in the misuse of federal funds. Municipalities can avoid clawbacks by preventing mistakes and deterring misconduct. Municipalities should consider safeguards that will make it more likely that they will be able to detect misappropriations or breaches of the rules governing the receipt and distribution of money.

Assessing internal controls is not only a best practice in grant management, but also something that the federal government expects municipalities to do. Specifically, 2 CFR 200.303, “Internal Controls,” states that:

[t]he non-federal entity must…[e]stablish and maintain effective internal control over the federal award that provides reasonable assurance that the non-federal entity is managing the federal award in compliance with federal statutes, regulations, and the terms and conditions of the federal award.[1]  

With the passage of numerous COVID-19 relief packages, municipalities have received millions of dollars from multiple funding sources that are then often passed on to subrecipients. In managing any grant program, the initial stage is the most important. Municipalities will find it difficult to adequately implement or monitor the grant program if their plan to manage, monitor, and oversee a funding program is not well-developed from the outset.[2]

Below are some suggested steps that municipalities can consider to strengthen the management of grant programs, including disbursements of funds to subrecipients. These steps may help prevent the misuse of funds and avoid potential clawbacks by federal auditors.

1. Leadership: Hire or contract a grant administrator with relevant grant administration experience and familiarity with the applicable Codes of Federal Regulation.
2. Transparency: Improve transparency with a data management system which serves as a central repository of information that: (i) accounts for the receipt and distribution of all grant funds; (ii) tracks the source and beneficiary of the funds; and (iii) justifies the proposed use of funds. A central repository can help manage a municipality’s relief programs and identify mistakes early in the process before they become larger or more systemic issues.
3. Risk Assessment: Analyze the terms and conditions of the award or subaward and conduct risk assessments to evaluate noncompliance risk. These assessments can also be employed to help determine the appropriate levels of oversight.[3] The following are examples of due diligence measures to be considered for inclusion in the risk assessments:

• Require subrecipients to complete a pre-award risk assessment questionnaire that will help determine the level of risk. The U.S. Department of Justice (“DOJ”) has provided a sample risk assessment questionnaire to help formulate and tailor specific assessment questionnaires - DOJ Sample Risk Assessment Questionnaire.
• Perform basic due diligence checks including (i) a SAM database search, available at https://sam.gov/content/exclusions, to determine if a person or entity is on the federal government excluded parties list and (ii) searches for recent liens, judgements, bankruptcy filings, etc. Municipalities can consider leveraging locally-based resources for due diligence expertise including banking and financial institutions, law enforcement, and regulatory agencies.
  • Many states and municipalities have their own debarment or excluded parties lists, and these should be checked as well.
• As part of the self-certification process, require the potential recipient to disclose all previously received grant funds as well as pending grant applications. Municipalities can consider accessing federal and local agency data sources and databases to randomly test the accuracy of these disclosures.

4. Subrecipient Agreement: Execute a subrecipient agreement or contract with the awarded entity. The following information can be considered for inclusion in the subrecipient agreement:

• Right-to-audit clause to provide future access to books and records maintained by subrecipients;
• Cooperation clause that obligates the subrecipient to cooperate with any future government review, audit, or investigation;
• Acknowledgement signed and in writing by subrecipients of having read and understood the federal grant requirements laid out in 2 CFR 200;[4]
• Language detailing the mechanism for the recovery of misspent grant money;
• Language describing the service to be provided and how it fits into the permissible uses of the grant program;
• Language requiring subrecipients to perform their own due diligence of employees, subcontractors, and vendors; and
• A certification that the information contained in the grant application and the subrecipient agreement is true and accurate; any false statements made as part of the certification or application can be prosecuted.

5. Oversight and Monitoring: A DOJ National Procurement Fraud Task Force (“NPFTF”) report titled “Best Practices for Combatting Grant Fraud” noted that grant awarding agencies are often focused on awarding the grant money and do not devote sufficient resources to the oversight of how those funds are spent. The report noted that awarding agencies often fail to: (i) sufficiently audit and review supporting documentation for grant expenditures; (ii) establish performance goals for programs; (iii) ensure that grantees submit performance data to demonstrate that grant monies are being used effectively and as intended; and (iv) properly close grants in a timely manner.[5] To try to detect and address program vulnerabilities before they potentially become systemic, municipalities can consider proactively performing oversight, auditing, and monitoring of their grant programs, including funds expended by subrecipients. To help ensure controls for proper documentation, tracking, and accountability are in place, municipalities can consider the following steps:

• Create internal policies that clearly communicate expectations regarding documenting and tracking expenditures and what procedures are to be followed to ensure accountability of the money spent. These policies should not only be distributed to the municipalities’ team but also to subrecipients. Subrecipients should acknowledge in writing that they have reviewed the policies and will adhere to the requirements.
• As part of the assessment process, make sure your municipality has sufficient resources in place to conduct assessments and provide oversight. If additional assistance is needed, consider hiring a private contractor or consultant to help supplement auditing and compliance staff. The various relief funds may provide the ability to use a portion of the federal funds to assist with the management of grant funding and aid. Refer to funding source guidance for more specific details.
• Clawbacks will most likely come as the result of an audit. As a result, prepare project documents in anticipation of an audit by creating an audit trail. The audit trail should include, but not be limited to: general ledgers that account for the receipt and disbursement of funds, budget records, payroll records to support payroll expenses related to COVID-19, contracts and subcontracts, and, where applicable, photographs supporting expenditures. 
• Consider starting your own municipal internal program audits as soon as possible. Regular proactive internal audits might help identify and correct issues that, if gone unnoticed, could result in future clawbacks.

6. Information Sharing Within and Among Agencies: The NPFTF report also noted that coordination and communication will help: (i) identify cross-cutting management sectors; (ii) spot problem grantees that accept awards from more than one agency; (iii) identify common fraud schemes; and (iv) provide opportunities for coordination and cooperation in outreach and training.[6] Municipalities may consider finding opportunities to maintain regular contact with local, state, and federal agencies in order to exchange lessons learned and to share best practices.

Date Revised: February 1, 2022

How can cities balance spending federal funds on transformative internal projects against the desire to give funds directly to the community?

Which year’s qualified census tract designations (“QCT”) are applicable under ARP and how should a city address changes in QCTs during the ARP-funded project?

Qualified Census Tracts (“QCTs”) are a common, readily accessible, and geographically granular method of identifying communities with a large proportion of low-income residents. Using an existing measure may speed implementation and decrease administrative burden, while identifying areas of need at a highly localized level.[1]

As per the U.S. Department of Housing and Urban Development (“HUD”) Federal Register Notice dated September 9, 2020, Statutorily Mandated Designation of Difficult Development Areas (“DDAs”) and Qualified Census Tracts for 2022, Section VIII Future Delegations, “HUD designates QCTs annually as new income and poverty rate data are released.”[2] In addition, “the 2022 lists of QCTs and DDAs are effective:

• For allocations of credit after December 31, 2021; or
• For purposes of IRC Section 42(h)(4), if the bonds are issued and the building is placed in service after December 31, 2021.

If an area is not on a subsequent list of QCTs or DDAs, the 2022 lists are effective for the area if:

• The allocation of credit to an applicant is made no later than the end of the 730-day period after the applicant submits a complete application to the Low-Income Housing Tax Credit (“LIHTC”) allocating agency, and the submission is made before the effective date of the subsequent lists.

For purposes of IRC Section 42(h)(4), if:

• The bonds are issued, or the building is placed in service no later than the end of the 730-day period after the applicant submits a complete application to the bond-issuing agency, and
• The submission is made before the effective date of the subsequent lists, provided that both the issuance of the bonds and the placement in service of the building occur after the application is submitted.”[3]

As outlined above, a QCT designation is good for at least two years (730 days after submission of an LIHTC application). Municipalities should check HUD notices to ensure they are using the most recent available data and should note this requirement in any policies and procedures for the program. As projects are implemented over a long period of time (implementation period), the municipality will likely only need to add the additional QCT designations. All previous designations will still apply, and they will not change going forward.[4]

The HUD, QCTs and DDAs can be located at: https://www.huduser.gov/portal/sadda/sadda_qct.html.

New or Modified Guidance

The Final Rule issued by the U.S. Department of the Treasury (“Treasury”) states that many different geographic, income-based, or poverty-based presumptions can continue to be used to designate disproportionately impacted populations or households. The Final Rule allows recipients to also presume that certain low-income households were disproportionately impacted by the pandemic, allowing additional flexibility to provide services to underserved households or communities, even those that may not be located within a QCT.[5] Data on household incomes is readily available at varying levels of geographic granularity (e.g., Census Tracts, counties).

Treasury notes that recipients may also identify other households, populations, and communities disproportionately impacted by the pandemic, in addition to those presumed to be disproportionately impacted.[6] The Final Rule recognizes categorical eligibility for the following programs and populations:

Impacted households: The Treasury will recognize a household as impacted if it otherwise qualifies for any of the following programs:

• Children’s Health Insurance Program (CHIP);
• Childcare Subsidies through the Child Care and Development Fund (CCDF) Program;
• Medicaid;
• National Housing Trust Fund (HTF), for affordable housing programs only; or
• Home Investment Partnerships Program (HOME), for affordable housing programs only.[7]

Disproportionately impacted households: The Treasury will recognize a household as disproportionately impacted if it otherwise qualifies for, or participates in, any of the following programs:

• Temporary Assistance for Needy Families (TANF);
• Supplemental Nutrition Assistance Program (SNAP);
• Free and Reduced-Price Lunch (NSLP) and/or School Breakfast (SBP) programs;
• Medicare Part D Low-income Subsidies;
• Supplemental Security Income (SSI);
• Head Start and/or Early Head Start;
• Special Supplemental Nutrition Program for Women, Infants, and Children (WIC);
• Section 8 Vouchers;
• Low-Income Home Energy Assistance Program (LIHEAP);
• Title I school attendance; or
• Pell Grants.[8]

Further, the Final Rule identifies a pathway to designate other disproportionately impacted classes. 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.[9] To augment their analysis, or when quantitative data is not readily available, recipients may also consider qualitative research and sources like resident interviews or feedback from relevant state and local agencies, such as public health departments or social services departments. In both cases, recipients should consider the quality of the research, data, and applicability of analysis to their determination.[10]

Last Revised: January 26, 2022

How should a municipality account for component government units, e.g., 911 agency, when calculating revenue?

Municipalities should generally include revenue from component government units in their calculations of revenue loss for the purposes of accessing revenue replacement funds from the Coronavirus State and Local Fiscal Recovery Funds ("CSLFRF").

The U.S. Department of the Treasury (“Treasury”)’s Final Rule implementing CSLFRF defines general revenue based on the components of “General Revenue from Own Sources” in the Census Bureau’s Annual Survey of State and Local Government Finances.[1] The Final Rule defines the term “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. General revenue also includes revenue from liquor stores that are owned and operated by state and local governments. General revenue does not include revenues from utilities, except recipients may choose to include revenue from utilities that are part of their own government as general revenue provided the recipient does so consistently over the remainder of the period of performance. Revenue from Tribal business enterprises must be included in general revenue.[2]

Further, the Final Rule defines “tax revenue” in a manner consistent with the Census Bureau’s definition of the term, with certain changes (i.e., inclusion of certain intergovernmental transfers). Current charges are defined as “charges imposed for providing current services or for the sale of products in connection with general government activities.” They include revenues such as those produced by public education institutions, public hospitals, and toll revenues. Miscellaneous general revenue comprises all other general revenue of governments from their own sources (i.e., other than utility and insurance trust revenue), including rents, royalties, lottery proceeds, and fines.[3]  

The Final Rule establishes the process for accounting for general revenues that are to be considered by a recipient for the purposes of the revenue loss calculation, with two exceptions: recipients that operate utilities which are part of their own government may choose whether to include revenue from these utilities in their revenue loss calculation, and revenue from recipient-owned liquor stores should be considered part of general revenue.[4]

In addition, the Final Rule excludes “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” from its definition of “general revenue.”[5] These activities are excluded to focus on sources generated from economic activity to support government services, rather than to account for a particular activity.[6]

All revenues included in the definition of general revenue are to be aggregated and calculated at the recipient level, rather than on an agency, fund, or revenue stream basis. Only the recipient itself should calculate revenue loss, as it is the aggregate revenue reduction of the recipient due to the public health emergency that is the critical figure to demonstrate declines in the recipients’ overall ability to pay for governmental services.[7] Likewise, the “provision of government services” eligible up to the amount of the recipient’s revenue loss can be provided generally on such government services, irrespective of the loss demonstrated by any specific agency, or fund.[8]

Dependent units of government, according to the U.S. Census Bureau Manual, lack “separate existence [which] is not attributed to entities lacking either fiscal or administrative independence.” Such governmental entities that lack fiscal or administrative independence, or the following characteristics, should likely generally be considered part of the recipient’s unit of government for the purposes of calculating revenue loss:

1. Control of the agency by a board composed wholly or mainly of parent government officials.
2. Control by the agency over facilities that supplement, serve, or take the place of facilities ordinarily provided by the creating government.
3. Provision that agency properties and responsibilities revert to the creating government after agency debt has been repaid.
4. Requirements for approval of agency plans by the creating government.
5. Legislative or executive specification by the parent government as to the location and type of facilities the agency is to construct and maintain.
6. Dependence of an agency for all or a substantial part of its revenues on appropriations or allocations made at the discretion of another state or local government.
7. Provision for the review and the detailed modification of agency budgets by another local government. County review of agency budgets in connection with statutory limitations on tax rates, however, is not, by itself, sufficient to establish lack of fiscal autonomy.[9]

For areas of uncertainty, the municipality may choose to assess the component unit in question and evaluate its revenue sources to understand whether they meet the standard of general revenue. As the definition of the General Revenue from Own Sources is based on the Census Bureau’s definition, the Census Bureau’s Government Finance Classification Manual can also be referenced in determining the correct classification of revenue.