Should sewage fees be included in a municipality’s revenue calculation?

The U.S. Department of the Treasury’s (“Treasury”) Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) Final Rule defines general revenue based on the U.S. Census Bureau’s “General Revenue from Own Sources” found in the Annual Survey of State and Local Government Finances.[1] Prior to Treasury’s Final Rule, revenue from utilities was excluded from general revenue.[2] However, the Final Rule has expanded 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 calculation.”[3]

In addition to the expanded definition of general revenue, the Final Rule provides municipalities the option to elect the standard allowance of up to $10 million dollars for the entire period of performance as an alternative to calculating revenue loss.[4]

Last Revised: March 3, 2022

How will premium pay be taxed?

The Internal Revenue Service (“IRS”) released Frequently Asked Questions (“FAQ”) regarding the taxability and reporting of Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”).[1]

IRS guidance states that premium payments are considered wages and therefore workers “must include the [premium] payment in gross income as compensation for services.”[2] This is the case “whether an amount is paid to [a recipient] by [its] state/local government, or by [its] employer, a payment that is in the nature of compensation for services is not excludable as a qualified disaster relief payment under section 139 of the Code.”[3]

From an employer perspective, premium pay payments are considered wages and employers must generally withhold federal income tax as well as social security tax and Medicare tax from employees’ wages.[4] Employers may also have to pay federal unemployment tax on the wages.[5]

Last Revised: April 1, 2022

What guidance should a municipality consider regarding the use of ARP funds to cover administrative costs?

The U.S. Department of the Treasury’s (“Treasury”) Final Rule on Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) affirms the use of CSLFRF for administrative expenses. Treasury clarifies:

direct and indirect administrative expenses are permissible uses of CSLFRF funds and are a separate eligible use category from “expenses to improve efficacy of public health or economic relief programs,” which refers to efforts to improve the effectiveness of public health and economic programs through use of data, evidence, and targeted consumer outreach.[1]

In the Final Rule, Treasury provides several categories of eligible administrative expenses. First, recipients may use funds for administrative costs to improve the efficacy of public health or economic relief programs through tools like program evaluation, data analysis, and targeted consumer outreach.[2]

In addition, recipients may use funds for 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.[3] Treasury recognizes that responding to the public health and economic impacts of the pandemic requires many programs and activities, some of which are not funded by CSLFRF. Executing these programs effectively is considered part of responding to COVID-19.

Recipients may also use funds for direct and indirect administrative costs for administering the CSLFRF program and projects funded by the CSLFRF program.[4] Additional information that may be helpful in evaluating the use of CSLFRF for administrative expenses can be found in Treasury’s Compliance and Reporting Guidance.[5] Administrative costs must be reasonable, allocable, and accounted for consistently.[6]

CSLFRF recipients are required to adhere to the requirements of 2 CFR Part 200, Subpart E, Cost Principles.[7] Under 2 CFR Part 200.413, administrative costs that are typically charged to federal awards include, “compensation of employees who work on that award, their related fringe benefit costs, the costs of materials and other items of expense incurred for the Federal award.”[8] Municipalities should consider establishing payroll and finance account codes to track all time charged to activities that will be paid for under CSLFRF. These costs should be separated from work charged to other funding sources including but not limited to FEMA Public Assistance, Coronavirus Relief Funds, or other local, state, and federal funding sources to ensure no duplication of federal benefits. 

Last Revised: March 7, 2022

Are upgrades to network fiber and cybersecurity infrastructure eligible uses of ARP funds?

Municipalities may use Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) for upgrades to network fiber and cybersecurity infrastructure that are not directly tied to water or sewer infrastructure projects.

Sections 602(c)(1)(C) and 603(c)(1)(C) of the American Rescue Plan Act of 2021 (“ARP”) provide recipients with broad latitude to use CSLFRF funds for the provision of government services, to the extent of reduction in revenue.[1] Government services can include, but are not limited to: (i) maintenance or pay-go funded building of infrastructure, including roads; (ii) modernization of cybersecurity, including hardware, software, and protection of critical infrastructure; (iii) health services; (iv) environmental remediation; (v) school or educational services; and (vi) the provision of police, fire, and other public safety services.[2]

The CSLFRF Final Rule also significantly broadens eligible broadband infrastructure investments to address challenges with broadband access, affordability, and reliability, and adds eligible water and sewer infrastructure investments, including a broader range of lead remediation and stormwater management projects.[3]

Under the Final Rule, CSLFRF funds can be used for eligible investments in broadband, which are those that are designed to provide services meeting adequate speeds and are provided to unserved and underserved households and businesses. Understanding that recipients have a wide range of broadband infrastructure needs, the Final Rule provides them with “flexibility to identify a need for additional broadband infrastructure investments: examples of need include lack of access to a connection that reliably meets or exceeds symmetrical 100 Mbps download and upload speeds, lack of affordable access to broadband service, or lack of reliable broadband service.”[4] To meet the immediate needs of unserved and underserved households and businesses, recipients are encouraged to focus on projects that deliver a physical broadband connection by prioritizing fiber-optic infrastructure wherever feasible, focusing on projects that achieve “last-mile” connections.[5]

Additionally, the Final Rule requires recipients to address the affordability needs of low-income consumers in accessing broadband networks funded by CSLFRF.[6] To do so, Treasury states that:

Recipients must require the service provider for a completed broadband infrastructure investment project that provides service to households to either participate in the Federal Communications Commission’s (“FCC”) Affordable Connectivity Program (“ACP”), or otherwise provide access to a broad-based affordability program to low income consumers in the proposed service area of the broadband infrastructure that provides benefits to households commensurate with those provided under the ACP.[7]

Treasury also encourages recipients to prioritize support for broadband networks owned, operated by, or affiliated with local governments, non-profits, and co-operatives’ providers with less pressure to turn profits and with a commitment to serving entire communities.[8]

Treasury allows for modernization of cybersecurity for existing and new broadband infrastructure as an eligible use of CSLFRF funds.[9] Although modernization of cybersecurity is an eligible use of funds, the Final Rule highlights that recipients should carry out investments in broadband infrastructure in ways that comply with applicable federal laws.[10]

Last Revised: February 16, 2022

May a municipality make repairs to a city-owned convention center as a governmental service to the extent of revenue loss?

Revenue Loss and the Provision of Government Services

A major component of the Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) is that it allows municipalities to address reductions in revenue due to the COVID-19 pandemic by using revenue replacement funds for the provision of government services. Regarding the eligibility of different “government services” for CSLFRF funding, the Final Rule clarifies that:

[G]enerally speaking, services provided by the recipient governments are “government services” under the interim final rule and final rule, unless Treasury has stated otherwise. Government services include, but are not limited to, maintenance or pay-go funded building of infrastructure, including roads; modernization of cybersecurity, including hardware, software, and protection of critical infrastructure; health services; environmental remediation; school or educational services; and the provision of police, fire, and other public safety services. The aforementioned list of government services is not exclusive. However, recipients should be mindful that other restrictions may apply, including those articulated in the section Restrictions on Use.[1]

Although city-owned convention centers are not explicitly mentioned in the Final Rule, an important consideration is whether the contemplated repairs comport with the Final Rule’s requirement that revenue replacement funds be used for the provision of “government services.” Unless stated otherwise, government services include any service traditionally provided by the government.[2] Government services specified by Treasury include (as quoted above) “maintenance or pay-go funded building of infrastructure... and protection of critical infrastructure,” and as such, the critical inquiry is whether the maintenance on the convention center constitutes a “government service.”[3]

Potential uses that do not fall within other eligible use categories (e.g., responding to the public health and negative economic impacts of the pandemic; providing premium pay to essential workers; or making necessary investments in water, sewer and broadband infrastructure) may nevertheless be permissible as the provision of an eligible government service, which recipients can fund up to their amount of revenue loss.[4] Treasury allows the loss amount to be calculated by either using the revenue loss formula or using the standard allowance provision, a one-time election of $10 million to use under the lost revenue clause for the entire period of performance.[5] Recipients that select the standard allowance may use up to that amount for government services.[6]

Infrastructure spending beyond the amount allocated under the revenue loss provision is considered an ineligible expense, with exceptions for spending on water, sewer, and broadband investments.[7] For infrastructure spending to be eligible under another expense category, such as negative economic impacts, the project would need to respond to a specific pandemic public health need or negative economic impact.[8]                                                                                                       

It is important to recognize that, in making any determinations relative to use of funds, recipients must follow key compliance principles to substantiate use of funds and maintain a robust documentation and compliance system.[9]

Capital Expenditures

Capital expenditures: “…must be related and reasonably proportional to the pandemic impact identified and reasonably designed to benefit the impacted population or class.”[10] This is related to the public health or negative economic impact category and is not part of the revenue loss category analysis. Construction of convention centers or other large capital projects intended for general economic development are ineligible uses of funds.[11] Specifically, Treasury states:

Large capital expenditures intended for general economic development or to aid the travel, tourism, and hospitality industries – such as convention centers and stadiums – are, on balance, generally not reasonably proportional to addressing the negative economic impacts of the pandemic, as the efficacy of a large capital expenditure intended for general economic development in remedying pandemic harms may be very limited compared to its cost.[12]

However, when evaluating potential capital expenditure projects, Treasury recommends that recipients consider the possibility of improving existing capital assets that a municipality already owns.[13] In such a case, municipalities may review the framework for eligible uses beyond those enumerated to clarify the eligibility of the capital expenditure project.

Last Revised: February 24, 2022

How should cities document use of ARP and other federal funds?

Part I: Basic Documentation Requirements 

The U.S. Department of the Treasury’s (“Treasury”) Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) Final Rule[1] directs recipients to the supplemental guidance such as the CSLFRF Compliance and Reporting Guidance[2] for the requirements on documenting the use of American Rescue Plan Act of 2021 (“ARP”) funds.

There are several requirements for appropriate and accurate reporting for CSLFRF recipients. Municipalities must consider reporting requirements in three areas: (i) procurement processes, (ii) written policies, and (iii) documentation, each of which is addressed below. Municipalities should also review the Reporting User Guide[3] and Recovery Plan Template found in Treasury’s guidance of August 9, 2021.[4]  

Municipalities may choose to designate representatives to track deadlines, monitor newly published guidance and regulations, and share them with internal representatives and external stakeholders. Municipalities should also consider local needs when evaluating projects and handling procurement and must document all expenditures accurately and diligently.

Procurement Processes

First, recipients of federal funding should follow the guidance set forth in 2 CFR Part 200 - Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (the “Uniform Guidance”).[5] The Uniform Guidance applies to all federal programs, along with any program-specific regulations. The CSLFRF Compliance and Reporting Guidance[6] requires recipients to follow Uniform Guidance at 2 CFR 200.317 through 2 CFR 200.327 for procurement standards.

The Federal Emergency Management Agency’s (“FEMA”) “Top 10 Procurement under Grants Mistakes” contains additional important guidance. It highlights key risks applicable to all federal grant opportunities.[7]

Treasury’s Overview of the Final Rule includes key provisions and critical principles that municipalities must follow. This overview contains a brief summary of eligible uses of ARP funds that may need procurement activities.[8] In addition, Treasury’s CSLFRF Frequently Asked Questions (“FAQs”) provides details about eligible uses where procurement may be needed to fulfill delivery of services to a community.[9]

The FEMA Audit-Related Guidance for Entities Receiving FEMA Public Assistance Funds Fact Sheet contains information on appropriate preparatory steps and good practices.[10]

Written Policies

Each municipality should consider employing a written policy that delineates requirements when applying ARP funds to expenditures. In some cases, municipalities may find it prudent to mirror state processes that already follow federal procurement rules. If there are no local standardized or written procurement policies in place, municipalities can look to the state rules to help them access ARP funding; Coronavirus Aid, Relief, and Economic Security (“CARES”) funding; and disaster-related awards such as FEMA Public Assistance (“FEMA PA”) or FEMA Hazard Mitigation Grant Program (“HMPG”) funding, all of which could become necessary in the future.

To facilitate accurate documentation, municipalities should implement a robust policy and/or decision checklists to ensure that the expenses meet the definitions of eligible use under the particular grant/award. Designating multiple personnel to participate in the evaluation process using the same criteria provided by each funding type can help ensure that the expenses meet the outlined priorities for each funding stream.

Documentation

Reporting requirements for federal grants have many similarities, such as quarterly expenditure reports and detailed procurement processes as described above. Specific ARP documentation obligations are reported throughout the Final Rule,[11] the CSLFRF FAQs (for eligible use definitions), and the CSLFRF Compliance and Reporting Guidance.

The Compliance and Reporting Guidance describes the three types of reports that must be submitted to Treasury for CSLFRF: the Interim Report, the Project and Expenditure Report, and the Recovery Plan Performance Report.[12]

• The Interim Report “is a one-time interim report with expenditures by Expenditure Category covering the period from March 3rd to July 31, 2021, [submitted] by August 31, 2021 or sixty (60) days after first receiving funding if the recipient’s date of award is between July 15, 2021 and October 15, 2021.”[13] The Interim Report is not a requirement for NEUs.
• The Project and Expenditure Report is explained in detail to include the different documentation requirements for each expenditure category. Based on the type of entity, the initial Project and Expenditure Report is either due to Treasury by January 31, 2022 and then quarterly, or due to Treasury by April 30, 2022 and only required annually. [14]  
• The third type of report is the Recovery Plan Performance Report required of states, U.S. territories, metropolitan cities, and counties with populations exceeding 250,000 residents. “The Recovery Plan will provide the public and Treasury information on the projects recipients are undertaking with program funding and how they are planning to ensure program outcomes are achieved in an effective, efficient, and equitable manner.”[15] The initial Recovery Plan should have been submitted to Treasury by August 31, 2021 or 60 days after receiving funding.[16]

Some additional federal guidance on documentation for ARP funds includes:

• April 19, 2021, Treasury Office of Inspector General (“OIG”) Coronavirus Relief Fund Prime Recipient Quarterly Grant Solutions Submissions Monitoring and Review Procedures Guide.[17]
• March 2, 2021, Treasury OIG Coronavirus Relief Fund Frequently Asked Questions Related to Reporting and Recordkeeping (Revised).[18]
• July 2, 2020, Treasury OIG Coronavirus Relief Fund Reporting and Record Retention Requirements.[19]
• December 2020, Treasury Coronavirus Relief Fund Compliance Addendum.[20]

Part II:  Linking COVID-19 Impact to Potential Municipal Projects

The Recovery Plan Performance Report includes a Uses of Funds section that describes how the specific needs of the jurisdiction are being addressed. The CSLFRF Compliance and Reporting Guidance explains how this should relate to recovery from the COVID-19 pandemic and economic impacts.[21] The Compliance and Reporting Guidance also provides required performance indicators and programmatic data for each expenditure category to be included in the Recovery Plan Performance Report. The recipient is given flexibility on additional key performance indicators and how they are presented. “While the initial report will focus heavily on early output goals, recipients must include the related outcome goal for each project and provide updated information on achieving these outcome goals in annual reports.”[22]

Certain uses of ARP funds require a specific connection to the impacts of the COVID-19 pandemic, but FAQ guidance states that “funds made available for the provision of governmental services (to the extent of reduction in revenue) are intended to support direct provision of services to citizens” and may allow for activities that conform to the August 9, 2021, Treasury Compliance and Reporting Guide and Recovery Plan Template.[23]

Treasury’s CSLFRF guidance, including the Quick Reference Guide, contains information on programmatic eligibility. The section of the Reference Guide entitled “Example Uses of Funds,” lists “[b]ehavorial healthcare services, including mental health or substance abuse treatment, crisis intervention, and related services” as examples of fund usages that support a public health response.[24] In addition, the FAQs describe eligible uses within the health infrastructure and incorporate an expanded definition of medical staff and public health employees[25] as well as public safety projects.[26]

The FAQs expand upon eligible uses of funds relating to social distancing investments for small businesses and non-profits.[27] They discuss the definition of public safety employees[28] and expand upon the housing and equity-focused educational disparities discussed in the Final Quick Reference Guide,[29] as further explained in the FAQs.[30]

For municipal projects that do not have a clear eligible use category that ties to the COVID-19 public health emergency, consult the Treasury Recovery Plan Template Table of Expenses.[31] It is recommended that the municipality seek clarification from Treasury for the program it proposes to implement if the use is not clarified in the Final Rule.

Notably, additional information may be provided when Treasury issues new Frequently Asked Questions ("FAQ") specific to the Final Rule.[32] In addition, Treasury has encouraged 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.[33]

Last Revised: February 16, 2022

How should a municipality document the COVID-19 nexus for infrastructure projects outside of the specified eligibility categories?

The U.S. Department of the Treasury’s (“Treasury”) Final Rule on the Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) significantly expands eligibility criteria for infrastructure, broadening eligible broadband infrastructure investments to address challenges with broadband access, affordability, and reliability, as well as adding additional eligible water and sewer infrastructure investments, including a broader range of lead remediation and stormwater management projects.[1]

With broadened eligibility under the Final Rule, CSLFRF funds may be used to fund additional types of projects, such as:

• expanding the scope of the eligible use of funds for water and sewer projects to include culvert repair, dam and reservoir rehabilitation​; and[2]
• enlarging the eligible pool of broadband infrastructure investments to ensure better connectivity to broader populations​.[3]

In addition to changes in infrastructure project eligibility, the Final Rule offers a standard allowance for revenue loss of $10 million, allowing recipients to select between a standard amount of revenue loss or complete a full revenue loss calculation.[4] Recipients that select the standard allowance[5] may use that amount to provide government services. The Final Rule defines “government services” as “any service traditionally provided by a government, including construction of roads and other infrastructure, provision of public safety and other services, and health and educational services.”[6]

Regarding the applicable reporting requirements, it is the recipient’s responsibility to ensure that all CSLFRF award funds are used in compliance with these requirements. Relatedly, recipients should be mindful of any additional compliance obligations that may apply. These may include additional restrictions imposed upon other sources of funds used in conjunction with CSLFRF award funds, or statutes and regulations that may independently apply to water, broadband, and sewer infrastructure projects.[7] Recipients should ensure they maintain proper documentation supporting determinations of costs and applicable compliance requirements, and how they have been satisfied as part of their award management, internal controls, and subrecipient oversight and management.[8]

For all projects listed under the Water, Sewer, and Broadband Expenditure Categories (see all infrastructure projects [Expenditure Category (EC) 5] located in Treasury’s Compliance and Reporting Guidance), more detailed project-level information is required. Each project will be required to report expenditure data as described in the Compliance and Reporting Guidance, but will also report the following information:

• Projected/actual construction start date (month/year)
• Projected/actual initiation of operations date (month/year)
• Location (for broadband, geospatial location data)
• For projects over $10 million (based on expected total cost):
  • A recipient may provide a certification that, for the relevant project, all laborers and mechanics employed by contractors and subcontractors in the performance of such project are paid wages at rates not less than those prevailing, as determined by the U.S. Secretary of Labor in accordance with subchapter IV of chapter 31 of title 40, United States Code (commonly known as the “Davis-Bacon Act”), for the corresponding classes of laborers and mechanics employed on projects of a character similar to the contract work in the civil subdivision of the state (or the District of Columbia) in which the work is to be performed, or by the appropriate state entity pursuant to a corollary state prevailing-wage-in-construction law (commonly known as “baby Davis-Bacon Acts”). If such certification is not provided, a recipient must provide a project employment and local impact report detailing:
    • The number of employees of contractors and sub-contractors working on the project;
    • The number of employees on the project hired directly and hired through a third party;
    • The wages and benefits of workers on the project by classification; and
    • Whether those wages are at rates less than those prevailing.[9]

Recipients must maintain sufficient records to substantiate this information upon request. A recipient may provide a certification that a project includes a project labor agreement, meaning a pre-hire collective bargaining agreement consistent with section 8(f) of the National Labor Relations Act (29 U.S.C. 158(f)). If the recipient does not provide such certification, the recipient must provide a project workforce continuity plan, detailing:

• how the recipient will ensure the project has ready access to a sufficient supply of appropriately skilled and unskilled labor to ensure high-quality construction throughout the life of the project;
• how the recipient will minimize risks of labor disputes and disruptions that would jeopardize timeliness and cost-effectiveness of the project;
• how the recipient will provide a safe and healthy workplace that avoids delays and costs associated with workplace illnesses, injuries, and fatalities;
• whether workers on the project will receive wages and benefits that will secure an appropriately skilled workforce in the context of the local or regional labor market;
• whether the project has completed a project labor agreement;
• whether the project prioritizes local hires; and
• whether the project has a Community Benefit Agreement, with a description of any such agreement.[10]

Regarding revenue replacement funds, Treasury specifies that funds spent to provide government services (including infrastructure spending) are subject to streamlined reporting and compliance requirements.[11] As mentioned above, to ease the burden on recipients and account for anomalous variations in revenue, Treasury has incorporated a “standard allowance” option into the Final Rule. A recipient may choose to use the standard allowance, which under the Final Rule is set at $10 million, as an alternative to calculating revenue loss.[12] For reporting requirements under the revenue loss provision, refer to the Compliance and Reporting Guidance section titled revenue replacement (EC 6.1). [13]  

Last Revised: February 16, 2022

Given that ARP revenue replacement funds should not flow into restricted purpose funds (e.g. pension/reserves), how can cities keep revenue replacement funds separate, when it is not normal practice to categorize revenues into specific expense items?

A municipality can use the Coronavirus State and Local Fiscal Recovery Funds (“CSFRF”/ CLFRF”/ or “Fiscal Recovery Funds”) for the “provision of government services to the extent of the reduction in revenue experienced due to the COVID-19 public health emergency.”[1] Therefore, a municipality must first calculate the revenue loss consistent with the guidelines contained in the American Rescue Plan Act (“ARP”) and the U.S. Treasury Department’s (“Treasury”) Interim Final Rule (“the Rule”). After completing this step, a municipality must track the CLFRF expenditures used for the “provision of government services to the extent of the reduction in revenue experienced.”[2]

Many municipalities use their financial management system tools for tracking and management purposes, such as a chart of accounts and/or a project/grants module. For example, many municipalities have a separate Fund Number to signify a Grant Fund, use a separate Appropriation Number to distinguish the individual award (i.e., Fiscal Recovery Funds in this case), and use another segment of the chart of accounts to track the CLFRF eligibility categories (i.e., provision of government services to the extent of the reduction in revenue experienced in this case). By using these practices, a municipality would not associate this account string with replenishing financial reserves or pension deposits.

The Rule also adopts a definition of “General Revenue” as a means to identify revenue sources that can be used to calculate revenue loss. Treasury names the Census Bureau’s Annual Survey of Local Government Finances as a source of additional context for municipalities to determine which funds can be included in the calculation of revenue loss.[3] In addition to excluding reserve/pension funds, Treasury also excluded: (i) refunds and other correcting transactions; (ii) proceeds from issuance of debt or the sale of investments; (iii) agency or private trust transactions; (iv) revenue generated by utilities and insurance trusts; and (v) intergovernmental transfers from the federal government, including federal transfers made via a state to a locality pursuant to the Coronavirus Relief Fund (“CRF”) or the Fiscal Recovery Funds.[4] Municipalities should be consistent in calculating revenue loss, and include the same specific funding sources for the duration of the covered period that extends through December 2024.

Regarding pension deposits, Treasury interprets “deposit” as an “extraordinary payment into a pension fund for the purpose of reducing an accrued and unfunded liability.”[5] This type of payment is distinct from a “payroll contribution”; therefore, in general, “if an employee’s wages and salaries are an eligible use of Fiscal Recovery Funds, recipients may treat the employee’s covered benefits as an eligible use of Fiscal Recovery Funds.”[6]

Last Updated: June 22, 2021

We understand that ARP funds must be “obligated” by 2024 but expended by 2026. What specifically meets the definition of “obligated”?

The American Rescue Plan Act of 2021 (“ARP”) states that the Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) can be used to cover costs incurred by December 31, 2024.[1] The U.S. Department of the Treasury’s (“Treasury”) CSLFRF Final Rule specifies the “interpretation of ‘incurred’ to be equivalent to the definition of ‘obligation,’ based on the definition used for purposes of the [Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, 2 CFR § 200 (the ‘Uniform Guidance’)].”[2]

In 2 CFR § 200.71, the Uniform Guidance defines “obligation” as “orders placed for property and services, contracts and subawards made, and similar transactions during a given period that require payment by the non-Federal entity during the same or a future period.”[3] In other words, funds must be committed to particular eligible uses by the end of 2024. Funds may be expended after 2024 so long as the payment occurs before December 31, 2026.

The Final Rule states that recipients “must return any funds not obligated by December 31, 2024. A recipient must also return funds obligated by December 31, 2024 but not expended by December 31, 2026.”[4]

Last Revised: March 16, 2022

How should a municipality calculate its lost revenue?

What factors should municipalities consider when attempting to create a stabilization fund to help offset COVID-19-related financial losses?

A stabilization fund is, in essence, a rainy-day fund or budget reserve fund, and is not considered an eligible use of Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”). Specifically, the U.S. Department of the Treasury’s (“Treasury”) Final Rule provides that the following uses of funds are not eligible under the revenue replacement eligible use category:

Contributions to rainy day funds, financial reserves, or similar funds; payment of interest or principal on outstanding debt instruments; fees or issuance costs associated with the issuance of new debt; and satisfaction of any obligation arising under or pursuant to a settlement agreement, judgment, consent decree, or judicially confirmed debt restructuring plan in a judicial, administrative, or regulatory proceeding, except to the extent the judgment or settlement requires the provision of services that would respond to the COVID-19 public health emergency.[1]

The replenishment of a rainy-day fund is not an eligible use of CSLFRF either to respond to the public health emergency and its negative economic impacts, or as a provision of government services to the extent of revenue loss.[2] Similarly, funds made available for the provision of governmental services (to the extent of reduction in revenue) are intended to support direct provision of services to citizens. Contributions to rainy day funds are not considered a provision of government services since such expenses do not directly relate to the provision of services to constituents.[3]

When contemplating the creation of a stabilization fund, municipalities should consult the guidance provided by the Government Finance Officers Association (“GFOA”), which may be adapted to the municipality’s specific intent.[4] The following are some strategic factors that municipalities may consider:

1. Existing state or local legislation or policies that govern stabilization funds

The municipality must also comply with existing state or local laws as well as policies that address stabilization funds. A planned new stabilization fund must not contravene those laws.

2. How the stabilization fund will be created

Stabilization funds are generally created by legislation (approved by a legislative body), administratively (approved by the executive branch), or through another approach (approved by an independent body or a body with legislative and/or executive representatives). Municipalities should consider their respective jurisdictions’ legislation, ordinances, and other requirements along with the responsibilities of various branches of government and/or administrative bodies when determining the best approach.

Moreover, a stabilization fund’s design may impact how credit rating agencies view the fund. Municipalities should consider reviewing credit rating methodologies with their financial advisors and/or debt management staff to understand those perspectives prior to making a determination as to the best approach.

3. The policies that govern the stabilization fund

Municipalities should consider policies that govern stabilization funds and how the fund operates. The factors to consider will ultimately be determined by the exact type of stabilization fund that the municipality seeks to create. In general, factors to consider may include uses, replenishment, reporting requirements, and risks.

• Uses: What can (and cannot) the fund be used for? How flexible or specific are the uses? What is the time period for using the fund? What are the processes for using the fund?
• Replenishment: Does the fund need to be replenished and, if so, over what time period?
• Reporting: Is it required to report to the legislative branch, executive branch, or other stakeholders on the use of funding? What data points may stakeholders require and/or be interested in monitoring via reporting? How will leadership use reporting to drive decision-making?
• Risks: Is the municipality more susceptible, for example, to natural disasters that may deplete stabilization funds more quickly? It is important to articulate these types of risks in the policy so that stakeholders have transparency on the fund rationale.

Policies should clearly delineate roles and responsibilities and, where applicable, explain the rationale(s) behind specific policy components.

4. The amount or size of the stabilization fund

Municipalities must consider the intended use of the fund, volatility of revenue sources, the municipality’s susceptibility to disasters (including COVID-19), and the current or potential state actions that may impact future revenue.

For example, GFOA recommends “at a minimum, that general-purpose governments, regardless of size, maintain unrestricted budgetary fund balance in their general fund of no less than two months of regular general fund operating revenues or regular general fund operating expenditures.”[5] Alternatively, credit rating agencies view reserve levels more or less favorably based on their own methodologies. It is recommended to review credit rating methodologies with the municipality’s financial advisor and/or debt management staff.

If the stabilization fund is to be used for COVID-19-related financial losses, a municipality may consider estimating the temporary and permanent impact COVID-19 has had on revenues and expenditures. That impact should be taken into consideration when determining an appropriate amount or size. Estimations should remain reasonable, transparent, and compliant with any policies, guidelines, or other legislative requirements.

Some questions a municipality should ask and answer include: What lost revenue from COVID-19 is expected to be regenerated? Are there permanent changes to specific revenue streams post-COVID-19? Are there one-time fluctuations in expenditures, and if so, how long is that fluctuation projected for? Are there permanent changes in expenditures due to COVID-19-related changes in government operations, services, or programs?[6]

The municipality should also consider which funding source(s) may be used to build a stabilization fund. Federal funds have a prescribed purpose and intent, so a municipality should review the specific rules and regulations associated with federal funds to determine if these funds may be used to build a stabilization fund.

What are some best practices to ensure the efficient and expeditious distributions of federal stimulus funds, while involving necessary stakeholders in the disbursement process?

Municipalities can prioritize including and incorporating feedback from key community stakeholders. These stakeholders, including local residents, business owners, chambers of commerce, and civic leaders, are often the best source available for understanding local needs. Their ability to reach out to communities that are traditionally underrepresented, such as immigrant populations, seniors, and students, will make them important partners in administering federal funding.^[1]

Below are some good practices for municipalities to consider in facilitating the efficient and expeditious distribution of funds while incorporating community stakeholders, taking into consideration the relevant federal funding source and municipality capacity:

• Understanding and setting expectations regarding scope and eligibility of each funding source before any stakeholder engagement. Funding source eligibility requirements may include, but are not limited to:
  • required local match;
  • timelines;
  • eligibility;
  • reporting requirements;
  • compliance requirements; and
  • monitoring requirements.
• Identifying relevant funding source deadlines, including application, expenditure, and reporting deadlines and closeout requirements.
  • Ensuring that these timelines and deadlines are easy to understand and accessible to stakeholders.
• Understanding and communicating any federal or local match requirements during preliminary discussions with stakeholders.
• Understanding the structure of fund distribution (i.e. reimbursement, direct allocation, etc.)
• Identifying potential stakeholders including (but not limited to) civic society organizations, chambers of commerce, not-for-profits, local residents, civic leaders, and government entities that would be eligible to receive funding based on funding eligibility criteria.
• Ensuring awareness and implementation of all notice and public hearing requirements, as required by federal regulations or local jurisdiction requirements.
• Setting up town hall meetings (in-person or virtually) with local community groups in order to solicit questions, garner feedback, and review funding sources, eligibility, and distribution plans.
• Participating in local community meetings (in-person or virtually) to educate the community on these funding sources, timelines, and what relief is available.
  • Conducting presentations and distributing outreach literature, ensuring that materials are available in the relevant local languages (typically defined in local or municipal laws).
  • Setting up a municipal website and opening a hotline for residents to submit questions regarding the eligible funding sources.
• Working with local chambers of commerce and civic leaders to identify critical community needs. A bottom-up approach will ensure community members are included and feel invested in the decision-making process.

Based on the municipality’s priorities, it is critical to set goals and expectations with the community from the start. The above practices can build a solid foundation for grant administration and delivery down the road thus ultimately facilitating fund distribution more quickly.