What documentation will cities need to provide to show that city expenses are in response to the “public health emergency with respect to COVID-19 or its negative consequences”?

The American Rescue Plan Act of 2021 (“ARP”) grants broad, but not unlimited, discretion to local governments in using their allocations of Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) within four broad categories:

1. to respond to the COVID-19 public health emergency and its negative economic impacts;
2. to provide premium pay to essential workers;
3. to provide government services to the extent of eligible government revenue losses; and
4. to make necessary water, sewer, and broadband infrastructure investments.[1]

The U.S. Department of the Treasury’s (“Treasury”) CSLFRF Final Rule “clarifies and expands on how [CSLFRF] funds may be used for certain capital expenditures, including [the applicable] criteria and documentation requirements” in response to the public health emergency or its negative economic impacts.^[2]

The Final Rule states that:

Treasury provides presumptions and guidelines for capital expenditures that are enumerated earlier in sections Public Health, Negative Economic Impacts, and General Provisions: Other under the Public Health and Negative Economic Impact eligible use category . . . along with capital expenditures beyond those enumerated by Treasury. In addition to satisfying the two-part framework in Standards: Designating a Public Health Impact and Standards: Designating a Negative Economic Impact for identifying and designing a response to a pandemic harm, Treasury will require projects with total expected capital expenditure costs of $1 million or greater to undergo additional analysis to justify their capital expenditure. Increased reporting requirements will be required for projects that are larger in size, as well as projects that are not enumerated as eligible by Treasury . . . . Smaller projects with total expected capital expenditures below $1 million will not be required to undergo additional analysis to justify their capital expenditure, as such projects will be presumed to be reasonably proportional, provided that they are responding to a harm caused or exacerbated by the public health emergency. These standards and documentation requirements are designed to minimize administrative burden while also ensuring that projects are reasonably proportional and supporting­­ Treasury’s risk-based approach to overall program management and monitoring.^[3]­­­­

Recipients of CSLFRF must meet compliance and reporting requirements to ensure an equitable, transparent, and responsible recovery.[4] Treasury provides resources to help recipients understand how to comply with the guidelines set forth in ARP[5] and the Final Rule.[6] Most notably, Treasury recently updated the Compliance and Reporting Guidance[7] prescribing reporting requirements and deadlines with which recipients must comply. On January 24, 2022, Treasury also released the Project and Expenditure Report User Guide which provides additional information about the reports which recipients must complete. [8]

Good documentation practices include:

Demonstration of compliance and validation that the municipality met the rules and requirements of the different programs: Municipalities may have to forgo eligible funding or face de-obligation if they fail to meet documentation requirements or if they provide documentation that does not adequately support a claim under any given funding source. Municipalities should determine that a nexus to the COVID-19 public health emergency or its negative economic impacts exists in accordance with the eligible uses listed in the ARP and further addressed by the Final Rule.[9] Municipalities must be prepared to show documentation of their decision-making process. Municipalities will benefit from maintaining a record of all relevant documentation, such as invoices, proofs of payments, procurement methodologies, etc. To help prevent duplication of benefits (“DOB”), to demonstrate a nexus to the COVID-19 public health emergency or its negative economic impacts, and to maximize additional funding, it may be helpful to maintain documentation that is:

• detailed;
• stored centrally and electronically; and
• organized logically.

In addition to meeting the federal program requirements, municipalities should be prepared to show that they also followed the same policies and procedures they used for procurements from non-federal funds. A municipality’s procurement policies and procedures must comply with federal regulation at CFR 200.[10] Municipalities should designate a representative to: (i) track deadlines; (ii) monitor newly published guidance and regulations; and (iii) share pertinent information with internal representatives and external stakeholders. Municipalities may be subject to external audits.

Detailed tracking of costs is critical to avoiding duplication of benefits: No two funding sources can provide funding for the same item, service, or scope. In some cases, multiple funding sources may be eligible to provide funding for the same item, so each municipality must identify and choose which funding source will best meet its needs. For example, many COVID-19 funding sources may cover the cost of purchasing Personal Protective Equipment (“PPE”), so it is important to ensure that two or more funding sources are not used to reimburse the purchase of the same PPE, including donations.

The Compliance and Reporting Guidance states that “[r]ecipients 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.”[11]

Table 1: Internal controls good practices[12]

Last Revised: March 31, 2022

Are ARP funds "emergency" funds and, if so, do they therefore have the flexibility of emergency dollar disbursement protocols?

The American Rescue Plan Act (ARP) of 2021 recently passed and there are no compliance supplements from prior years for reference. Municipalities should thus exercise caution; a municipality that treats ARP funds as subject to emergency dollar disbursement protocols risks its ability to use the Coronavirus Local Fiscal Recovery Fund (CLFRF) monies for those purposes. On May 10, 2021, Treasury published guidance on the ARP and its various funding processes, but did not address whether the ARP funds will have the flexibility of emergency dollar disbursement protocols.

As background the ARP’s CLFRF is a form of federal financial assistance, making it subject to many of the provisions of the Uniform Guidance (2 CFR 200). ^[1]  

In question number 46 of the CLFRF Frequently Asked Questions (“FAQ”) ^[2] document issued on May 10, 2021, the U.S. Department of Treasury (Treasury) addressed which provision of 2 CFR Part 200 will be applicable:

“Most of the provisions of the Uniform Guidance (2 CFR Part 200) apply to this program, including the Cost Principles and Single Audit Act requirements. Recipients should refer to the Assistance Listing for detail on the specific provisions of the Uniform Guidance that do not apply to this program. The Assistance Listing will be available on beta.SAM.gov.”

In general, in the absence of any specific “emergency dollar disbursement protocols” language from Treasury, municipalities should follow their usual procurement policies and practices.  If a municipality would not pursue a disbursement transaction with its own funding, the municipality in all likelihood ought not consider doing so with CLFRF funds.  

Last Revised: May 24, 2021

May cities expend ARP funds to support events aimed at economic recovery, including tourism or supporting small businesses?

1. ARP General Guidance:

The U.S. Department of the Treasury’s (“Treasury”) Final Rule on the American Rescue Plan Act of 2021 (“ARP”) Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) provides guidance for municipal governments intending to use CSLFRF to respond to the COVID-19 public health emergency and mitigate the economic impacts of the pandemic.

Municipalities may use CSLFRF to support small businesses and affected industries, such as tourism. The Final Rule clarifies that the ARP provides for CSLFRF to be used 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.”[1] Whether expenditures for an event funded by a municipality for tourism and small businesses are eligible under the Final Rule depends on the facts and circumstances related to that event based on the eligibility criteria discussed below.

Furthermore, Treasury provides a framework to determine eligibility for using CSLFRF awards:

[W]hen assessing whether a program or service is an eligible use to respond to the public health impacts of the COVID–19 public health emergency, the Department will consider the two eligibility requirements discussed below… First, there must be a negative public health impact or harm experienced by an individual or a class…[and] Second, the program, service, or other intervention must address or respond to the identified [COVID-19 related] impact or harm.[2]

Treasury does not make transfers directly to nonprofits or private organizations, such as small businesses, as part of the CSLFRF. However, municipalities receiving CSLFRF allocations may transfer funds to a “private nonprofit organization … a Tribal organization … a public benefit corporation involved in the transportation of passengers or cargo, or a special-purpose unit of state or local government” as well as other constituent units of governments and other private entities.[3] Any such transferee is consequently a CSLFRF subrecipient and must comply with all regulations regarding the uses of such funds, including only using funds in manners determined to be eligible under the Final Rule, as well as subrecipient reporting requirements.[4] Additionally, the municipality is responsible for oversight of their subrecipients, as well as reporting upon the uses of the funds by the transferee as part of its regular CSLFRF reporting process.[5]

Note that the Final Rule maintains “that general economic development or workforce development, meaning activities that do not respond to negative economic impacts of the pandemic and rather seek to more generally enhance the jurisdiction’s business climate, would generally not be eligible under this eligible use category.”[6]

2. Tourism:

A CSLFRF recipient may provide aid to impacted industries, such as tourism, travel, and hospitality industries, to respond to the negative economic impacts of the pandemic. In the Final Rule, Treasury clarifies that aid to impacted industries should be limited to “businesses, attractions, business districts, and Tribal development districts that were operating prior to the pandemic and affected by required closures and other efforts to contain the pandemic.”[7] A recipient may also provide aid to support a “planned expansion or upgrade of tourism, travel and hospitality facilities delayed due to the pandemic.”[8]

The Final Rule specifies that aid may be used to implement COVID-19 response and infection prevention measures to enable safe resumption of tourism, travel, and hospitality services, such as:

• Improvements to ventilation;
• Physical barriers or partitions;
• Signage to facilitate social distancing;
• Provision of masks or personal protective equipment; and
• Consultation with infection prevention professionals to develop safe reopening plans. [9]

3. Small Businesses:

Under the Final Rule, small businesses need to be designated as either “impacted” or “disproportionately impacted” to be eligible to receive CSLFRF assistance to small businesses.[10]

The Final Rule defines a small business as one that “[h]as no more than 500 employees or, if applicable, the size standard in number of employees established by the Administrator of the Small Business Administration for the industry in which the business concern or organization operates,” and “[i]s a small business concern as defined in section 3 of the Small Business Act.”[11]

Municipalities may consider a number of factors to determine whether a small business has been impacted by the pandemic, including, but not limited to, decreased revenue or gross receipts; financial insecurity; increased costs; capacity to weather financial hardship; and challenges covering payroll, rent or mortgage, and other operating costs.[12] Assistance to small businesses that experienced such negative economic impacts may include loans or grants to mitigate financial hardship, such as by supporting payroll and benefits and costs to retain employees, and mortgage, rent, utility, and other operating costs, as well as technical assistance, counseling, or other services to support business planning.[13]

Disproportionately impacted small businesses include those operating in Qualified Census Tracts, operated by Tribal governments or on Tribal lands, or operating in the U.S. territories.[14] Such businesses are eligible for assistance including rehabilitation of commercial properties, storefront improvements and façade improvement; technical assistance, business incubators, and grants for start-up or expansion costs for small businesses; and support for microbusinesses, including financial, childcare, and transportation costs.[15]

Additionally, Treasury notes that “recipients may also designate a class of small businesses that experienced a negative economic impact or disproportionate negative economic impact (e.g., microbusinesses, small businesses in certain economic sectors), design an intervention to fit the impact, and document that the individual entity is a member of the class.”[16] For more information on designating a class of small businesses that experiences a negative or disproportionate negative economic impact from the COVID-19 public health emergency and designing a response to these harms, see pages 21-27 of the Final Rule.[17]

Treasury notes that uses of funds under these parameters:

[S]hould be assessed based on their responsiveness to their intended beneficiary and the ability of the response to address the impact or harm experienced by that beneficiary. Responses must also be related and reasonably proportional to the extent and type of harm experienced … uses that bear no relation or are grossly disproportionate to the type or extent of harm experienced would not be eligible uses.[18]

4.  Revenue Loss

Revenue loss may also be an applicable route for recipients to consider when pursuing economic recovery. Municipalities are permitted to use CLSFRF funds for the provision of government services up to the extent of the reduction in revenue or take the standard allowance of $10 million.[19] Although the enumerated set of eligible uses does not include events focused on supporting tourism and small businesses, such events could be considered services traditionally provided by governments and would thus be eligible uses of funds designated for replacement of lost revenue.[20] For more details, see pages 12-20 and 30-34 of the Overview of the Final Rule.[21]

5.  Additional Considerations

Relative to Public Health and Economic Impact use, the Final Rule further requires state, local, and Tribal governments to:

[P]ublicly report assistance provided to private-sector businesses under this eligible use, including tourism, travel, hospitality, and other impacted industries, and its connection to negative economic impacts of the pandemic. Recipients also should maintain records to support their assessment of how businesses were affected by the negative economic impacts of the pandemic and the aid provided in response to these impacts.[22]

Last Revised: April 1, 2022

What steps should a municipality take when planning how to allocate ARP funds?

Below are a few non-exhaustive steps municipalities can take to prepare for the distribution of funds: 

(1) Assess your government’s potential needs and uses for ARP funds:

Complete an Unmet Needs Assessment / Gap Analysis – As a first step, municipalities should (i) identify unmet needs in current and ongoing COVID-19 response and recovery operations; (ii) determine which COVID-19 response and recovery costs meet the municipality’s operational budgets (and which costs exceed the operational budgets); and (iii) determine which of those needs cannot be covered through additional funding sources provided through previous COVID-19 legislation, FEMA Public Assistance, or private funding sources. Examples of eligible uses for COVID-19 mitigation and prevention described in the Final Rule include: 

• vaccination programs;
• medical care;
• testing;
• contact tracing;
• support for isolation or quarantine;  
• support for vulnerable populations to access medical or public health services;
• public health surveillance (e.g., monitoring case trends, genomic sequencing for variants);
• enforcement of public health orders;
• public communication efforts;
• enhancement to health care capacity, including through alternative care facilities;
• purchases of personal protective equipment;
• support for prevention, mitigation, or other services in congregate living facilities (e.g., nursing homes, incarceration settings, homeless shelters, group living facilities) and other key settings like schools;
• ventilation improvements in congregate settings, health care settings, or other key locations;
• enhancement of public health data systems;
• public health responses; and
• capital investments in public facilities to meet pandemic operational needs, such as physical plant improvements to public hospitals and health clinics or adaptations to public buildings to implement COVID-19 mitigation tactics.[1]

Examples of eligible uses for COVID-19 medical expenses described in the Final Rule include: 

• costs related to medical care provided directly to an individual due to COVID-19 infection (e.g., treatment) or a potential infection (e.g., testing);
• medical costs to uninsured individuals;
• deductibles, co-pays, or other costs not covered by insurance;
• costs for uncompensated care at a health provider;
• emergency medical response costs; and
• excess health insurance costs due to COVID-19 medical care.[2]

Identify Capital Improvement Priorities – Municipalities should consider identifying existing capital plans that could be expedited through ARP funding and would assist the community in recovering from the COVID-19 public health emergency. Costs for water, sewer, and broadband infrastructure projects are included as allowable uses within the Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”).[3] Certain other capital improvement projects may be funded using the Replacing Lost Public Sector Revenue Expenditure Category (discussed in greater detail below).

Address Budget Impacts Through Revenue Loss Reimbursement – Municipalities can identify anticipated loss of revenue projections towards which CSLFRF funds may be applied. The U.S. Department of the Treasury’s (“Treasury)” Final Rule offers municipalities a standard allowance for revenue loss of $10 million, or recipients can choose to follow the established methodology to calculate its reduction in revenue.[4] If taking the latter approach, recipients compute the extent of their reduction in revenue by comparing their actual revenue to an alternative revenue number which represents what could have been expected to occur in the absence of the pandemic.[5]

Assess and Catalog Available Funding to Prioritize Needs – Municipalities should identify all available funding to create a strategy that defines when and how funds should be used, from most to least restrictive, to maximize all resources. Short-term and long-term fiscal impact of fund uses should also be considered. Cities should develop a fund deployment strategy that: (i) positively influences their credit rating; (ii) enables them to finance new projects; and (iii) assists in refinancing of existing debt.

(2) Engage stakeholders to identify priorities and additional unmet needs:

Coordinate with Community Partners – Municipalities should consider working with community partners in response to the COVID-19 public health emergency. Municipalities can receive feedback and strategic direction from community partners to identify ways they can support the community’s recovery, leverage existing partnerships and funding opportunities, and maximize the impact of ARP funds. In certain circumstances, CSLFRF funding may be shared with subrecipients responding to the COVID-19 public health emergency for both new and existing programs.[6]

Consider Public Engagement Opportunities – Municipalities should consider holding public hearings to obtain feedback from residents on ways to best serve the community in responding to and recovering from the COVID-19 pandemic.

(3) Prepare to Take Potential Certification Steps:

Certification for Metropolitan Cities – Metropolitan cities (generally populations over 50,000) can now apply to receive funds directly through the Treasury Submission Portal, and individuals applying on behalf of their municipality will be asked to provide the following information, at a minimum:

1. Jurisdiction name, taxpayer ID number, DUNS Number, and address.
2. Authorized representative name, title, and email.
3. Contact person name, title, phone, and email.
4. Funds transfer information, including recipient’s financial institution, address, phone, and routing number and account number.
5. Completed certification document (to be signed by the authorized representative).[7]

Certification for Non-Entitlement Cities – Non-entitlement cities are subject to rules and regulations of their state and generally are expected to receive guidance and payment from their state within 30 days of the state’s receipt of CSLFRF funds.[8]

(4) Assess Available Resources to Manage ARP Funds:

Municipalities in receipt of ARP funds are also responsible for ensuring proper oversight and management of funds. Based on each municipality’s unmet needs, additional internal resources may be required to monitor the implementation of ARP funds. Municipalities should assess internal resources and consult staff with significant experience to determine if there are any limitations or gaps in the support staff’s capabilities.

Considerations for Tribal Governments

In addition, Tribal governments should be aware of and prepare for the Treasury guidance regarding the disbursement in two tranches of Fiscal Recovery Funds specific to Tribes. Treasury’s CSLFRF Frequently Asked Questions (“FAQs”) document addressed this and then further refined this topic.[9]

The $1.9 trillion ARP funds are administered by numerous federal agencies, each of which sets its own rules regarding allowable uses of the funds. Distribution methodologies, application methods, and allowable uses vary from program to program. Some ARP funds may be received directly or indirectly by municipalities, as outlined below.

What steps should my municipality consider in developing a plan for use of the ARP funds?