In calculating revenue reduction, when should municipalities use a 4.1% revenue growth rate instead of the “average annual revenue growth in the three full fiscal year prior to the COVID-19 public health emergency"?

Recipients should consider using the 5.2% revenue growth rate for the calculation of revenue loss[1] under the U.S. Department of the Treasury’s ("Treasury") Final Rule on the Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) instead of the “average annual revenue growth in the three full fiscal years prior to the COVID-19 public health emergency” when:

1. they choose not to take advantage of the new standard allowance for revenue loss;[2] or
2. 5.2% exceeds the recipient's average annual revenue growth in the three full fiscal years prior to the public health emergency.[3]

Under the standard allowance introduced in the Final Rule, Treasury allows recipients to make a one-time selection of $10 million under the lost revenue clause. If selecting this option, the recipient does not need to calculate its revenue loss on an annual basis and can use the $10 million (not to exceed the award amount) to fund “government services over the course of the [CSLFRF] period of performance.”[4] Treasury has introduced this option to provide recipients with “the flexibility to use minimal administrative capacity on the [revenue loss] calculation if desired.”[5]

Alternatively, recipients may use a formula articulated in the Final Rule to calculate revenue loss. This formula can be found on pages 236 through 237 of the Final Rule, and the steps for calculating revenue loss per this formula are also provided below.[6] The formula directs recipients, including municipalities, to compare actual revenue to a “counterfactual trend representing what could have plausibly been expected to occur in the absence of the pandemic.”[7] 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.”[8] Revenue reduction equals the 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.[9]

Concerning the measurement of revenue growth in the counterfactual trend, municipalities use “a growth adjustment of either 5.2 percent per year or the recipient’s average annual revenue growth over the three full fiscal years prior to the COVID-19 public health emergency, whichever is higher.”[10]

The process for calculating revenue loss prescribed by the Final Rule is summarized below:

• 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 equal to base year revenue * [(1 + growth adjustment) ^(n/12)], where n is the number of months elapsed since the end of the base year to the calculation date, and growth adjustment is the greater of 5.2 percent and the recipient’s average annual revenue growth in the three full fiscal or calendar years prior to the COVID-19 public health emergency. Recipients must be consistent in their calculation of annual revenue, and calculate either fiscal or calendar year actual revenue throughout the duration of the SLFRF program.
• Step 3: Identify actual revenue, which equals revenues collected over the past twelve months as of 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.[11]

The revenue loss calculation is for “the aggregate revenue reduction of the recipient due to the public health emergency” and cannot be calculated for individual revenue sources or dependent government agencies.[12] Recipients may provide data on a cash, accrual, or modified accrual basis, but must be consistent in their choice of methodology throughout the covered period until reporting is no longer required.[13]

If a recipient is unsure whether a particular revenue source is included in the Final Rule’s definition of “General Revenue,” the recipient may consider the classification and instructions used to complete the Census Bureau’s Annual Survey.[14]

Last Updated: February 16, 2022