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Can a municipality that charges property owners an annual Sewer and Storm Water Fee use ARP funds to pay for sewer and stormwater capital projects?

Under the U.S. Department of the Treasury’s (“Treasury”) Interim Final Rule (the “Rule”), the Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”), established by the American Rescue Plan Act of 2021 (“ARP”), include support to municipalities for water and sewer infrastructure projects and services.[1] Treasury guidance indicates that in specific scenarios, a municipality that charges an annual sewer and stormwater fee (that is not ad valorem property tax) is permitted to utilize CSLFRF to fund water and sewer-related capital projects on a pro-rata basis.[2]

Treasury’s Frequently Asked Questions (“FAQs”) on the authorized use of CSLFRF for water and sewer infrastructure projects states:

[T]he IFR refers to the EPA Drinking Water[3] and Clean Water State Revolving Funds[4] (SRFs) for the categories of projects and activities that are eligible for funding. Recipients should look at the relevant federal statutes, regulations, and guidance issued by the EPA to determine whether a water or sewer project is eligible. Of note, the IFR does not incorporate any other requirements contained in the federal statutes governing the SRFs or any conditions or requirements that individual states may place on their use of SRFs.[5]

Under the Clean Water State Revolving Funds, Treasury identifies several categories of eligible projects:

[C]onstruction of publicly owned treatment works, nonpoint source pollution management, national estuary program projects, decentralized wastewater treatment systems, stormwater systems, water conservation, efficiency, and reuse measures, watershed pilot projects, energy efficiency measures for publicly-owned treatment works, water reuse projects, security measures at publicly-owned treatment works, and technical assistance to ensure compliance with the Clean Water Act.[6]

Furthermore, Treasury has also stated that:

The EPA’s Overview of Clean Water State Revolving Fund Eligibilities describes eligible energy-related projects. This includes a “[p]ro rata share of capital costs of offsite clean energy facilities that provide power to a treatment works.” Thus, State and Local Fiscal Recovery Funds may be used to finance the generation and delivery of clean power to a wastewater system or a water treatment plant on a pro-rata basis.[7]

If a municipality’s annual sewer and stormwater fee covered the cost of delivering or facilitating clean power to a wastewater system or water treatment plant, or if the municipality sought to maintain or expand its clean energy systems to deliver more power to a wastewater system or water treatment plant, the Treasury guidance indicates that these expenses would likely be permissible uses of CSLFRF on a pro-rata basis.

To determine if intended funding uses are permissible, a municipality should generally refer to the Clean Water State Revolving Funds Program Eligibilities for sewer and stormwater projects.[8] A municipality should also review its State’s State Revolving Funds (“SRFs”) to help inform the municipality’s strategy. Treasury states that “the [Rule] does not incorporate any other requirements contained in the federal statutes governing the SRFs or any conditions or requirements that individual states may place on their use of SRFs.”[9]

A municipality that charges an annual sewer and stormwater fee that is not ad valorem property tax should also focus on the risk of potential duplication of benefits (“DOB”). DOB occurs if a person, household, business, government, or other entity receives financial assistance from multiple sources for an identical purpose, and the total aid received for that purpose, therefore, exceeds the total need for assistance. Municipalities should conduct a DOB analysis to determine which costs have not been paid from another assistance fund source to avoid duplication.

Recipients may use CSLFRF funds to cover costs incurred for eligible sewer and water-related projects that have been “planned or started prior to March 3, 2021, provided that the project costs are covered by the Coronavirus State and Local Fiscal Recovery Funds were incurred after March 3, 2021.”[10] Notably, Treasury states that it:

[I]s interpreting the requirement that costs be incurred by December 31, 2024, to only require that recipients have obligated the funds by such date. The period of performance will run until December 31, 2026, which will provide recipients a reasonable amount of time to complete projects funded with Fiscal Recovery Funds.[11]

When a municipality decides to apply CSLFRF to a given project or service, it must adhere to all compliance and reporting guidance outlined by Treasury’s Compliance and Reporting Guidance for CSLFRF[12] and Portal for Recipient Reporting for CSLFRF.[13] Municipalities should be mindful that current Treasury guidance may be superseded by subsequent guidance, and a municipality may be required to demonstrate its rationale for using ARP funds. Moreover, municipalities should document the guidance relied upon in choosing to apply CSLFRF to a particular use.

Last Updated: August 13, 2021

[2] Coronavirus State and Local Fiscal Recovery Funds: Frequently Asked Questions (updated July 19, 2021) – FAQ #6.13, at 32, available at: https://home.treasury.gov/system/files/136/SLFRPFAQ.pdf.

[3] U.S. Environmental Protection Agency, Drinking Water State Revolving Fund Eligibility Handbook, June 2017, available at: https://www.epa.gov/sites/production/files/2019-10/documents/dwsrf_eligibility_handbook_june_13_2017_updated_508_versioni.pdf.

[5] Coronavirus State and Local Fiscal Recovery Funds: Frequently Asked Questions (as of July 19, 2021) – FAQ #6.7, at 29, available at: https://home.treasury.gov/system/files/136/SLFRPFAQ.pdf.

[6] Id., at FAQ #6.1, at 27-28.

[7] Id., at FAQ #6.13, at 32.

[8] U.S. Environmental Protection Agency, Overview of Clean Water State Revolving Fund Eligibilities, May 2016, at 3, available at: Overview of CWSRF Eligibilities (epa.gov).

[9] Coronavirus State and Local Fiscal Recovery Funds: Frequently Asked Questions (updated July 19, 2021) – FAQ #6.7, at 29, available at: https://home.treasury.gov/system/files/136/SLFRPFAQ.pdf.

[10] Id., at FAQ #4.7, at 21.

[11] Id., at #6.2, at 28.

[12] U.S. Department of the Treasury, Compliance and Reporting Guidance: State and Local Fiscal Recovery Funds (as of June 24, 2021), available at: https://home.treasury.gov/system/files/136/SLFRF-Compliance-and-Reporting-Guidance.pdf.

[13] U.S. Department of the Treasury, Treasury’s Portal for Recipient Reporting: State and Local Fiscal Recovery Funds (as of August 9, 2021), available at: SLFRF_Treasury-Portal-Recipient-Reporting-User-Guide.pdf