Can a municipality use ARP funds to pay for ARP-eligible expenses in the general budget, creating a general fund surplus that can be used to fund any activity, without regard to ARP eligibility?

The American Rescue Plan Act of 2021 (“ARP”) Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) Final Rule does not explicitly restrict recipients from running a budget surplus while allocating and expending CSLFRF.[1] However, the Final Rule restricts the use of CSLFRF for the purposes of funding or offsetting reductions in tax revenue.[2] Additionally, municipalities should avoid allocating CSLFRF under the revenue loss eligibility category while running a budget surplus.  

The ARP and Final Rule seek to provide recipients with broad flexibility for the allocation of funding and do not generally restrict recipients’ ability to budget local, non-ARP funding as they see fit. It is therefore possible for a recipient to allocate local funds, offset by ARP funding or other grants, for their needs without regard to ARP eligibility.

One exception to this flexibility is noted in the Final Rule, which states that recipients cannot use CSLFRF to offset a net reduction in tax revenue resulting from law, regulation, or administrative interpretation (a tax cut) for the period beginning on March 3, 2021. Recipients are free to implement tax reductions during this period; however, they must demonstrate that CSLFRF was not used to fund or offset the tax reduction. Failure on the part of a recipient to effectively demonstrate that a tax reduction was funded by means other than CSLFRF will result in CSLFRF being returned to the U.S. Department of the Treasury (“Treasury”).[3]

Under CSLFRF, recipients may fund projects under the following eligible use categories:

• Public sector revenue loss replacement;
• Support of the COVID-19 public health and economic response;
• Providing premium pay for workers providing essential work; and
• Investing in water, sewer, and broadband infrastructure.[4]

If running a budget surplus, recipients should avoid allocating CSLFRF usage under the revenue loss eligibility category. Funds allocated under this category must, by definition, replace lost revenue.[5] It may therefore be difficult for a recipient to justify a budget surplus while claiming revenue loss under either the revenue loss calculation formula outlined in the Final Rule or the standard revenue loss allowance of $10 million.

There do not, however, appear to be any restrictions on a recipient’s ability to allocate local, non-ARP surplus funding resulting from the use of CSLFRF expended under the eligible use categories in support of the COVID-19 public health and economic response, providing premium pay, or investing in water, sewer, and broadband, with the exception of funding a tax reduction.