COVID-19 Federal Assistance e311


Lost Revenue & Revenue Replacement

Can revenue loss from 2020 be used to pay for any budget shortfalls for 2021?

The answer to this question depends on how broadly the phrase “any budget shortfall” is defined.  As described below, numerous eligible uses of the Coronavirus Local Fiscal Recovery Funds (“CLFRF”) exist; however, the U.S. Department of the Treasury (“Treasury”) has imposed some noteworthy restrictions on municipalities’ use of CLFRF funds. To the extent that “any budget shortfall” might include prohibited uses of CLFRF money, municipalities cannot of course use those funds to pay for the ineligible activities.   

At bottom, municipalities may use revenue replacement funds to pay for budget shortfalls in 2021 so long as they relate to actual programmatic activity pursuant to the municipality’s provision of government services:[1]

The Interim Final Rule gives recipients broad latitude to use funds for the provision of government services to the extent of reduction in revenue. Government services can include, but are not limited to, maintenance of infrastructure or pay-go spending for building new 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.[2]

Once a municipality qualifies to receive all or a portion of its funding through the ARP’s revenue replacement provision based on the 2020 calculation, it can use the funds to make up programmatic shortfalls in the 2021 budget year.[3] The ARP does not directly replace revenue shortfalls in government accounts.[4]

Moreover, Treasury has identified some specific applications that do not qualify for revenue replacement funding using CSLFRF money:

However, paying interest or principal on outstanding debt, replenishing rainy day or other reserve funds, or paying settlements or judgments would not be considered provision of a government service, since these uses of funds do not entail direct provision of services to citizens. This restriction on paying interest or principal on any outstanding debt instrument, includes, for example, short-term revenue or tax anticipation notes, or paying fees or issuance costs associated with the issuance of new debt. In addition, the overarching restrictions on all program funds (e.g., restriction on pension deposits, restriction on using funds for non-federal match where barred by regulation or statute) would apply.[5]

The Supplementary Information to Treasury’s Interim Final Rule (the “Rule”) further discusses restrictions on the use of CLFRF funds.[6]

In summary, to the extent that ineligible types of expenses constitute budget shortfalls, CLFRF assistance cannot be used for these purposes. However, municipalities have broad latitude to use these funds for a wide variety of other pandemic-related expenses, as described in the statute and the Rule.[7] It is noteworthy that the Rule authorizes the use of this assistance “to cover costs incurred by the State, territory, Tribal government, or local government by December 31, 2024.”[8]  And the CLFRF “period of performance will run until December 31, 2026, which will provide recipients a reasonable amount of time to complete projects funded with payments from the Fiscal Recovery Funds.”[9]

Last Revised: August 31, 2021

[1] Coronavirus State and Local Fiscal Recovery Funds, Frequently Asked Questions (as of July 19, 2021) – FAQ #3.8, at 15, available at:

[2] Id (emphasis added).

[3] Id., at 20.

[4] Id.

[5] Id., at 15 (emphasis added).

[6] Treas. Reg. 31 CFR 35 at 78-79, available at:

[7] Id., at 10-78.

[8] Id., at 97.

[9] Id., at 99.