Does a municipality need to direct revenue replacement funds to the sources of lost revenue?

The American Rescue Plan Act of 2021 (“ARP”) Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) do not expressly require recipients to direct CSLFRF to address revenue losses from one or more particular sources. Nor does the associated regulatory guidance indicate that specific amounts of funding must be directed to specific sources of revenue loss.

Rather, CSLFRF assistance can be used to address a broad range of issues. As noted in the U.S. Department of the Treasury’s (“Treasury”) CSLFRF Final Rule, published on January 6, 2022, this assistance may be applied to four eligible use categories:

1. Responding to the public health and negative economic impacts of the pandemic (which includes several sub-categories) 
2. Providing premium pay to essential workers 
3. Providing government services to the extent of revenue loss due to the pandemic, and
4. Making necessary investments in water, sewer, or broadband infrastructure.[1]

In addition, the Final Rule states: “First, under the revenue loss eligible use category, recipients have broad latitude to use funds for government services up to their amount of revenue loss due to the pandemic.”[2]

Treasury’s January 2022 Frequently Asked Questions (“FAQ”) also provide relevant information at FAQ #3.2, which addresses revenue calculation and whether it should be calculated on an entity-wide basis or a source-by-source basis (e.g., property tax, income tax, sales tax, etc.). FAQ #3.2 states:

Recipients should calculate revenue on an entity-wide basis. This approach minimizes the administrative burden for recipients, provides for greater consistency across recipients, and presents a more accurate representation of the net impact of the COVID-19 public health emergency on a recipient’s revenue, rather than relying on financial reporting prepared by each recipient, which vary in methodology used and which generally aggregates revenue by purpose rather than by source.[3]

In summary, given Treasury’s emphasis on recipient flexibility and its entity-wide revenue loss calculation, a municipality should be able to use CSLFRF funding in its discretion for eligible purposes. After the loss due to COVID-19 has been calculated, revenue replacement funds should be used for the provision of government services. Government services generally include any service traditionally provided by a government unless Treasury has stated otherwise. The following are some common examples, although this list is not exhaustive:

• Construction of schools and hospitals;
• Road building and maintenance, and other infrastructure;
• Health services;
• General government administration, staff, and administrative facilities;
• Environmental remediation; and
• Provision of police, fire, and other public safety services (including purchase of fire trucks and police vehicles).[4]

The “government services” category offers the most flexible range of eligible uses under the CSLFRF program, and funds are subject to streamlined reporting and compliance requirements. Recipients should be mindful that certain restrictions, which are detailed further in the Restrictions on Use section and apply to all uses of funds, apply to government services as well.[5]

It should be noted that additional information may be provided when Treasury issues new FAQs specific to the Final Rule as indicated in the Interim Final Rule FAQ.[6] In addition, Treasury encourages municipalities to consider the guidance issued in the Statement Regarding Compliance with the Coronavirus State and Local Fiscal Recovery Funds Interim Final Rule and Final Rule.[7]

Last Updated: March 7, 2022