How should a city calculate its revenue if its fiscal calendar changed in 2020?

The American Rescue Plan Act of 2021 (“ARP”) Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) provide fiscal relief for recipients that have experienced revenue loss due to the onset of the COVID-19 public health emergency.[1]

Under the CSLFRF Final Rule,[2] the U.S. Department of the Treasury (“Treasury”) outlines two distinct options for recipients to determine their amount of revenue loss. Recipients must choose one of these options and cannot switch between these approaches after making an election:

1. recipients may elect a “standard allowance” of $10 million to spend on the provision of government services through the period of performance; or
2. recipients may calculate their actual revenue loss (using actual revenues and not projections) according to the formula articulated in the Final Rule.[3]

If recipients choose the first option, Treasury will presume that up to $10 million in revenue has been lost due to the public health emergency, and recipients will be permitted to use that amount (not to exceed the award amount) to fund the provision of eligible government services. All recipients may elect to use this standard allowance instead of calculating lost revenue using the formula below, including those with total allocations of $10 million or less. Electing the standard allowance does not increase or decrease a recipient’s total allocation.[4]

Recipients choosing the second option may calculate revenue loss at four distinct points in time, either at the end of each calendar year (e.g., December 31 for years 2020, 2021, 2022, and 2023) or the end of the recipient’s fiscal year. Under the flexibility provided in the Final Rule, recipients can choose whether to use calendar or fiscal year dates but must be consistent throughout the period of performance.[5] As the Final Rule does not explicitly address accounting for the impact of changes to fiscal years, it may be advisable to use consistent full years with identical start and end dates. 

To calculate revenue loss at each of these dates, recipients must follow a four-step process:

• Calculate 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.
• Estimate counterfactual revenue, which is equal to the following formula, where n is the number of months elapsed since the end of the base year to the calculation date:

[???? ???? ??????? × (1 + ?????ℎ ??????????)] ^ (?/12)

The growth adjustment is the greater of either a standard growth rate—5.2 percent—or the recipient’s average annual revenue growth in the last full three fiscal years prior to the COVID-19 public health emergency.

• Identify actual revenue, which equals revenues collected over the twelve months immediately preceding the calculation date.
  • Under the Final Rule, recipients must adjust actual revenue totals for the effect of tax cuts and tax increases that are adopted after the date of adoption of the Final Rule (January 6, 2022). Specifically, the estimated fiscal impact of tax cuts and tax increases adopted after January 6, 2022, must be added or subtracted to the calculation of actual revenue for purposes of calculation dates that occur on or after April 1, 2022.
  • Recipients may subtract from their calculation of actual revenue the effect of tax increases enacted prior to the adoption of the Final Rule. Note that recipients that elect to remove the effect of tax increases enacted before the adoption of the Final Rule must also remove the effect of tax decreases enacted before the adoption of the Final Rule, such that they are accurately removing the effect of tax policy changes on revenue.
• Revenue loss for the calculation date is equal to counterfactual revenue minus actual revenue (adjusted for tax changes) for the twelve-month period. If actual revenue exceeds counterfactual revenue, the loss is set to zero for that twelve-month period. Revenue loss for the period of performance is the sum of the revenue loss on for each calculation date.[6]

The supplementary information in the Final Rule provides an example of a full revenue loss calculation.[7]

Last Revised: February 16, 2022