How should a municipality account for cost increases beyond the amount of revenue loss when allocating money under the revenue loss eligibility? May a municipality pay increased costs that exceed the amount of lost revenue?

The U.S. Department of the Treasury’s (“Treasury”) Final Rule governs the Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) established under the American Rescue Plan Act of 2021 (“ARP”).[1] For municipalities facing challenges caused by the rising cost of goods and services, the following information and recommendations summarize guidance under the Final Rule and provide a strategy for risk mitigation.

The Final Rule explicitly states that “[a] recipient may use funds for the provision of government services to the extent of the reduction in the recipient’s general revenue due to the public health emergency.”[2] Treasury notes that “recipients have broad latitude to use funds for government services up to their amount of revenue loss due to the pandemic.”[3] Treasury’s language “to the extent of” and “up to” indicates an upper limit to the amount of funds eligible under this eligible use category. Treasury appears to describe “the reduction in the recipient’s general revenue” and “their [municipality’s] amount of revenue loss” as this upper limit.[4]

Regarding the overall use of funds, Treasury expressly limits the amount of eligible funds to the amount of lost revenue due to the COVID-19 pandemic.[5] Furthermore, the Final Rule and its accompanying guidance does not appear to identify any cases in which municipalities have authorization to exceed revenue loss funds, for any reason. Therefore, municipalities may not expect flexibility to exceed the amount of funds set by the revenue loss calculation or standard allowance.

Because Treasury guidance does not expressly authorize municipalities to spend funds beyond the upper limit identified by the Final Rule, exceeding that upper limit for any reason would likely be considered a violation of the Final Rule, which could cause Treasury to recoup such funds.[6]

Municipalities experiencing cost increases that exceed their revenue loss funds may consult the Final Rule to determine whether those costs satisfy another eligible use under the ARP.