How should a municipality calculate its lost revenue?

Municipalities have two options for accessing Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) under the revenue replacement provision. First, they may elect to use a one-time “standard allowance for revenue loss” of up to $10 million to spend on government services through the period of performance.[1] Second, they may calculate their revenue loss using the U.S. Department of the Treasury’s (“Treasury”) formula. The CSLFRF Final Rule, published on January 6, 2022, describes the formula as follows:

Step 1: Identify 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.

Step 2: Estimate counterfactual revenue, which is the amount of revenue the recipient would have expected in the absence of the downturn caused by the pandemic. The counterfactual revenue is equal to base year revenue * [(1 + growth adjustment) ^ ( n/12)], where n is the number of months elapsed since the end of the base year to the calculation date, and growth adjustment is the greater of the average annual growth rate across all State and Local Government “General Revenue from Own Sources” in the most recent three years prior to the emergency, 5.2 percent, or the recipient’s average annual revenue growth in the three full fiscal years prior to the COVID-19 public health emergency. This approach to the growth rate provides recipients with the option to use a standardized growth adjustment when calculating the counterfactual revenue trend and thus minimizes administrative burden, while not disadvantaging recipients with revenue growth that exceeded the national average prior to the COVID-19 public health emergency by permitting these recipients to use their own revenue growth rate over the preceding three years.

Step 3: Identify actual revenue, which equals revenues collected over the twelve months immediately preceding the calculation date.

Step 4: The extent of the reduction in revenue is equal to counterfactual revenue less actual revenue. If actual revenue exceeds counterfactual revenue, the extent of the reduction in revenue is set to zero for that calculation date.[2]

The Final Rule provides further guidance regarding revenue loss. Treasury has adjusted the definition to allow recipients that operate utilities which are part of their own government to choose whether to include revenue from these utilities in their revenue loss calculation.[3] For utilities or other entities (e.g., certain service districts) which are not part of the recipient government, a transfer from the utility to the recipient constitutes an intergovernmental transfer and is therefore included in the definition of “general revenue.”[4] The Final Rule also includes liquor store revenue in the definition of general revenue.[5]

Treasury provides recipients with the option to choose whether to calculate revenue loss on a fiscal year or calendar year basis, though they must choose a consistent basis for loss calculations throughout the period of performance.[6] Treasury has also clarified that revenue loss is calculated separately for each year such that the calculation of revenue lost in one year does not affect the calculation of revenue lost in prior or future years.[7] In addition, the Final Rule requires recipients to exclude the value of tax policy changes adopted after January 6, 2022 when performing revenue loss calculations.[8]

When determining revenue, recipients should review their treatment of tax revenue in their submission of the Census Bureau’s Annual Survey of State and Local Government Finances. A municipality may apply the Census Bureau’s criteria for judging whether an entity, such as a TID, is independent from, or a constituent of, the municipality. This will help determine if a portion of the entity’s revenue should be included in the municipality’s general revenue for the calculation of revenue loss.[9]

Determining Government Entity Inclusion

The Final Rule also explains that Frequently Asked Question (“FAQ”) #3.14 clarifies “how a recipient may determine whether a particular entity is ‘part of the recipient’s government.’”[10] This FAQ states, in part, that:

In determining whether a particular entity is part of a recipient’s government for purposes of measuring a recipient’s government revenue, recipients should identify all the entities included in their government and the general revenue attributable to these entities on a best-efforts basis. Recipients are encouraged to consider how their administrative structure is organized under state and local statutes. In cases in which the autonomy of certain authorities, commissions, boards, districts, or other entities is not readily distinguishable from the recipient’s government, recipients may adopt the Census Bureau’s criteria for judging whether an entity is independent from, or a constituent of, a given government. Generally, entities that meet all four of the following conditions are classified as independent:

• The entity is an organized entity and possesses corporate powers, such as perpetual succession, the right to sue and be sued, having a name, the ability to make contracts, and the ability to acquire and dispose of property.
• The entity has governmental character, meaning that it provides public services, or wields authority through a popularly elected governing body or officers appointed by public officials. A high degree of responsibility to the public, demonstrated by public reporting requirements or by accessibility of records for public inspection, also evidences governmental character.
• The entity has substantial fiscal independence, meaning it can determine its budget without review and modification by other governments. For instance, the entity can determine its own taxes, charges, and debt issuance without another government’s supervision.
• The entity has substantial administrative independence, meaning it has a popularly elected governing body, or has a governing body representing two or more governments, or, in the event its governing body is appointed by another government, the entity performs functions that are essentially different from those of, and are not subject to specification by, its creating government.

If an entity does not meet all four of these conditions, a recipient may classify the entity as part of the recipient’s government and assign the portion of General Revenue that corresponds to the entity.

To further assist recipients in applying the forgoing criteria, recipients may refer to the Census Bureau’s Individual State Descriptions: 2017 Census of Governments publication, which lists specific entities and classes of entities classified as either independent (defined by Census as “special purpose governments”) or constituent (defined by Census as “dependent agencies”) on a state-by-state basis. Recipients should note that the Census Bureau’s lists are not exhaustive and that Census classifications are based on an analysis of state and local statutes as of 2017 and subject to the Census Bureau’s judgement.[11]

Last Revised: February 15, 2022