How should a municipality calculate revenue loss associated with reductions in state level funding?

On January 6, 2022, the U.S. Department of the Treasury (“Treasury”) issued the Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) Final Rule as part of the American Rescue Plan Act of 2021 (“ARP”). The Final Rule takes effect on April 1, 2022. Regarding timing, Treasury states the following:

the interim final rule remains in effect; funds used consistently with the IFR while it is in effect are in compliance with the SLFRF program. However, recipients can choose to take advantage of the final rule’s flexibilities and simplifications now, even ahead of the effective date. Treasury will not take action to enforce the interim final rule to the extent that a use of funds is consistent with the terms of the final rule, regardless of when the SLFRF funds were used.[1]

Municipalities must note that “The Secretary of the Treasury (Treasury) is adopting as final the interim final rule published on May 17, 2021, with amendments. This rule implements the Coronavirus State Fiscal Recovery Fund and the Coronavirus Local Fiscal Recovery Fund established under the American Rescue Plan Act.”[2] As such, municipalities must use both the Interim Final Rule and the Final Rule when determining eligibility criteria for CSLFRF funds.

The Interim Final Rule defines general revenue as including “revenue collected by a recipient and generated from its underlying economy, and it would capture a range of different types of tax revenues, as well as other types of revenue that are available to support government services.”[3] The Final Rule keeps this definition with two changes: (a) giving recipients the option to include revenue from utilities that are part of the recipient government in their revenue loss calculation and (b) including liquor store revenue in the definition of general revenue.[4] According to the Final Rule, state funding is included in the definition of general revenue:

Treasury is maintaining the inclusion of intergovernmental transfers other than from the federal government for the reasons provided in the Supplemental Information to the interim final rule; to do otherwise would be to significantly distort the revenue calculations for local governments that regularly receive revenue sharing payments, for example, from their state governments.[5]

Municipalities should note that this inclusion of revenue from the state does not include those funds being passed through the state but originating from the federal government or any federal program.[6]

The Final Rule adds an option for recipients to use a standard allowance as an alternative to calculating revenue loss. This fixed amount of loss is set at $10 million total for the entire period of performance. Treasury intends to amend its reporting forms to provide a mechanism for recipients to make a one-time, irrevocable election to utilize either the revenue loss formula or the standard allowance.[7]

The Eligible Uses section of the Final Rule describes how to determine if the activities being considered are allowable using CSLFRF. The categories described in this section include public health and negative economic impacts, premium pay, revenue loss, and investments in water, sewer, and broadband infrastructure.[8]

Treasury has stated that offsetting a reduction in net tax revenue, paying interest or principal on outstanding debt, replenishing rainy day or other reserve funds, or paying settlements or judgments will not be considered a provision of a government service (and thus would not be an authorized use of ARP funds).[9]^,[10]

Additional information may be provided when Treasury issues new Frequently Asked Questions ("FAQ") specific to the Final Rule, as indicated in the Interim Final Rule FAQ updated simultaneously with the issuance of the Final Rule.[11] Treasury also 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.[12]

Last Revised: February 1, 2022