May cities expend ARP funds to support events aimed at economic recovery, including tourism or supporting small businesses?

1. ARP General Guidance:

The U.S. Department of the Treasury’s (“Treasury”) Final Rule on the American Rescue Plan Act of 2021 (“ARP”) Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) provides guidance for municipal governments intending to use CSLFRF to respond to the COVID-19 public health emergency and mitigate the economic impacts of the pandemic.

Municipalities may use CSLFRF to support small businesses and affected industries, such as tourism. The Final Rule clarifies that the ARP provides for CSLFRF to be used to “respond to the public health emergency or its negative economic impacts, including assistance to households, small businesses, and nonprofits, or aid to impacted industries such as tourism, travel, and hospitality.”[1] Whether expenditures for an event funded by a municipality for tourism and small businesses are eligible under the Final Rule depends on the facts and circumstances related to that event based on the eligibility criteria discussed below.

Furthermore, Treasury provides a framework to determine eligibility for using CSLFRF awards:

[W]hen assessing whether a program or service is an eligible use to respond to the public health impacts of the COVID–19 public health emergency, the Department will consider the two eligibility requirements discussed below… First, there must be a negative public health impact or harm experienced by an individual or a class…[and] Second, the program, service, or other intervention must address or respond to the identified [COVID-19 related] impact or harm.[2]

Treasury does not make transfers directly to nonprofits or private organizations, such as small businesses, as part of the CSLFRF. However, municipalities receiving CSLFRF allocations may transfer funds to a “private nonprofit organization … a Tribal organization … a public benefit corporation involved in the transportation of passengers or cargo, or a special-purpose unit of state or local government” as well as other constituent units of governments and other private entities.[3] Any such transferee is consequently a CSLFRF subrecipient and must comply with all regulations regarding the uses of such funds, including only using funds in manners determined to be eligible under the Final Rule, as well as subrecipient reporting requirements.[4] Additionally, the municipality is responsible for oversight of their subrecipients, as well as reporting upon the uses of the funds by the transferee as part of its regular CSLFRF reporting process.[5]

Note that the Final Rule maintains “that general economic development or workforce development, meaning activities that do not respond to negative economic impacts of the pandemic and rather seek to more generally enhance the jurisdiction’s business climate, would generally not be eligible under this eligible use category.”[6]

2. Tourism:

A CSLFRF recipient may provide aid to impacted industries, such as tourism, travel, and hospitality industries, to respond to the negative economic impacts of the pandemic. In the Final Rule, Treasury clarifies that aid to impacted industries should be limited to “businesses, attractions, business districts, and Tribal development districts that were operating prior to the pandemic and affected by required closures and other efforts to contain the pandemic.”[7] A recipient may also provide aid to support a “planned expansion or upgrade of tourism, travel and hospitality facilities delayed due to the pandemic.”[8]

The Final Rule specifies that aid may be used to implement COVID-19 response and infection prevention measures to enable safe resumption of tourism, travel, and hospitality services, such as:

• Improvements to ventilation;
• Physical barriers or partitions;
• Signage to facilitate social distancing;
• Provision of masks or personal protective equipment; and
• Consultation with infection prevention professionals to develop safe reopening plans. [9]

3. Small Businesses:

Under the Final Rule, small businesses need to be designated as either “impacted” or “disproportionately impacted” to be eligible to receive CSLFRF assistance to small businesses.[10]

The Final Rule defines a small business as one that “[h]as no more than 500 employees or, if applicable, the size standard in number of employees established by the Administrator of the Small Business Administration for the industry in which the business concern or organization operates,” and “[i]s a small business concern as defined in section 3 of the Small Business Act.”[11]

Municipalities may consider a number of factors to determine whether a small business has been impacted by the pandemic, including, but not limited to, decreased revenue or gross receipts; financial insecurity; increased costs; capacity to weather financial hardship; and challenges covering payroll, rent or mortgage, and other operating costs.[12] Assistance to small businesses that experienced such negative economic impacts may include loans or grants to mitigate financial hardship, such as by supporting payroll and benefits and costs to retain employees, and mortgage, rent, utility, and other operating costs, as well as technical assistance, counseling, or other services to support business planning.[13]

Disproportionately impacted small businesses include those operating in Qualified Census Tracts, operated by Tribal governments or on Tribal lands, or operating in the U.S. territories.[14] Such businesses are eligible for assistance including rehabilitation of commercial properties, storefront improvements and façade improvement; technical assistance, business incubators, and grants for start-up or expansion costs for small businesses; and support for microbusinesses, including financial, childcare, and transportation costs.[15]

Additionally, Treasury notes that “recipients may also designate a class of small businesses that experienced a negative economic impact or disproportionate negative economic impact (e.g., microbusinesses, small businesses in certain economic sectors), design an intervention to fit the impact, and document that the individual entity is a member of the class.”[16] For more information on designating a class of small businesses that experiences a negative or disproportionate negative economic impact from the COVID-19 public health emergency and designing a response to these harms, see pages 21-27 of the Final Rule.[17]

Treasury notes that uses of funds under these parameters:

[S]hould be assessed based on their responsiveness to their intended beneficiary and the ability of the response to address the impact or harm experienced by that beneficiary. Responses must also be related and reasonably proportional to the extent and type of harm experienced … uses that bear no relation or are grossly disproportionate to the type or extent of harm experienced would not be eligible uses.[18]

4.  Revenue Loss

Revenue loss may also be an applicable route for recipients to consider when pursuing economic recovery. Municipalities are permitted to use CLSFRF funds for the provision of government services up to the extent of the reduction in revenue or take the standard allowance of $10 million.[19] Although the enumerated set of eligible uses does not include events focused on supporting tourism and small businesses, such events could be considered services traditionally provided by governments and would thus be eligible uses of funds designated for replacement of lost revenue.[20] For more details, see pages 12-20 and 30-34 of the Overview of the Final Rule.[21]

5.  Additional Considerations

Relative to Public Health and Economic Impact use, the Final Rule further requires state, local, and Tribal governments to:

[P]ublicly report assistance provided to private-sector businesses under this eligible use, including tourism, travel, hospitality, and other impacted industries, and its connection to negative economic impacts of the pandemic. Recipients also should maintain records to support their assessment of how businesses were affected by the negative economic impacts of the pandemic and the aid provided in response to these impacts.[22]

Last Revised: April 1, 2022