May a municipality use non-CSLFRF fiscal support to fund loan principal? Can CSLFRF fiscal support only pay for projected costs incurred? Is the loan principal qualified as a projected cost?

1. May a municipality use non-Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) fiscal support to fund loan principal? 

Under certain circumstances, municipalities may utilize non-American Rescue Plan Act (“ARP”) CSLFRF to support payments on forgivable loans maturing after December 31, 2026. The U.S. Department of the Treasury’s (“Treasury”) CSLFRF Frequently Asked Question (“FAQ”) #4.10 states:

Funds may be used in conjunction with other funding sources, provided that the costs are eligible costs under each source program and are compliant with all other related statutory and regulatory requirements and policies.[1]

A municipality can therefore use other funds in addition to CSLFRF assistance for eligible projects, likely including funding loan principal.[2] It should be noted that additional information may be provided when Treasury issues new FAQs specific to the Final Rule.[3]

2. Can CSLFRF fiscal support only pay for projected costs incurred? 

The Final Rule states that for loans that mature or are forgiven on or before December 31, 2026, CSLFRF may fund the principal of the loan; however, for loans maturing after December 31, 2026, funds may be used for the projected cost of the loan. Projected cost may be estimated by either estimating “the subsidy cost (i.e., net present value of estimated cash flows) or the discounted cash flow under current expected credit losses (i.e., CECL method).”[4]

3. Is the loan principal qualified as a projected cost?

Projected costs are used for loans that mature after December 31, 2026. According to the Final Rule, the projected cost is determined by the net present value of estimated cash flow or the discounted cash flow under the CECL method.[5] The loan principal can be funded using CSLFRF for loans that mature or are forgiven on or before December 31, 2026; however, the recipient must track repayment of principal and interest, and the principal of the loan must be reported as an expense at origination.[6]

Last Revised: January 26, 2022