Is a municipality required to go through a competitive procurement process in order to transfer CSLFRF funds to its economic development agency (a 501(c)(3)) for ARP-eligible programming?

Transfers of CSLFRF to Nonprofit Subrecipients

A municipality is not required to competitively bid transfers of Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) to a 501(c)(3). The U.S. Department of the Treasury’s (“Treasury”) Final Rule recognizes that a nonprofit may be a subrecipient providing services on behalf of the recipient and states:

[T]he Final Rule maintains [] the ability for the recipient to transfer, e.g., via grant or contract, funds to nonprofit entities to carry out an eligible use on behalf of the recipient. Treasury notes that recipients may award [C]SLFRF to many different types of organizations to carry out eligible uses of funds and serve beneficiaries on behalf of a recipient government (e.g., assisting in a vaccination campaign, operating a job training program, developing affordable housing). When a recipient provides funds to an organization to carry out eligible uses of funds and serve beneficiaries, the organization becomes a subrecipient. In this case, a nonprofit need not have experienced a negative economic impact in order to serve as a subrecipient.

In the context of [C]SLFRF, nonprofits of all types may be subrecipients. Treasury is not restricting the types of nonprofits that can operate as subrecipients, rather allowing recipients to decide what form best meets the needs of their community. Therefore, a “nonprofit” that is acting as subrecipient could include, but is not limited to, a nonprofit as that term is defined in paragraph (17) of section 401 of the McKinney-Vento Homeless Assistance [Act].

Recipients may transfer funds to subrecipients in several ways, including advance payments and on a reimbursement basis. Ultimately, recipients must comply with the eligible use requirements and any other applicable laws or requirements and are responsible for the actions of their subrecipients or beneficiaries.[1]

The Final Rule includes 501(c)(3) organizations within its definition of nonprofits, thereby encompassing a wide range of organizations with varying charitable or public service-oriented goals (e.g., housing, food assistance, job training).[2]

Since a nonprofit entity that receives a transfer from a recipient is a subrecipient, the Uniform Guidance requires that the nonprofit adhere to the same requirements as a recipient.[3] Specifically, the Final Rule states:

• nonprofit subrecipient may only receive funds to carry out an eligible use of [C]SLFRF funds and must comply with any reporting and compliance requirements. Note that recipients are ultimately responsible for reporting information to Treasury and must collect any necessary information from their subrecipients to complete required reporting.[4] However, if a municipality provides funds to a “contractor” instead of a subrecipient, a competitive bid process is generally required as outlined in the Uniform Guidance CFR §200.319.[5] In addition, the Uniform Guidance CFR §200.331 provides information to help determine whether an entity is a subrecipient or contractor:
  • Subrecipients. A subaward is for the purpose of carrying out a portion of a Federal award and creates a Federal assistance relationship with the subrecipient. Characteristics which support the classification of the non-Federal entity as a subrecipient include when the non-Federal entity:
    • Determines who is eligible to receive what Federal assistance;
    • Has its performance measured in relation to whether objectives of a Federal program were met;
    • Has responsibility for programmatic decision-making;
    • Is responsible for adherence to applicable Federal program requirements specified in the Federal award; and
    • In accordance with its agreement, uses the Federal funds to carry out a program for a public purpose specified in authorizing statute, as opposed to providing goods or services for the benefit of the pass-through entity.
  • Contractors. A contract is for the purpose of obtaining goods and services for the non-Federal entity's own use and creates a procurement relationship with the contractor. Characteristics indicative of a procurement relationship between the non-Federal entity and a contractor are when the contractor:
    • Provides the goods and services within normal business operations;
    • Provides similar goods or services to many different purchasers;
    • Normally operates in a competitive environment;
    • Provides goods or services that are ancillary to the operation of the Federal program; and
    • Is not subject to compliance requirements of the Federal program as a result of the agreement, though similar requirements may apply for other reasons.[6]

The United States Department of Justice, Office of Justice Programs, has prepared a checklist that can be used by recipients to help determine whether the subrecipient or contractor classification applies.[7]

Eligible Use Limitations

It is important to note that Treasury does restrict the ability of a municipality to fund economic development with CSLFRF in some cases.[8] Municipalities are not permitted to use CSLFRF for general economic or workplace development; funding must be used to address the negative economic impacts of the COVID-19 pandemic, not simply to improve a municipality’s overall business climate.[9] The Final Rule further describes this restriction starting on page 218:

In the final rule, Treasury maintains the interim final rule’s approach 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. As noted above, to identify an eligible use of funds under this category, a recipient must identify a beneficiary or class of beneficiaries that experienced a harm or impact due to the pandemic, and eligible uses of funds must be reasonably designed to respond to the harm, benefit the beneficiaries that experienced it, and be related and reasonably proportional to that harm or impact…

[R]ecipients should analyze eligible uses based on the beneficiary of the assistance, and recipients may not provide assistance to small businesses or impacted industries that did not experience a negative economic impact. Provision of assistance to a business that did not experience a negative economic impact, under the theory that such assistance would generally grow the economy and therefore enhance opportunities for workers, would not be an eligible use, because such assistance is not reasonably designed to impact individuals or classes that have been identified as having experienced a negative economic impact. In other words, there is not a reasonable connection between the assistance provided and an impact on the beneficiaries. Such an activity would be attenuated from and thus not reasonably designed to benefit the households that experienced the negative economic impact.[10]

Thus, it is crucial that a municipality considering such a transfer carefully review the Final Rule and assess whether the proposed use of funds by an economic development agency complies with all Treasury guidance.

Further, the Uniform Guidance CFR §200.332 outlines requirements for subawards to any subrecipient. All recipients must:

1. Ensure that every subaward is clearly identified to the subrecipient as a subaward and includes the following information at the time of the subaward and if any of these data elements change, include the changes in subsequent subaward modification. When some of this information is not available, the pass-through entity must provide the best information available to describe the Federal award and subaward [].
2. Evaluate each subrecipient's risk of noncompliance with Federal statutes, regulations, and the terms and conditions of the subaward for purposes of determining the appropriate subrecipient monitoring described in paragraphs (d) and (e)[].
3. Consider imposing specific subaward conditions upon a subrecipient if appropriate as described in § 200.208.
4. Monitor the activities of the subrecipient as necessary to ensure that the subaward is used for authorized purposes, in compliance with Federal statutes, regulations, and the terms and conditions of the subaward; and that subaward performance goals are achieved.[]. 
5. Depending upon the pass-through entity's assessment of risk posed by the subrecipient (as described in paragraph (b) of this section), the following monitoring tools may be useful for the pass-through entity to ensure proper accountability and compliance with program requirements and achievement of performance goals [].
6. Verify that every subrecipient is audited as required by Subpart F [] when it is expected that the subrecipient's Federal awards expended during the respective fiscal year equaled or exceeded the threshold set forth in § 200.501.
7. Consider whether the results of the subrecipient's audits, on-site reviews, or other monitoring indicate conditions that necessitate adjustments to the pass-through entity's own records.
8. Consider taking enforcement action against noncompliant subrecipients as described in § 200.339 [] and in program regulations.[11]

Example Jurisdictions That Have Transferred CSLFRF Without Competitive Bids

Below are four examples where ARP funds have been provided by local governments to nonprofits via mechanisms that do not include a competitive bidding process.

1. Buffalo, New York

Buffalo has allocated $1.2 million in ARP funds to the Buffalo Urban Development Corporation (“BUDC”), a 501(c)(3) nonprofit. See here for Buffalo’s Spending Proposal, which states in part:

$1.2 million will be allocated for BUDC. Over the course of the pandemic, BUDC provided small business assistance to private entities impacted by the public health safety measures intended to slow the spread of COVID-19. It also continued to provide critical economic development planning work necessary to ensure a speedy recovery for people once people got vaccinated and the economy began to resume its upwards growth trend. This funding will cover the operational costs BUDC incurred as a result of this work and help maintain this higher level of service during the course of our recovery period.[12]

Buffalo will award funds to the BUDC through a Memorandum of Understanding.[13]

2. Clallam County, Washington

Clallam County’s Chief Financial Officer approved the granting of $3 million in ARP funds to the Clallam Economic Development Council (“EDC”), a 501(c)(6) nonprofit, in order to administer a program focused on assisting small businesses and nonprofits.

The draft Subrecipient Agreement entered into by Clallam County and EDC can be found at this link. This draft Subrecipient Agreement captures the terms of the granting of funds to EDC, including allowable uses of funds, the manner in which funds will be released to EDC, and rules and regulations that must be followed during the administration of funds.[14]

3. Syracuse, New York

Syracuse will provide $4 million in ARP funds to the Syracuse Economic Development Corporation (“SEDCO”), a 501(c)(3) nonprofit. SEDCO is a city-affiliated nonprofit economic development organization that provided grants to businesses during the COVID-19 pandemic. SEDCO will use the ARP funds to “[r]ecapitalize SEDCO for COVID-19 relief programs and enable support for commercial redevelopment projects, with special focus on economically underinvested neighborhoods and minority owned businesses.”[15]

4. Pittsburgh, Pennsylvania

Pittsburgh transferred $2.5 million to OnePGH Fund, a 501(c)(3) nonprofit, to provide guaranteed monthly income payments to low-income residents.[16]