Regarding the principal of loans/revolving loans with maturities longer than December 31, 2026: Can Fiscal Recovery Funds (FRF) be used to fund the principal?

The U.S. Department of the Treasury’s (“Treasury”) American Rescue Plan Act (“ARP”) Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) Final Rule states that in the case of loans that will mature or are forgiven on or before December 31, 2026, Fiscal Recovery Funds may fund the principal of the loan. However, the municipality must track repayment of principal and interest. In addition, the principal of the loan must be reported as an expense at origination. For loans maturing after December 31, 2026, funds may be used for the projected cost of extending the loan over the life 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., the Current Expected Credit Loss (‘CECL’) method).”[1]

Treasury’s CSLFRF Frequently Asked Questions (“FAQs”) state that funds must be spent to cover a municipality’s “costs incurred” for eligible uses between March 3, 2021, and December 31, 2024, and must be expended by December 31, 2026. Consequently, recipients have the burden to determine the amount of funds used to make a loan.[2] This guidance applies to the use of ARP funds to issue loans or other extensions of credit as well as interest earned on such credit programs.[3] Additional information may be provided when Treasury issues new FAQs specific to the Final Rule.[4]

As discussed, Treasury identifies two different approaches for measuring the cost of the loan. Under the first approach, the cost of the loan “equals the expected cash flows associated with the loan discounted at the recipient’s cost of funding.”[5] Expected cash flows may include principal. Under the second approach, municipalities would utilize the CECL accounting standard. Under the CECL accounting standard, municipalities may “treat the cost of the loan as equal to the CECL-based expected credit losses over the life of the loan.”[6]

FAQ #4.11 provides important detail regarding recipients that are not subject to restrictions under 2 CFR 200.307(e)(1) and are not required to track repayment of principal or interest for loans that mature after December 31, 2026.[7] Pursuant to Treasury FAQ #4.11, principal and interest may only be expended for uses that would be eligible for direct CSLFRF funding.[8] Municipalities may not use CSLFRF funds to provide a loan where the interest or principal will be used for an ineligible purpose.

Municipalities may find Treasury’s Appendix to the FAQs helpful in identifying eligible uses, as it provides a chart of government expenses that may qualify for reimbursement of lost revenue using ARP funds.[9] Notably, Treasury’s Final Rule specifically excludes the following:

contributions to rainy day funds, financial reserves, or similar funds; payment of interest or principal on outstanding debt instruments; fees or issuance costs associated with the issuance of new debt; and satisfaction of any obligation arising under or pursuant to a settlement agreement, judgment, consent decree, or judicially confirmed debt restructuring plan in a judicial, administrative, or regulatory proceeding, except to the extent the judgment or settlement requires the provision of services that would respond to the COVID-19 public health emergency.[10]

Accordingly, principal or interest from a CSLFRF-funded loan cannot be used for those purposes.

Last Revised: January 28, 2022