Is there a limit on what percentage of ARP funds can be allocated to revenue replacement?

The U.S. Department of Treasury (“Treasury”) does not limit the amount or ratio of Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) that can be allocated for revenue replacement so long as the amount correctly corresponds to the recipient’s determined revenue loss. Treasury’s Final Rule on CSLFRF grants municipalities broad discretion to use payments for the provision of government services, treating these as an eligible use for any or all of the municipality’s CSLFRF allocation up to the amount of revenue that has been lost as revenue replacement.[1] The municipality must calculate its revenue loss according to the formula and guidance provided by Treasury.[2]

Alternatively, the Final Rule allows recipients to choose to use a “standard allowance” of $10 million to spend on government services through the period of performance.[3] This is a one-time allowance.[4] Recipients must choose whether to take the standard allowance or to calculate revenue loss on an annual basis.[5]

The Final Rule also updates how municipalities may perform the revenue loss calculation and the types of revenue loss that should and should not be included. For example, the Final Rule allows recipients to perform the revenue loss calculation on a calendar year or fiscal year basis.[6] Recipients should consult pages 245 to 250 of the Final Rule for more information on these updates when performing the revenue loss calculation.

The Final Rule maintains that

 [g]overnment services can include, but are not limited to, maintenance of infrastructure or pay-go spending for building new infrastructure, including roads; modernization of cybersecurity, including hardware, software, and protection of critical infrastructure; health services; environmental remediation; school or educational services; and the provision of police, fire, and other public safety services.[7]

Although the Final Rule grants broad latitude to municipalities to use allocated funds as revenue replacement, it does not include an exhaustive list of eligible activities. However, uses must be limited to the provision of government services.[8]

Treasury outlines several ineligible uses. Paying interest or principal on outstanding debt, replenishing rainy day or other reserve funds, or paying settlements or judgments would not be considered provisions of a government service, because these uses of funds do not entail direct provision of services to citizens. This restriction on paying interest or principal on any outstanding debt instrument, includes, for example, short-term revenue or tax anticipation notes, or paying fees or issuance costs associated with the issuance of new debt. In addition, the overarching restrictions on all program funds (e.g., restriction on pension deposits, restriction on using funds for non-federal match where barred by regulation or statute) would apply.[9], [10]

Last Revised: March 25, 2022