Under the American Rescue Plan Act (“ARP”), how close of a nexus must be demonstrated to show that services provided are directly tied to a person impacted by the pandemic or a person within a vulnerable population?

The American Rescue Plan Act of 2021 (“ARP”) authorizes municipalities to use Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) to respond to the negative economic consequences of the COVID-19 pandemic. Neither the ARP nor the U.S. Department of the Treasury’s (“Treasury”) Final Rule precisely defines what nexus must be demonstrated between the pandemic and a proposed project or service.

Treasury guidance indicates that municipalities must make a threshold determination as to whether the COVID-19 public health emergency. With respect to eligibility requirements, the Final Rule considers the following:

First, there must be a negative economic impact, or an economic harm, experienced by an individual or a class. The recipient should assess whether, and the extent to which, there has been an economic harm, such as loss of earnings or revenue, that resulted from the COVID–19 public health emergency. A recipient should first consider whether an economic harm exists and then whether this harm was caused or made worse by the COVID–19 public health emergency… Second, the response must be designed to address the identified economic harm or impact resulting from or exacerbated by the public health emergency. In selecting responses, the recipient must assess whether, and the extent to which, the use would respond to or address this harm or impact.[1]

With respect to eligibility in disproportionally impacted households and communities, the Final Rule states:

the final rule presumes that an expanded set of households and communities are “impacted” or “disproportionately impacted” by the pandemic, thereby allowing recipients to provide responses to a broad set of households and entities without requiring additional analysis. Further, the final rule provides a broader set of enumerated eligible uses available for these communities as part of COVID-19 public health and economic response, including making affordable housing, childcare, and early learning services eligible in all impacted communities and making certain community development and neighborhood revitalization activities eligible for disproportionately impacted communities.[2]

Therefore, there is a presumption of eligibility when CSLFRF assistance is used in households and communities which are “impacted” or “disproportionally impacted” by the pandemic.

The Final Rule maintains the presumption that low- and moderate-income households were negatively impacted by the pandemic. The Final Rule states that:

The final rule defines a household as low income if it has (i) income at or below 185 percent of the Federal Poverty Guidelines (FPG) for the size of its household based on the most recently published poverty guidelines by the Department of Health and Human Services (HHS) or (ii) income at or below 40 percent of the Area Median Income (AMI) for its county and size of household based on the most recently published data by the Department of Housing and Urban Development (HUD).

The final rule defines a household as moderate income if it has (i) income at or below 300 percent of the FPG for the size of its household based on the most recently published poverty guidelines by HHS or (ii) income at or below 65 percent of the AMI for its county and size of household based on the most recently published data by HUD.[3]

In addition, Treasury authorizes recipients of CSLFRF to determine whether to measure income by household or geographic area depending on the scope of services provided.[4]

Treasury further indicates in the Final Rule that:

Recipients may identify classes of households, communities, small businesses, nonprofits, or populations that have experienced a disproportionate impact based on academic research or government research publications, through analysis of their own data, or through analysis of other existing data sources . . . In designing a program or service that responds to a disproportionately impacted class, a recipient must first identify the impact and then identify an appropriate response.[5]

To provide assistance to small business owners using CSLFRF funds, municipalities may use the funds to assist small business owners who have experienced a “negative economic impact from the public health emergency,”[6] or small business owners who operate their business in a Qualified Census Tract (“QCT”) or otherwise-defined disproportionately impacted community.[7]

Treasury identifies “businesses in need” of CSLFRF assistance as:

businesses facing financial insecurity, substantial declines in gross receipts… or other economic harm due to the pandemic, as well as businesses with less capacity to weather financial hardship, such as the smallest businesses, those with less access to credit, or those serving disadvantaged communities.[8] 

In addition, Treasury considers some services and economic assistance automatically eligible for CSLFRF funding when provided in a QCT. These services include:

• Building stronger communities through investments in housing and neighborhoods;
• Addressing educational disparities; and
• Promoting healthy childhood environments.[9]

The Final Rule further clarifies the restrictions on use for CSLFRF for mitigating negative economic impacts: “While economic impacts may either be immediate or delayed, individuals or classes that did not experience a negative economic impact from the public health emergency would not be eligible beneficiaries under this category.”[10]

In addition to these provisions of the Final Rule, Treasury has addressed in its CSLFRF Frequently Asked Questions ("FAQ") whether recipients must demonstrate that each individual or business that benefits from the use of CSLFRF assistance experienced a negative impact from the pandemic. Treasury’s response states in pertinent part:

Not necessarily. The Interim Final Rule allows recipients to demonstrate a negative economic impact on a population or group and to provide assistance to households or businesses that fall within that population or group. In such cases, the recipient need only demonstrate that the household or business is within the population or group that experienced a negative economic impact.[11]

The response to this question describes the flexibility that recipients have in demonstrating negative impacts within their communities.

Additional information may be provided when Treasury issues new FAQs specific to the Final Rule.[12] Treasury also encourages municipalities to consider the guidance issued in the Statement Regarding Compliance with the Coronavirus State and Local Fiscal Recovery Funds Interim Final Rule and Final Rule.[13]

Last Revised: February 3, 2022