What are the parameters on using lost revenue funds?

The Final Rule identifies four categories of allowable uses for Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) funds:

• To respond to the public health emergency or its negative economic impacts, including assistance to households, small businesses, and nonprofits, or aid to impacted industries such as tourism, travel, and hospitality;
• To respond to workers performing essential work during the COVID-19 public health emergency by providing premium pay to eligible workers;
• For the provision of government services to the extent of the reduction in revenue due to the COVID–19 public health emergency relative to revenues collected in the most recent full fiscal year prior to the emergency; and,
• To make necessary investments in water, sewer, or broadband infrastructure.[1]

The Final Rule identifies non-exclusive examples of eligible use as well as certain prohibitions of use.[2] Municipalities should review the Final Rule and the associated Frequently Asked Questions (“FAQs”) as they begin to determine how to spend their funds. To aid in these determinations, the Final Rule also outlines restrictions on the use of CSLFRF funds. These restrictions include deposits into pension funds, offseting a reduction in net tax revenue, paying interest or principal on outstanding debt, replenishing rainy day or other reserve funds, or paying settlements or judgements.[3]

Recipients have a choice between two options to determine their amount of revenue loss. Once the choice is made, recipients cannot switch between these approaches.[4]

1. Recipients may elect a “standard allowance” of $10 million to spend on government services through the period of performance.

• Under this option, which is newly offered in the Final Rule, Treasury presumes that up to $10 million in revenue has been lost due to the public health emergency and recipients are permitted to use that amount (not to exceed the award amount) to fund “government services.” The standard allowance provides an estimate of revenue loss that is based on an extensive analysis of average revenue loss across states and localities, and offers a simple, convenient way to determine revenue loss, particularly for CSLFRF’s smallest recipients. All recipients may elect to use this standard allowance instead of calculating lost revenue using the formula below, including those with total allocations of $10 million or less. Electing the standard allowance does not increase or decrease a recipient’s total allocation.[5]

2. Recipients may calculate their actual revenue loss according to the formula articulated in the Final Rule.

• Under this option, recipients calculate revenue loss at four distinct points in time, either at the end of each calendar year (e.g., December 31 for years 2020, 2021, 2022, and 2023) or the end of each fiscal year of the recipient. Under the flexibility provided in the Final Rule, recipients can choose whether to use calendar or fiscal year dates but must be consistent throughout the period of performance. Treasury has also provided several adjustments to the definition of general revenue in the Final Rule.[6]

After recipients have determined their lost revenue, they can then use CSLFRF funds to pay for government services up to the revenue loss amount. Government services generally include any service traditionally provided by a government, unless Treasury has stated otherwise.[7] Examples provided by Treasury may include but are not limited to:

• Construction of schools and hospitals;
• Road building and maintenance, and other infrastructure;
• Health services;
• General government administration, staff, and administrative facilities;
• Environmental remediation, and;
• Provision of police, fire, and other public safety services (including purchase of fire trucks and police vehicles).[8]

The revenue replacement eligible use offers municipalities more flexibility than other CSLFRF eligible use categories. Funds are subject to streamlined reporting and compliance requirements. Recipients should be mindful that certain restrictions, which are detailed further in the Final Rule’s restrictions on use section and apply to all uses of funds, apply to government services as well.[9]

Notably, Treasury may provide additional information when it issues new FAQs specific to the Final Rule.[10]