What are the restrictions on how a municipality can spend funds claimed as a result of lost revenue in an enterprise fund?

As detailed below, because the U.S. Department of the Treasury (“Treasury”) mandates that revenue loss must be calculated on an “entity-wide basis,” a municipality has broad latitude in deciding how to allocate funding for the provision of government services. While simply replenishing an enterprise fund is not an allowable purpose, funding activities for which an enterprise fund usually pays would be allowable if these activities relate to the provision of government services. Using revenue replacement funds to provide services normally paid for by the enterprise funds that lost revenue may allow those funds to restabilize over time.

The Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) established by the American Rescue Plan Act of 2021 (“ARP”) were designed to help “mitigate the fiscal effects stemming from the public health emergency with respect to the Coronavirus Disease (‘COVID-19’).”[1] CSLFRF provides opportunities for municipalities to address reductions in revenue due to COVID-19. Section 603(c)(1)(C) of the ARP states that CSLFRF funds may be used for (among other uses):

the provision of government services to the extent of the reduction in revenue of such metropolitan city, nonentitlement unit of local government, or county due to the COVID–19 public health emergency relative to revenues collected in the most recent full fiscal year of the metropolitan city, nonentitlement unit of local government, or county prior to the emergency.[2]

One consideration in accounting for the CSLFRF funds is the requirement in Treasury’s Final Rule implementing CSLFRF that revenue must be calculated on an entity-wide basis.[3] Because of this requirement, the municipality will have to calculate its total revenue loss before determining whether to use CSLFRF funds for addressing revenue loss experienced in a single enterprise fund. Funds awarded through revenue replacement must be used for the provision of government services.[4] The Final Rule further states:

Treasury continues to believe that the lists of activities that either are or are not providing government services are accurate but is clarifying here that, generally speaking, services provided by the recipient governments are “government services” under the interim final rule and final rule, unless Treasury has stated otherwise. Government services include, but are not limited to, maintenance or pay-go funded building of 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.[5]

Under the Final Rule, the following uses of funds are not eligible under this eligible use category:

• 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.[6]

Last Revised: February 16, 2022