What are the restrictions placed on funds directed towards public sector revenue loss?

The U.S. Department of the Treasury (“Treasury”) provides examples of both qualifying and non-qualifying revenue loss under the Final Rule. The revenue loss provision is the broadest and most flexible category in the Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) program. Under this provision, recipients may spend funds on any service traditionally provided by governments. While Treasury provides a non-exhaustive list of enumerated eligible uses in the Final Rule, recipients must still comply with CSLFRF regulations and cannot spend funds on ineligible uses.

Calculating Revenue Loss

Generally, to calculate revenue loss for purposes of using funds from the American Rescue Plan Act’s (“ARP”) CSLFRF to replace lost revenue, municipalities may determine their jurisdiction’s specific revenue loss by “choosing a standard allowance of up to $10 million in aggregate, not to exceed their award amount, during the program,” or by “calculating their jurisdiction’s specific revenue loss each year using Treasury’s formula, which compares actual revenue to a [counterfactual] trend.”[1] The counterfactual trend “begins with the last full fiscal year prior to the public health emergency (as required by statute) and projects forward with an annualized growth adjustment.”[2]  Treasury’s Final Rule includes a four-step formula to calculate revenue loss:

• Step 1: Identify revenues collected in the most recent full fiscal year prior to the public health emergency (i.e., last full fiscal year before January 27, 2020), called the base year revenue.
• Step 2: Estimate counterfactual revenue, which is the amount of revenue the recipient would have expected in the absence of the downturn caused by the pandemic…
• Step 3: Identify actual revenue, which equals revenues collected over the twelve months immediately preceding the calculation date.
• Step 4: The extent of the reduction in revenue is equal to counterfactual revenue less actual revenue. If actual revenue exceeds counterfactual revenue, the extent of the reduction in revenue is set to zero for that calculation date.[3]

To the extent it has experienced a qualifying revenue loss, a municipality may use CSLFRF funds for the “provision of government services to the extent of the reduction in revenue experienced due to the COVID-19 public health emergency.”[4] Under the Revenue Loss Category, the Final Rule states that “recipients have broad latitude to use funds for government services up to their amount of revenue loss due to the pandemic.”[5] The Final Rule provides examples of qualified government services, including, but 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;
• Provision of police, fire, and other public safety services (including purchase of fire trucks and police vehicles).[6]

However, the Final Rule also describes a non-exhaustive list of items that do not qualify as government services or eligible use of funds, including:

• debt service and reserve replenishment costs;[7]
• contributions to rainy day funds and similar financial reserves constitute savings for future spending needs;[8]
• satisfaction of any obligation arising under or pursuant to a settlement agreement, judgment, consent decree, or judicially confirmed debt restructuring in a judicial, administrative, or regulatory proceeding, except if the settlement or judgment requires the recipient to provide services to respond to the COVID-19 public health emergency or its negative economic impacts or to provide government services;[9]
• for a program that undermines practices included in the CDC’s guidelines and recommendations for stopping the spread of COVID-19;[10]
• violative of the conflict of interest requirements contained in the Award Terms and Conditions or the Office of Management and Budget’s Uniform Guidance, including any self-dealing or violation of ethics rules;[11]
• violative of other background laws that limit the scope of activities that may be conducted as “government services,” including other state and federal laws;[12] and
• explicitly restricted use of ARP funds, such as:
  • pension deposits that are an extraordinary payment of an accrued, unfunded liability;[13] or
  • use of funds for non-federal match where barred by regulation or statute.[14]

Treasury published additional guidance related to revenue loss in their January 2022, Frequently Asked Questions (“FAQ”) document.[15] The document notes that recipients are not required to use audited financials when calculating revenue loss.[16] Where audited data is not available, recipients are not required to obtain audited data, but still must submit complete and accurate information.[17] Treasury also states “recipients should use their own data sources to calculate general revenue, and do not need to rely on published revenue data from the Census Bureau.”[18] Due to differences in timing, data sources, and definitions, recipients’ self-reported general revenue figures may differ somewhat from those published by the Census Bureau.[19] Recipients may provide data on a cash, accrual, or modified accrual basis, provided that recipients are consistent in their choice of methodology throughout the covered period and until reporting is no longer required.[20]

The Final Rule also offers a standard allowance for revenue loss of $10 million, allowing recipients to opt for either a standard amount of revenue loss or complete a full revenue loss calculation.[21] Recipients selecting the standard allowance may use that amount for government services as described above and discussed in the Final Rule.[22]

In addition, Treasury requires projects with total expected capital expenditures costs exceeding $1 million to undergo additional analysis and increased reporting requirements to justify the capital expenditure.[23] Recipients are expected to meet the substantive requirements of a written justification for the capital expenditures. The written justification should (i) describe the harm or need to be addressed; (ii) explain why a capital expenditure is appropriate to address the harm or need; and (iii) compare the proposed capital expenditure against alternative capital expenditures that could be made.[24]

Further, when preparing their written justification:

1. Recipients should provide a description of the specific harm or need to be addressed, and why the harm was exacerbated or caused by the public health emergency. 
2. Recipients should provide an independent assessment demonstrating why a capital expenditure is appropriate to address the specified harm or need. This should include an explanation of why existing capital equipment, property, or facilities would be inadequate to addressing the harm or need and why policy changes or additional funding to pertinent programs or services would be insufficient without the corresponding capital expenditures.
3. Recipients should assess the proposed capital expenditure against at least two alternative types or sizes of capital expenditures that are potentially effective and reasonably feasible.[25]

Last Revised: March 25, 2022