What happens if cities commit funds relying on the Interim Final Rule and the guidance changes in the Final Rule?

On January 6, 2022, the U.S. Department of the Treasury (“Treasury”) released the Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) Final Rule[1], accompanied by a Statement Regarding Compliance with the CSLFRF Interim Final Rule and Final Rule (the “Statement”).[2]

The Statement addresses the need to reconcile the scopes of the Interim Final Rule and the Final Rule, clarifying critical areas of flexibility to prevent undue administrative burden and the potential retroactive ineligibility of projects initiated and substantially begun under the Interim Final Rule. It states:

State, territorial, local, and Tribal governments (together, recipients) must comply with the final rule beginning on April 1, 2022, when the final rule takes effect. Prior to April 1, 2022, recipients may take actions and use funds in a manner consistent with the final rule, and Treasury will not take action to enforce the interim final rule if a use of funds is consistent with the terms of the final rule, regardless of when the [CSLFRF] funds were used.[3]

Prior to April 1, 2022, the interim final rule remains in effect. Accordingly, recipients may obligate and expend funds in a manner consistent with the interim final rule prior to April 1, 2022.  In addition, Treasury recognizes that recipients have taken steps to use [CSLFRF] funds for projects in a manner consistent with the interim final rule. To the extent that a recipient has taken significant steps toward obligating [CSLFRF] funds in a manner consistent with the interim final rule prior to January 6, 2022, Treasury will generally not take action to enforce provisions contained in the final rule, to the extent that they are more restrictive than those in the interim final rule. Such significant steps include initiation of procurement or grantmaking actions, detailed planning of projects or programs, appropriation of funds, and other significant planning steps.[4]

To document any decisions made with reference to the scope of the Interim Final Rule, municipalities should consider developing an audit narrative. An audit narrative may include:

• any policy and eligibility decisions made to fund a program under CSLFRF;
• sections of the Interim Final Rule referenced to make an eligibility decision;
• timelines associated with eligibility decisions;
• supporting documentation requirements;
• reporting requirements; and a formal authorization to appropriate CSLFRF funding by the municipality’s Board or senior leadership.

Municipalities should also consider performing regular compliance audits to ensure its audit narrative contains the information above. Proactive compliance audits focusing on the audit narrative and other key documents may help identify gaps in record-keeping that, if gone unnoticed, could result in sanctions from the federal government. It is also a good practice to save copies of all versions of Treasury’s CSLFRF guidance. This allows a municipality to refer to the specific guidance that informed each funding and allocation decision.

Last Updated: January 28, 2022