What is the proper course of action to take if a municipality identifies that it calculated lost revenue incorrectly? Can the funds be put back in the reserves?

Municipalities should follow the revenue calculation guidelines identified in the American Rescue Plan Act of 2021 (“ARP”) and further explained in both the U.S. Department of the Treasury’s  (“Treasury”) Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) Final Rule and Treasury’s CSLFRF Frequently Asked Questions (“FAQs”) as of January 2022.[1]^, [2]^, [3] If a municipality identifies lost revenue incorrectly and/or later identifies that its lost revenue was miscalculated or overcalculated, a municipality must reclassify the corresponding “re-identified” municipal funds into an appropriate municipal subaccount where the calculation error occurred.

Revenue Loss Re-Calculation

While municipalities should always apply their internal financial controls to ensure lost revenue is calculated correctly, Treasury provides municipalities with the opportunity to further identify revenue loss which was miscalculated or overcalculated, and to re-calculate that revenue loss. Treasury appears to recognize that the COVID-19 pandemic can affect economies at different points in time, stating in the Final Rule:

Recipients will have the opportunity to calculate revenue loss at several points throughout the program, recognizing that some recipients may experience revenue effects with a lag. This option to re-calculate revenue loss on an ongoing basis is intended to result in more support for recipients to avoid harmful cutbacks in future years.[4]

In addition, the FAQs state that “recipients should calculate the extent of the reduction in revenue as of four points in time: December 31, 2020; December 31, 2021; December 31, 2022; and December 31, 2023.”[5] In the Final Rule, Treasury has provided the choice to calculate revenue loss based on a fiscal year or a calendar year, provided that choice is maintained for the period of performance.[6] The Final Rule also adjusts for tax changes in order to give a more representative calculation of revenue loss due to the pandemic.[7]

Additionally, Treasury has provided the option for any recipient to use a standard allowance of $10 million for revenue loss. Any recipient can choose the standard allowance instead of calculating revenue loss but must maintain this choice for the entire period of performance.[8]

In the event of a miscalculation or overcalculation, municipalities should follow their internal budgetary procedures designated for reclassifying ineligible costs from the financial accounts identified for CSLFRF expenditures into or returning to the appropriate municipal fund subaccount(s). This reclassification explanation should be documented in accordance with internal financial control mechanisms, rules, procedures, and relevant Treasury and program rules. Notifying Treasury of the miscalculation should be included as a part of the initial interim report, or the quarterly or annual Project and Expenditure reports (which include subaward reporting, and in some cases annual Recovery Plan reports). The Final Rule does not address miscalculations, only re-calculating annually to capture a representative revenue loss over the period of performance. The Final Rule describes remediation and recoupment when Treasury identifies a potential violation in the use of funds but does not specifically address instances when a recipient self-identifies a miscalculation.[9] The municipality should maintain accounting records to assist with compiling and reporting accurate and compliant financial data in accordance with the appropriate accounting standards and principles.[10] 

Use of Funds

The Final Rule gives municipalities broad latitude to use funds for the provision of government services.[11] Reviewing the FAQs and the Final Rule is recommended when determining eligible/ineligible uses.[12]^, [13]

As a reminder, Treasury’s CSLFRF Compliance and Reporting Guidance requires municipalities to take several steps to ensure that funds are used for permitted activities.[14] Municipalities are advised to carefully review the Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (2 CFR Part 200) and any additional regulatory and statutory requirements applicable to the funding stream it is utilizing.[15]

It should be noted that additional information may be provided when Treasury issues new Frequently Asked Questions (“FAQs”) specific to the Final Rule.[16] In addition, Treasury 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.[17]

Last Revised: March 11, 2022