Treasury Issues Long-Awaited Guidance on ARPA Funding and FRF

The U.S. Department of the Treasury issued its long-awaited interim final rule on use of American Rescue Plan Act (ARPA) funding on May 10, 2021.

In the two months since the ARPA was signed into law, local governments have wondered how they can use the much-needed funds they’ve received. This announcement contains extensive information about how Fiscal Recovery Funds will assist state/local governments with their public health response and rebuilding a stronger—and more equitable—economy through financial support for essential workers, replacement of lost public sector revenue, and investments in infrastructure.

What are Fiscal Recovery Funds?

Fiscal Recovery Funds (FRF) refer to the $350 billion included in ARPA for state, local, territorial and tribal governments to respond to the COVID-19 emergency and address its economic impact. The goal of the legislation was to support urgent response efforts to mitigate the spread of the virus, replace lost public sector revenue to strengthen investment in communities, support immediate economic stabilization for households and businesses, and address systemic public health and economic challenges that have contributed to the inequal impact of the pandemic.

The majority of the $350 billion will be distributed directly by Treasury, split as follows:

• States and the District of Columbia ($195.3 billion)
• Counties ($65.1 billion)
• Metropolitan cities ($45.6 billion)
• Tribal governments ($20 billion)
• Territories ($4.5 billion)

The remaining $19.5 billion will be distributed to non-entitlement units, or NEUs. These are smaller local governments that will not receive payments directly from Treasury. Rather, NEUs will receive their funding from the states based on population and the conditions and requirements set forth by ARPA and Treasury’s interim ruling.

How can the funds be used?

FRF have a purposefully broad range of eligible uses in order to meet the goals of addressing both the public health risk and economic impact of the COVID-19 pandemic. In broad terms, these include supporting the public health response, replacing public sector revenue loss, addressing negative economic impacts, providing premium pay for essential workers, and improving water, sewer, and broadband infrastructure to create more equitable health and economic outcomes in our communities.

Support Public Health Response

This may seem like the most straightforward portion of the legislation. However, the concept of what constitutes this response was broadened to include more than reimbursement of COVID-19 mitigation efforts such as testing, contact tracing, and purchases of personal protective equipment. It also encompasses behavioral healthcare needs like mental health and substance abuse treatment. These have become a growing concern as the pandemic’s effects on daily life continue into its second year.

This funding can also be used to cover payroll and other covered benefits for public healthcare, human services, public safety, and similar employees to the extent that they address the government’s COVID-19 response. Improvements to capital infrastructure to meet pandemic operational needs are also eligible.

Serving the Hardest-Hit Communities and Families

While the economy has fared better than many experts predicted following its steep decline last spring, there are still significant hurdles facing low-income families and communities of color. These vulnerable communities have also suffered the most severe health impacts. As a result, FRF can be used to address health disparities and social determinants of health and educational disparities. Governments can also use them to make investments in housing and neighborhoods and promote healthy childhood environments.

Utilizing these funds to address these disparities requires that the services be provided within a Qualified Census Tract, to families living within a Qualified Census Tract, or to other populations, households or geographic areas disproportionately impacted by the pandemic.

Addressing Negative Economic Impacts

Negative economic impacts extend to the business community as well. FRF can be used to help small businesses address financial challenges caused by the pandemic and make investments in COVID-19 prevention and mitigation tactics, as well as to provide technical assistance. They can also be spent on efforts to expedite the recovery of the tourism, travel and hospitality sectors by providing aid to support the safe reopening of these businesses. They could also aid a planned expansion or upgrade of facilities that was delayed due to the pandemic. FRF may also be used to supply aid and job training to unemployed workers, as well as aid to households facing food, housing or other financial insecurity.

Replacing Lost Public Sector Revenue

By far one of the most intriguing aspects of the FRF is its ability to be used to offset budget shortfalls to avoid the reduction or cessation of government services. The Interim Rule establishes a methodology to calculate reduction in revenue. Recipients must compute the extent of their reduction in revenue by comparing their actual revenue to an alternative representing what could have been expected in the absence of the pandemic. Analysis of this expected trend begins with the last full fiscal year prior to the public health emergency and projects forward at either the recipients average annual revenue growth over the three full fiscal years prior to the public health emergency or 4.1%, the national average state and local revenue growth rate from 2015-2018.

In an effort to simplify things for recipients and Treasury, recipients may presume that any reduction in actual revenue relative to the expected trend is due to the COVID-19 public health emergency. Upon receiving FRF, recipients may immediately calculate the reduction in revenue that occurred in 2020 and deploy funds to address any shortfall. Recipients will have the opportunity to re-calculate revenue loss at several points through the program, supporting those entities that experience a lagged impact of the crisis on revenues.

Infrastructure Investment

Recipients have the opportunity to utilize FRF to make improvements to their water and sewer infrastructures, including any such improvements that address the impacts of climate change. Funding may be used for a wide array of drinking water and wastewater infrastructure projects.

To simplify the execution of these services, Treasury has aligned its Interim Rule with projects enumerated under the Environmental Protection Agency’s Clean Water State Revolving Fund (CWSRF) and Drinking Water State Revolving Fund (DWSRF). Under the CWSRF, categories of eligible projects include:

• Construction of publicly-owned treatment works
• Nonpoint source pollution management
• National estuary program projects
• Decentralized wastewater treatment systems
• Stormwater systems
• Water conservation, efficiency, and reuse measures
• Watershed pilot projects
• Energy efficiency measures for publicly-owned treatment works
• Water reuse projects
• Security measures at publicly-owned treatment works
• Technical assistance to ensure compliance with the Clean Water Act

Under the DWSRF, categories of eligible projects include:

• Treatment, transmission and distribution (including lead service line replacement)
• Source rehabilitation and decontamination
• Storage
• Consolidation
• New systems development

Recognizing the acute need in certain communities, Treasury’s Interim Rule provides for investments in broadband to be made in areas currently unserved or underserved. This means the area lacks wireline connection that reliably delivers minimum speeds of 25 Mbps download and 3 Mbps upload. Recipients are also encouraged to prioritize projects that achieve last-mile connections to households and businesses. FRF may be used to expand equitable access to high speed broadband of 100 Mbps download and 100 Mbps upload speeds unless deemed impracticable due to topography, geography or financial cost (with an emphasis on the pursuit of fiber optic investments).

Treasury also encourages recipients to ensure these projects use strong labor standards. This includes project labor and community benefits agreements offering wages at or above the prevailing rate and prioritizing local hiring.

Providing Premium Pay for Essential Workers

FRF provides resources for recipients to prioritize pay for lower income workers. This includes the distribution of premium pay to workers in essential services for which heightened risk exists due to their physical presence on the job site. In addition to front line healthcare and public safety staff, the following workers are considered at heightened risk:

• Workers at farms, food production facilities, grocery stores, and restaurants
• Sanitation workers, truck drivers, transit staff, and warehouse workers
• Social and human services staff
• Childcare workers, educators, and school staff.

Premium pay should be prioritized for lower income workers. Premium pay that would increase a worker’s total pay above 150% of the greater of the state or county average annual wage requires specific justification for how it responds to the needs of these workers. In addition, employers are both permitted and encouraged to use FRF to offer retrospective premium pay. This is in recognition that many essential workers have not yet received additional compensation for work performed.

Ineligible Expenditures

ARPA provides only two limitations to the uses of FRF: the use of funding to directly or indirectly offset a reduction in net tax revenue, and making deposits to a pension fund. ARPA ensures that funds needed to provide vital services and support public employees, small businesses and families struggling to make it through the pandemic are not used to fund reductions in net tax revenue. Treasury’s Interim Final Rule implements this requirement.

If a state or territory cuts taxes, it must demonstrate how it paid for the tax cuts from sources other than FRF—by enacting policies to raise other sources of revenue, by cutting spending, or through higher revenue due to economic growth. If the funds provided have been used to offset tax cuts, the amount used for this purpose must be paid back to Treasury. In addition, Treasury’s Interim Rule defines deposits with respect to a pension fund as an extraordinary contribution to the pension fund for the purpose of reducing an accrued, unfunded liability. Routine payroll contributions are not considered deposits.

Treasury’s Interim Rule identifies several other ineligible uses, including funding debt service, legal settlements or judgments, and deposits to rainy day funds or financial reserves. Further, general infrastructure spending is not covered as an eligible use outside of water, sewer and broadband investments or above the amount allocated under the revenue loss provision. While the program offers broad flexibility to recipients to address local conditions, these restrictions will help ensure funds are used to augment existing activities and address pressing needs.

Reporting Requirements

Financial records and supporting documents related to the award must be retained for a period of five years after all funds have been expended or returned to Treasury, whichever is later. This includes those demonstrating the funds were used for eligible purposes in accordance with the ARPA, Treasury’s regulations implementing those sections, and Treasury’s guidance on eligible uses of funds.

In addition, Treasury’s Interim Rule requires recipients to file Interim reports, Quarterly Project and Expenditure reports, and Recovery Plan Performance reports. Direct recipients will need to file interim reports containing expenditures by category at the summary level. States will also need to provide information related to distributions to NEUs of local government from the date of award to July 31, 2021, and submitted to Treasury by Aug. 31, 2021. NEUs will not need to file Interim Reports.

Quarterly Project and Expenditure reports will include the same general data as those submitted by Coronavirus Relief Fund recipients. However, they will have some modifications to expenditure categories and the addition of data elements related to specific eligible uses. The initial quarterly Project and Expenditure report will cover two calendar quarters from the date of award to Sept. 30, 2021 and must be submitted to Treasury by Oct. 31, 2021. The subsequent quarterly reports will cover one calendar quarter and must be submitted to Treasury within 30 days after the end of each calendar quarter.

NEUs of local government will be required to submit the project and expenditure report annually. Their initial annual Project and Expenditure reports will cover activity from the date of award to Sept. 30, 2021 and must be submitted to Treasury by Oct. 31, 2021. The subsequent annual reports must be submitted to Treasury by Oct. 31 each year.

Recovery Plan Performance reports will include descriptions of the projects funded and information on the performance indicators and objectives of each award. This helps local residents understand how their governments are using the substantial resources provided by Coronavirus State and Local Fiscal Recovery Funds program.

The initial recovery plan performance report will cover activity from date of award to July 31, 2021 and must be submitted to Treasury by Aug. 31, 2021. Thereafter, the recovery plan performance reports will cover a 12-month period, with recipients required to submit the report to Treasury within 30 days after the end of the 12-month period. The second Recovery Plan Performance report will cover the period from July 1, 2021 to June 30, 2022 and must be submitted to Treasury by July 31, 2022.

Each annual recovery plan performance report must be posted on the public-facing website of the recipient. Local governments with fewer than 250,000 residents, tribal governments, and NEUs of local government are not required to develop a Recovery Plan Performance report.

What’s next?

Given the broad nature of how FRF can be used and its reporting requirements, along with the evolution of the CRF rules in 2020 after the CARES Act was passed, we expect to see further clarifications and updates from the Treasury in the coming months. We’ll do our best to provide updates as they come.

If you have any further questions about your particular plan to utilize these funds, as always, reach out to your governmental audit CPAs. Conversations with your auditors prior to expending these funds can save your team from headaches and surprises during the audit.

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