In 2021, Congress passed the American Rescue Plan Act (ARPA) and provided State and Local Fiscal Recovery Funds (SLFRF) to help communities who experienced financial losses due to the pandemic. While initial funding guidelines were fairly strict, the US Treasury granted more flexibility in using these funds in 2022. Though funding recipients had to choose either a standard allowance or a formula-based approach on their Project and Expenditure report due in April 2022, they can change it in their upcoming April 2023 report. After that, recipients must stick with their choice. To ensure choices align with their circumstances, recipients should ask themselves whether the method they initially chose is still the best option for them. With a deadline for obligating these funds by Dec. 31, 2024, now is the perfect time for local governments to look at their options and determine whether a new spending strategy is needed.
Every expenditure a community seeks to fund using SLFRF must fall within one of the four eligible categories: support COVID-19 public health and economic response; replace lost public sector revenue; provide premium pay to eligible essential workers; or invest in water, sewer, and broadband infrastructure.
Compliance requirements, awards terms and conditions, and the US Treasury’s application of the Uniform Guidance vary depending on which category local governments decide to use for spending their funds. Of the four categories, replacing lost public sector revenue is the most flexible and has the most streamlined reporting requirements.
Here’s an example of how the revenue replacement category can provide increased flexibility and streamlined reporting:
A town might want to improve access to safe drinking water for residents served by private wells. This is an eligible project under the water, wastewater, and broadband infrastructure category. To follow the guidelines under that category, the town will be responsible for procuring construction services following lengthy federal procurement guidelines and tracking the infrastructure according to property management guidelines.
By contrast, if the town uses the revenue replacement funds category for this project, it must only follow state and local guidelines, effectively lowering its administrative burden.
This is one example of how local governments can align their projects with the category that yields the best funding for the lowest amount of work.
Local governments’ revenue replacement dollars remain subject to the award terms and conditions in the Uniform Guidance. However, in July 2022, the US Treasury updated its Final Rule FAQs to clarify which Uniform Guidance provisions apply to revenue replacement dollars. The Final Rule excludes some of the Federal procurement laws, property management guidelines, program income tracking, and sub-awardee monitoring.
While each recipient should strive to use their funds responsibly, it’s worth noting that the lower administrative burden in the revenue replacement category makes completing specific projects—like water, wastewater, and stormwater infrastructure projects—more straightforward.
In addition to the reduced requirements for infrastructure projects, revenue replacement projects do not require subrecipient monitoring, according to federal guidelines. This means if a local government wants to award some of its funds to another entity to carry out a program on its behalf, such as portioning funds to a non-profit for water and rent relief for low-income citizens, it will not need to track all the non-profit’s activities.
Aside from a few ineligible uses, like debt payments, rainy day funds, pension fund contributions, legal fees, and settlements, anything allowed by state and local law is eligible under the revenue replacement category. So, even if a recipient may have allocated funds to a project in a different category, it can now do that same project under the revenue replacement category and take advantage of its streamlined reporting guidelines.
In addition to the SLFRF spending flexibility in the revenue replacement category, more flexibility was added to ARPA funding in the December 2022 ARPA Flex provision passed as part of the Consolidated Appropriations Act. The US Treasury is expected to release detailed guidance for this at any time now. The provision includes increased flexibility for spending up to $10 million or 30% of a recipient’s allocation on transportation, disaster recovery, and HUD-eligible projects. Additionally, it provides funding for the US Treasury to give more technical and administrative support to SLFRF recipients (responding to questions, walking through reports, and other necessary parts of the process).
While there may be more guidance beyond ARPA Flex, local governments should not wait to decide how to spend their funds. The December 2024 deadline to obligate funds will be here fast, and enough is known already about the opportunities available.
If you’d like some assistance with making the most of your funds as you identify your priorities, and involve stakeholders, give us a call, and let us help you see how this one-time investment can be used to reap many rewards for the long term.