American Rescue Plan Act funding guidance for local governments: What states, cities and counties should consider

The American Rescue Plan Act (ARPA) was created in response to COVID-19 to provide more than $350 billion to state, local, territorial and Tribal governments in efforts to rescue the American economy and support communities struggling in the wake of the pandemic. The emergency funding was designed specifically to help keep front line public workers on the job and paid, while also effectively distributing the vaccine, scaling testing, reopening schools and maintaining other vital services as work continues on beating back the virus.

Earlier in the year, the U.S. Department of the Treasury issued an Interim Final Rule (IFR) that provided guidance on the eligible uses of the funds and reporting requirements. State and local fiscal recovery funding is subject to the guidance specified in the IFR and includes a non-exhaustive list of eligible expenditures, encouraged expenditures, and prohibited expenditures. As final guidance is expected this fall, here are top questions states, cities and counties should keep in mind.

How do states, territories, cities or counties get the funds out into the community and what can the fund be used for?
Use of funding is to provide eligible state, local, territorial and Tribal governments with substantial financial support to meet pandemic response needs and rebuild a stronger and more equitable economy as the country recovers. Recipients may use these funds to support efforts in minimizing the spread of the COVID-19 virus, replace lost revenue by providing support for governmental activities, support immediate economic relief to businesses and households, provide support to remedy systemic health and economic challenges to populations disproportionately affected by the pandemic, or for investments in water, sewer and broadband internet infrastructure.

The broad overall categories allow recipients to have flexibility in determining how best to use funding to meet the needs of their communities.

Are there areas that states, cities and counties should avoid when using ARPA funds?
Bottom line, yes. Funds cannot be used for replenishing reserve funds, payments on outstanding debt or loans, extraordinary payments towards pension funds, paying judgements, and using funds as the local match when applying for federal grants. Additionally, funds allocated to states cannot be used to directly or indirectly to offset tax reductions or delay a tax or tax increase. And lastly, keep in mind all funding must be obligated by the end of calendar year 2024.

Do governments need to be preapproved before starting a specific project?
Preapproval is not required. Governments do not need approval from the Treasury to expend funds. Eligible use guidelines are detailed in Section II of the IFR.

Should governments take the time to calculate revenue loss?
This action should be taken by governments at the state, city and county level. By calculating the extent of revenue loss, governments are afforded a much broader range of projects to choose from. The funds under this category can be used for government services but may not be used for the repayment of outstanding debt, replenishment of reserve funds, payment of judgements or additional pension contributions.

This calculation should be done on an entity-wide basis. The calculation does exclude refunds or correcting transactions, debt proceeds, agency or trust transactions, revenue generated by utilities as defined in the IFR and intergovernmental transfers from the federal government.

Is the cost of hiring a consultant to assist with administering the funds an eligible expenditure?
Fortunately, the guidelines allow governments to use the funds to hire a consultant to help administer the expenditure of the ARPA funds. Hiring consultants can offer governments support with the above important questions and offer support around reporting and auditing.

Reporting guidance for governments
Governments may be required to file interim reports, quarterly project and expenditure reports or recovery plan performance reports. Here are the revised reporting deadlines for the Project and Expenditure Report. States, territories and cities/counties must submit a Project and Expenditure Report by January 31, 2022. Each non-entitlement unit of local government must submit a Project Expenditure Report by April 30, 2022 and then annually thereafter. Treasury issued detailed guidance on using their portal to file reports and has stated that additional information on submitting Project and Expenditure Reports is on the way.

Are audits required?
In addition to reporting, audits are a required process. A non-federal entity that expends $750,000 or more during the non-federal entity’s fiscal year in federal awards must have a single or program-specific audit conducted for that year in accordance with the provisions of this part.

Uniformed guidance requirements

Coronavirus state and local fiscal recovery funds are subject to the requirements set forth in the Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, 2 CFR Part 200. Meaning that “recipients should ensure they maintain proper documentation supporting determinations of costs and applicable compliance requirements, and how they have been satisfied as part of their award management, internal controls, and subrecipient oversight and management.”

Government guidance to successfully use and report on ARPA funds

The office of the state comptroller advises local governments to record the receipt of the funds in the general fund by recording a liability. As expenditures are made for eligible activities, revenues are recognized. If expenditures are made in other funds, interfund transfers will be recorded. By working with consultants, governments will receive the support and guidance needed to navigate the required steps, processes and reporting criteria revolved around ARPA funds.

Gregg Evans and Timothy Doyle are both CPAs and partners at The Bonadio Group. Both serve in the firm’s Government, Complianc, and Labor Division.

Disclaimer: The summary information presented in this article should not be considered legal advice or counsel and does not create an attorney-client relationship between the author and the reader. If the reader of this has legal questions, it is recommended they consult with their attorney.