Local government revises American Rescue Plan funding strategy after Final Rule is released

As the U.S. Treasury Department (Treasury) released the American Rescue Plan Act of 2021 (ARP) Final Rule on Jan. 6, now is the time for local governments to revise (or begin creating) their plan to utilize this potentially transformational funding source.

The Final Rule fills nearly 500 pages and makes numerous changes to the Interim Final Rule.  Government leaders should understand the Final Rule’s basics and key provisions to ensure compliance and optimize their community’s available ARP funds.

Understanding the basics

The ARP, signed into law on March 11, 2021, allocated $350 billion in pandemic-related aid to states, territories, tribes and local governments. This includes $130.2 billion in State and Local Fiscal Recovery Funds (SLFRF) to local governments. The SLFRF Interim Final Rule released by the Treasury in May 2021 was superseded by the Final Rule when it was distributed earlier this month.

The Final Rule preserves the Interim Rule’s focus on promoting a strong, equitable recovery by:

  • Supporting COVID-19 response efforts
  • Replacing lost public sector revenue
  • Economically stabilizing impacted households and businesses
  • Addressing systemic public health and economic challenges inequitably borne by certain populations

The Final Rule also generally maintains previously authorized eligible uses. However, it increases the flexibility with which the funds may be utilized and, in many cases, simplifies administration.

The Final Rule becomes effective on April 1, 2022. SLFRF obligations and expenditures incurred prior to that date should comply with either the Interim Final Rule or the Final Rule.  The Final Rule will govern all obligations and expenditures incurred after April 1, 2022.

ARP Final Rule key provisions

The most significant change in the Final Rule is a dramatic simplification to the lost revenue provision. To identify the general revenue amount lost due to the pandemic, recipients may now choose to do one of the following:

  • Perform the revenue loss calculation provided in the Final Rule
  • Assume a standard allowance of up to their entire award or $10 million, whichever is less

As provided in a recent Baker Tilly webinar, revenue loss dollars can be used for “government services,” a broad category that includes roads and public safety. Since 70% of counties and 90% of municipalities received awards less than $10 million, this change greatly expands potential eligible uses.

Revenue loss funds may be used to meet the non-federal cost share or matching requirement of other federal programs. However, these funds may not be used for the non-federal share of a state’s Medicaid program and/or Children’s Health Insurance Program (CHIP). Additional overarching use prohibitions still apply, such as debt service, pensions, legal judgments and deposits into rainy day funds.

It may be advantageous to perform the revenue loss calculation if a recipient’s award is greater than $10 million and its general revenues have been greatly reduced during the pandemic. Communities electing to calculate revenue loss now have the option to determine revenue loss on a fiscal year or calendar year basis. However, they must consistently apply whatever option they choose. They also may adjust their calculation based on certain tax increases and decreases adopted after Jan. 6, 2022. The revenue loss calculation still requires identification of a pre-pandemic revenue growth rate to which actual revenue gain (or loss) is compared. Recipients may choose to calculate the actual rate or utilize a standard growth rate. The standard growth rate is increased in the Final Rule from 4.1% to 5.2%.

Entities will make an election whether to use the $10 million standard allowance or revenue loss calculation when they file their first Project and Expenditure report (“P&E”) in January 2022. This election may be changed by the recipient with the P&E filed in April 2022. (Read this article for your organization’s reporting deadline.)

The Final Rule also includes new or expanded provisions aimed at responding to the public health and economic impacts of COVID-19. These include:

  • Paid family and medical leave for public sector employees to enable compliance with COVID-19 public health precautions
  • Local government re-hiring up to 107.5% of its pre-pandemic baseline
  • Additional funding eligibility for employees who were furloughed or experienced pay cuts, worker retention incentives and administrative costs related to hiring, support and retention. Notably, funds may be used to maintain inflationary adjusted compensation levels to avoid layoffs
  • Premium pay clarification and streamlining (although no substantial change to the benefit that may be provided)
  • Clarity on capital expenditures permitted outside of the infrastructure expenditure category, with additional reporting requirements for capital expenditures over $1 million

The Final Rule eases the identification of households, businesses and not-for-profits negatively impacted by the pandemic. Metrics are provided to help determine those “impacted” and “disproportionately impacted.” Those meeting certain defined thresholds may be presumed eligible. A methodology is available to identify eligible uses outside of those explicitly defined in the Final Rule.

Infrastructure eligibility is expanded in the Final Rule to include certain stormwater, residential well, lead remediation and dam/reservoir rehabilitation projects. Broadband infrastructure eligibility is expanded to include cybersecurity modernization.

Changes to the ARP Final Rule are described in greater detail in the Treasury’s Coronavirus State & Local Fiscal Recovery Funds: Overview of the Final Rule and the official Final Rule document.

Next steps to take

Now that the Final Rule is in place, local governments should revisit previously prepared strategic plans for leveraging Fiscal Recovery Funds or begin developing your plans. Baker Tilly’s specialized public sector Value Architects™ will help you translate the Final Rule’s 500 pages into consumable guidelines tailored specifically to your community’s needs and get the most out of your entity’s allotted funding while confidently maintaining compliance. Our comprehensive federal, state and local funding solution guides governments through this historic wave of federal funding. The flexibility afforded in the ARP Final Rule coupled with funding coming to entities from the Infrastructure Investment and Jobs Act makes it more important than ever to have an ally like Baker Tilly as your first mate.

Our team will meet you where you are in your community’s funding journey and help craft a strategic funding path to reach your long-term goals. For additional information, or to learn more about how Baker Tilly can help your community, contact our team.

Tom L. Kaleko
Sheanne Hediger
Team working in office
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