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Treasury clarifies rules governing ARP revenue replacement

As a recipient of an award under the American Rescue Plan Act’s (ARPA) Coronavirus State and Local Fiscal Recovery Funds (CSLFRF), recipients are required to comply with Treasury’s Final Rule. Among other requirements, the Final Rule states “most of the provisions of the Uniform Guidance (2 CFR Part 200) apply to this program, including the Cost Principles and Single Audit Act requirements.” Treasury maintained the right to make certain exceptions to the Uniform Guidance and has provided various iterations of frequently asked questions (FAQs) to recipients providing clarity on the applicability of numerous regulations. 

In the July 27, 2022 version of the FAQ’s, Treasury has provided exceptions to recipients over certain provisions of the Uniform Guidance for expenditures made under “Revenue Replacement” in questions 13.14 – 13.16. These exceptions may change how recipients choose to expend the portion of their award declared as revenue loss. The full text of the exceptions can be found in Treasury’s Frequently Asked Questions. Treasury reminds recipients that while certain provisions of the Uniform Guidance may not apply, they should not deviate from their established practices and policies regarding the incurrence of cost.

Notable changes impacting expenditures made from revenue replacement contained in the updated FAQs:

  • Acquired property, supplies or equipment are exempt from the use and disposition requirements (2 CFR 200.310-316).  If an acquired asset’s use changes, there is no repayment requirement.
  • Federal procurement requirements no longer apply. Instead, award recipients should adhere to their established procurement practices and policies and should expend and account for the funds in accordance with applicable state and local laws.
  • There are no subawards (or subrecipients) under the Revenue Replacement eligible use category. The definition of subrecipient in the Uniform Guidance provides that a subaward is provided for the purpose of “carrying out” a portion of a federal award. Recipients’ use of Revenue Replacement funds does not give rise to subrecipient relationships given there is no federal program or purpose to carry out.
  • Revenue generating programs are not subject to Program Income requirements. Significantly, if a recipient uses Revenue Replacement to fund loans, even if the maturity of the loan is after Dec. 31, 2026, the loaned funds may be considered expended at the point of disbursement to the borrower and repayments on such loans are not subject to program income rules. Similarly, any contribution of Revenue Loss funds to a revolving loan fund may also follow the approach of loans funded under the Revenue Loss eligible use category.

With these changes, recipients may wish to reconsider their strategy for utilizing the portion of their award dedicated as Revenue Replacement. Treasury has afforded an opportunity to do so. Originally, the “one-time, irrevocable” election to calculate revenue loss or take the $10 million standard allowance was to be made with the April 2022 Project and Expenditure Report. Treasury has now extended this deadline through April 2023 and any change will supersede the prior election. Also, previously reported program expenditures can be reallocated among expenditure categories in future Project and Expenditure Reports.   

As a reminder, important CSLFRF requirements applicable to Revenue Replacement have not changed.  Like funds expended from the other expenditure categories, Revenue Replacement expenditures must be obligated by Dec. 31, 2024 and expended by December 31, 2026. The following overarching prohibitions still apply:

  • Extraordinary deposits into pension funds (not applicable to tribes)
  • Debt service payments
  • Replenishment of financial reserves (e.g., “rainy day funds”)
  • Satisfaction of legal settlements and judgments
  • Programs, services or capital expenditures that include a term or condition that undermines the efforts to stop the spread of COVID-19

ARP awards create an opportunity to make transformational improvements in your community. Baker Tilly continues to guide our clients through the evolving landscape of the American Rescue Plan Act.  Please contact us to discuss how our proven Four steps to a successful ARP process can benefit your community.

Baker Tilly Municipal Advisors, LLC is a registered municipal advisor and controlled subsidiary of Baker Tilly Advisory Group, LP. Baker Tilly Advisory Group, LP and Baker Tilly US, LLP, trading as Baker Tilly, operate under an alternative practice structure and are members of the global network of Baker Tilly International Ltd., the members of which are separate and independent legal entities. Baker Tilly US, LLP is a licensed CPA firm and provides assurance services to its clients. Baker Tilly Advisory Group, LP and its subsidiary entities provide tax and consulting services to their clients and are not licensed CPA firms. ©2024 Baker Tilly Municipal Advisors, LLC

Tom L. Kaleko
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