Treasury increases flexibility for municipal use of ARPA funds

The Final Rule governing the use of Coronavirus State and Local Fiscal Recovery Funds from the American Rescue Plan Act, issued today by the U.S. Department of the Treasury, significantly increases flexibility for municipalities, particularly in the way they calculate local tax revenue loss attributable to the pandemic.

The ARPA defines four broad use categories for the State and Local Fiscal Recovery Fund program: response to the public health emergency or its negative economic consequences; provision of premium pay to eligible workers; revenue replacement; and investments in water, sewer and broadband infrastructure. The Final Rule maintains these categories but expanded them considerably.

Standard allowance for revenue loss
A new provision in the Final Rule allows municipalities to use a standard allowance of up to $10 million for the revenue loss category, as an alternative to the previous revenue loss calculation formula. This will simplify the process for many municipalities, and allow many cities and towns to claim the entirety of their State and Local Fiscal Recovery Fund grant award under revenue loss.

Because the amount claimed under revenue loss can be used for “general government services,” this single provision change provides significant flexibility for municipalities. “General government services” includes any service traditionally provided by a government, other than a few exceptions explicitly identified by the Treasury.

The Final Rule lists some common examples of “general government services,” including construction of schools and hospitals, road building and maintenance and other infrastructure, health services, general government administration, staff and administrative facilities, environmental remediation, and provision of police, fire and other public safety services (including purchase of fire and police vehicles).

Revenue loss calculation
In cases where a municipality chooses to use the original revenue loss calculation, any of its ARPA grant funds beyond the revenue loss amount would be subject to the requirements for the remaining three expense categories.

For eligible expenses related to responding to the public health emergency or its negative economic impacts, the Final Rule expands the non-exhaustive list of municipal uses, including increased clarity for capital expenditures as they relate to the pandemic.

For municipal government operations, the Final Rule includes expanded support for building public sector capacity, potentially beyond pre-pandemic levels, and streamlines the process for issuing premium pay for essential workers.

Under the infrastructure category, which still focuses on water, sewer and broadband, the Final Rule acknowledges that local governments have unique challenges when addressing clean water services and high-speed broadband.

The Final Rule includes a new provision, advocated by the MMA, around private wells and septic systems. The guidance clarifies that municipalities can test and treat residential wells to provide access to clean drinking water.

The Treasury published its Interim Final Rule in May 2021, describing eligible and ineligible uses of ARPA funds (as well as other program provisions). The Treasury sought feedback from the public on the interim rules and began to distribute funds.

The IFR went into effect immediately. Since then, municipalities have used SLFRF funds to meet their immediate needs while adhering to that IFR.

Meanwhile, the MMA solicited feedback from local leaders and advocated for broader flexibility for municipalities. The Massachusetts congressional delegation, led by Sen. Ed Markey and Congressman Jake Auchincloss, joined the effort to get the Treasury to consider changes.

The 437-page Final Rule, as well as a summary of changes from the Interim Final Rule to the Final Rule, are available on the Treasury website.

The Final Rule does not go into effect until April 22, but municipalities may take advantage of the greater flexibility and streamlined processes ahead of the effective date.

The Treasury announced it will not take action to enforce the Interim Final Rule so long as a use of funds is consistent with the terms of the Final Rule, regardless of when the SLFRF funds were used.

Grant recipients may consult the Statement Regarding Compliance with the Coronavirus State and Local Fiscal Recovery Funds Interim Final Rule and Final Rule for more information.

Under the SLFRF program, funds must be used for costs incurred on or after March 3, 2021, and funds must be obligated by Dec. 31, 2024, and expended by Dec. 31, 2026.