How State and Local Governments Can Use Recent Influx of Coronavirus Recovery Funds under the ARPA

On March 11, 2021, President Biden signed the American Rescue Plan Act (ARPA) into law. The Act will provide a total of $350 billion in Coronavirus State and Local Fiscal Recovery Funds (Fiscal Recovery Funds) to help eligible state, local and tribal governments continue to respond to the COVID-19 pandemic and its economic impact.

So far, the Treasury Department reports that it has distributed $194 billion. Cities and municipalities are using the funds in a variety of ways, including funding for the homeless, improving broadband access and making other infrastructure investments.

Local governments should expect to receive funds in two tranches with 50% having been received in May 2021 and the balance to be delivered 12 months later.

These funds have four categories of eligible uses:

• Funding COVID-19 mitigation efforts and addressing negative economic impacts
• Provide premium pay for essential workers
• For provision of government services to the extent of the loss of revenue
• Investments in water, sewer and broadband infrastructure

Within these overall categories, the Treasury’s Interim Final Rule provides guidance for determining the types of programs and services that the funds can be used to support, along with examples of allowable uses.

• 1. Funding COVID-19 mitigation efforts and addressing negative economic impacts

  Because the impact of COVID-19 continues to require unprecedented public health response, the Fiscal Recovery Funds provide resources to address a broad range of needs across COVID-19 mitigation, behavioral health care, payroll and benefits.

  The funds can be used for COVID-19 mitigation programs and services such as vaccination programs, medical expenses, contact tracing, quarantine costs, capacity enhancements and many related activities.

  Services to address behavioral health care needs include mental health and substance misuse treatment, crisis intervention and other related services.

  Payroll and covered benefits for public health, health care, human services and public safety staff to the extent that they work on COVID-19 related responses would be also be appropriate uses of funds to support the public health response.

  In order to address the negative economic impact of COVID-19, U.S. Department of Treasury lists allowable uses such as delivering assistance to workers and families; supporting small businesses with loans, grants, in-kind assistance and counseling programs; speeding up impacted industries such as travel, tourism and hospitality; and rebuilding the public sector by rehiring staff and implementing economic relief programs.

  2. Provide Premium Pay for Essential Workers

  Fiscal Recovery Funds also provide resources for eligible local governments to recognize the heroic contributions of essential workers. Since the start of the public health emergency, essential workers have put their physical well-being at risk to meet the daily needs of their communities and to provide care for others with little, if any, compensation for the heightened risks they have faced.

  Recipients may use these funds to provide premium pay directly, or through grants to third-party employers, to a broad range of essential workers in critical infrastructure sectors such as health care, grocery and food services, education, childcare, sanitation and transit.

  Treasury’s Interim Final Rule emphasizes the need for recipients to prioritize premium pay for lower income workers. Providing premium pay to eligible workers helps address the disparity between the critical services and risks taken by essential workers and the low compensation they tend to receive in exchange.

  Furthermore, because premium pay is intended to compensate essential workers for the heightened risk due to COVID-19, it must be entirely additive to their regular rate of pay. In addition, employers are both permitted and encouraged to use Fiscal Recovery Funds to offer retrospective premium pay for work performed any time since the start of the COVID-19 public health emergency, where those workers have yet to be compensated adequately for previous work performed.

  3. Revenue Loss

  Many cities have experienced significant budget shortfalls due to the COVID-19 public health emergency, which can have a devastating impact on their respective communities. Faced with budget shortfalls and pandemic-related uncertainties, local governments have cut staff in all 50 states. These budget shortfalls are particularly problematic in the current environment, as local governments work to mitigate and contain the COVID-19 pandemic and helps its citizens weather the economic downturn. Recipients can use the Fiscal Recovery Funds to avoid cuts to valuable government services and ensure that fiscal austerity measures does not hamper the broader economic recovery.

  Recipients may use these funds to replace public sector revenue loss. Treasury’s Interim Final rule establishes a methodology that recipients can use to calculate their reduction in revenue. Specifically, it requires recipients to compute the extent of their reduction by comparing their actual revenue to an alternative representing what could have been expected to be earned in the absence of the pandemic. Analysis of the expected trend begins with the last full fiscal year prior to the public health emergency (fiscal year 2019 for most entities) which is considered the base year, and projects forward at either (a) the recipient’s average annual revenue growth over the three full fiscal years prior to the public health emergency or (b) 4.1%, the national average annual State and local revenue growth rate in the most recent three years of available data (2015-2018).

  For administrative convenience, Treasury’s Interim Final Rule allows recipients to presume that any diminution in actual revenue relative to the expected trend is due to the COVID-19 public health emergency.

  Upon receiving Fiscal Recovery Funds, recipients may immediately calculate revenue loss for the period ending December 31, 2020 and deploy funds to address any shortfall. Recipients will have the opportunity to recalculate their revenue loss at other points in the program (specifically December 31, 2021, 2022 and 2023). This will assist entities that experience a lagged impact of the crisis on revenues.

  It is important to note that once a shortfall has been identified, recipients will have broad latitude in the use of these funds for the provision of government services up to the amount of lost revenue. Government services can include, but are not limited to, maintenance of pay-go funded building of infrastructure, including roads; modernization of cybersecurity, including hardware, software and protection of critical infrastructure; health services; environmental remediation; school or educational services; and the provision of police, fire and other public safety services.

  4. Investments in Infrastructure

  To assist in meeting the critical need for investments in and improvements to existing infrastructure in water, sewer and broadband, the Fiscal Recovery Funds provide funding to local governments to make necessary investments in these sectors.

  Recipients may use this funding to identify a wide range of drinking water and waste water infrastructure projects. Examples of drinking water projects include building or upgrading facilities and transmission, distribution and storage systems while waste water projects may include constructing publicly-owned treatment infrastructure, managing or treating stormwater or subsurface drainage water, facilitating water reuse, and securing publicly-owned treatment works.

  The Interim Final Rule helps recipients expedite the execution of their investments by aligning the eligible uses of the Fiscal Recovery Funds with the wide range of projects that would be eligible to receive financial assistance through the Environmental Protection Agency’s (EPA) Clean Water State Revolving Fund or Drinking Water State Revolving Fund. Recipients retain substantial flexibility to identify those water and sewer infrastructure investments that are of the highest priority for their own communities.

  The pandemic has underscored the importance of access to universal, high-speed, reliable and affordable broadband coverage, as millions of Americans rely on the internet for every facet of daily life including school, health care and work. By at least one measure, however, tens of millions of Americans live in areas where there is no broadband service or where existing service does not deliver minimally acceptable speeds. For millions of others, the high cost of broadband access places it out of reach. The American Rescue Plan aims to remedy this issue by allowing the use of Fiscal Recovery Funds to invest in broadband infrastructure.

  The Interim Final Rule provides that investments be made in areas that are unserved or underserved (lacking a wireline connection that delivers minimum reliable speeds of 25 Mbps download and 3 Mbps upload). Recipients are encouraged to prioritize projects that achieve last-mile connections to households and businesses.

  In using Fiscal Recovery Funds for this purpose, recipients should build broadband infrastructure with modern technologies in mind (specifically, those that deliver reliable upload and download speeds of 100 Mbps, unless impracticable). The Interim Final Rule also points out that assistance to households facing negative economic impacts due to COVID-19 is also an eligible use of the funds, including internet access and digital literacy assistance.

  Ineligible Uses

  Fiscal Recovery Funds provide substantial resources to help cities combat the COVID-19 emergency and its economic impact. Recipients have considerable flexibility in determining how best to use the funds in order to address the needs of their own communities.

  To ensure that the funds are used for their intended purpose, the ARPA includes two provisions that further define the boundaries of the statute’s eligible uses:

  1. States and territories may not use the funds to either directly or indirectly offset a reduction in net tax revenue resulting from a change in law, regulation or administrative interpretation during the covered period; and
  2. No recipient may use this funding for deposit into any pension fund.

  Treasury’s Interim Final Rule also identifies several other ineligible uses including funding debt service, paying legal settlements or judgments and deposits into “rainy day” funds or financial reserves.

For detailed information, including steps to apply for funding, visit the U.S. Treasury website. If you have questions about ARPA funds and reporting requirements, contact us. We are here to help.

© 2021