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Local Governments & The Final Rule: Coronavirus State and Local Fiscal Recovery Funds

May 3, 2022

The Coronavirus State and Local Fiscal Recovery Funds (SLFRF) program is part of the American Rescue Plan, which delivers a total of $350 billion to various governmental entities to support their response to and recovery from the COVID-19 public health emergency.

In May 2021, the U.S. Treasury published the Interim Final Rule (IFR) describing eligible and ineligible uses of these funds and sought public feedback on the program rules. The result of the feedback and additional consideration by the Treasury resulted in the Final Rule, which was published in late January 2022. The Final Rule is said to deliver broader flexibility and greater simplicity in the program. Below are the key areas of the use of the SLFRF funds:

  1. Replacement of lost public sector revenue:
    • This is the most flexible spending category for SLFRF funds.
  2. Public health and economic impacts:
    • Provides funding for expenditures that support an eligible COVID-19 public health or economic response.
  3. Premium pay:
    • Premium pay is provided to eligible workers, with a focus on lower-income and frontline workers performing essential work.
  4. Water, sewer, and broadband infrastructure:
    • The government identifies a broad range of water, sewer, and broadband infrastructure investments to address challenges with broadband access, affordability, and reliability.

The remainder of this summary will focus on the replacement of lost public sector revenues, which became far more significant when the Final Rule was issued.

Prior guidance provided a detailed calculation of lost revenues caused by COVID-19, which was uniquely difficult to calculate, especially for smaller governments. Additionally, many local governments did not experience losses in revenue, which lowered the chances of making SLFRF funds available for general government expenditures.

Fortunately, the Final Rule included a dramatic simplification of lost revenue provisions, allowing any local jurisdiction to take a standard allowance of up to $10 Million for the entire award term. This change allows many local governments to expend their entire SLFRF allocation for general government services, giving governmental entities an even greater opportunity to make the best strategic investments for their communities with these one-time funds. To utilize this standard allowance or the detailed calculation of revenue loss, local governments must make a singular irrevocable election.

Key items to note about the standard allowance:

  • There is no need to calculate the exact loss of revenues caused by the COVID pandemic.
  • Revenue replacement funds may be fully expended for general government services.
  • Other grant compliance, reporting, and recordkeeping requirements still apply.

What Are General Government Services?

The Treasury did not define general government services in The Final Rule. Instead, a non-exclusive list of general government services was listed in its supplemental information, “maintenance or pay-as-you-go (pay-go) funded building of infrastructure, including roads; modernization of cybersecurity, including software, hardware, and protection of critical infrastructure; environmental remediation; health services; school or educational services; and the provision of police, fire, and other public safety services.” The listed examples indicate that the definition of general government services is expansive and encompasses both capital and operational expenses.

What is not allowed with SLFRF funds?

  • Extraordinary payments into pension funds.
  • Using the funds to borrow money or make debt service payments.
  • Replenishing rainy-day funds or funding other financial reserves.
  • Satisfying an obligation arising from a legal proceeding.
  • Undermining efforts to stop the spread of COVID-19.
  • Using the funds in violation of conflict-of-interest requirements or in violation of any applicable federal, state, or local laws and regulations.

Compliance and Reporting

Since the SLFRF funds are Federal grant awards, the use of the funding is subject to all of the federal Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, 2 CFR Part 200 (Uniform Guidance or UG). The UG is a set of regulations that apply to federal grant awards management.

The Treasury provides a mechanism in the Project and Expenditure report for a local government to elect the standard allowance or the revenue-loss formula option. The local government must track and report how the funds are spent with either option.

What Now?

For most local governments, electing the standard allowance will enable the spending of all SLFRF funds for general government services. Before you finalize your expenditure decisions, your finance personnel should become familiar with the compliance provisions to ensure the municipality’s systems can properly account for the funds and provide proof of compliance. The scope of each of these policies and procedures should include at least the following minimum compliance requirements:

  1. Adopt a budget.
  2. Set up an accounting system to track obligations and expenditures by cost item.
    • You must explain how the revenue replacement funds were allocated to specific government services.
  3. Adopt and implement written policies and procedures.

Specific policies are mandated to be adopted and followed by governmental units and may trigger others if funds are expended in particular ways.

Mandated for All Local Governments:

  • Eligible Use Policy
  • Allowable Costs and Cost Principles Policy
  • Nondiscrimination Policy
  • Records Retention Policy
  • Conflict of Interest Policy
  • Financial Management and Internal Controls

Triggered by Certain Expenditures:

  • Program Income Policy
    • local government uses SLFRF funds to establish a loan program or otherwise earns income related to an SLFRF expenditure
  • Procurement Policy
    • local government contracts for goods or services paid for with SLFRF funds or must engage in a Single Audit (even if the audit is paid for with other funds
  • Property Management Policy
    • if a local government uses SLFRF to acquire or improve any real property, equipment, or supplies
  • Subaward Policy
    • local government partners with another government, nonprofit, or other private entity to carry out an SLFRF-eligible project

Don’t miss out on the funding benefits that the Coronavirus State and Local Fiscal Recovery Funds program has made available for your governmental organization. For further guidance on the Final Rule, contact your local CRI professional and check out our supplemental Coronavirus State and Local Fiscal Recovery Funds compliance resource.

 

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