Treasury Issues Final Rule on Expenditure of State and Local Coronavirus Recovery Funds

February 4, 2022
Publications

The U.S. Department of the Treasury recently published its final rule implementing the coronavirus state and local fiscal recovery funds (SLFRF) program established by the American Rescue Plan Act of 2021 (ARPA). The final rule adopts with amendments to the interim final rule published by the Treasury on May 17, 2021. The final rule updates the rules governing the expenditure of funds received by public entities under the program.

ARPA was signed into law on March 11, 2021, and provided $350 billion in funding to tribal governments, states, territories and local governments to combat the COVID-19 pandemic, with $220 billion going to states, territories and tribal governments and $130 billion going to local governments. Congress through passage of ARPA authorized expenditure of these funds by recipients on the following four categories of spending: public health and negative economic impacts; premium pay; revenue loss; and water, sewer, and broadband infrastructure.

The Treasury is responsible for promulgating regulations interpreting ARPA, and it did so initially through the publication of the interim final rule, which put some “meat on the bones” of the four categories of spending authorized by Congress. The Treasury received over 1,500 comments to the interim final rule, and in the final rule dedicates hundreds of pages to responding to these comments and describing the changes it is making to the interim final rule.

Public Health and Negative Economic Impacts

The Treasury in the interim final rule provided 12 examples of permitted expenditures that address the pandemic’s impacts on public health and the economy: COVID-19 response and prevention; payroll and benefit expenses for public health and safety staff; payroll and benefit expenses for state and local government staff; unemployment assistance; contributions to unemployment insurance trust fund to replenish such funds up to pre-pandemic levels; small business assistance; nonprofit assistance; direct household assistance (i.e., cash payments); targeted aid to tourism, travel, hospitality and other impacted industries; administrative expenses associated with any COVID-19 response programs; survivors’ benefits (i.e., cash payments); and aid to disproportionately impacted populations and communities.

The final rule restructures this guidance but largely retains its spirit. The final rule establishes a two-part, general rule of application, which provides that the expenditure to be funded with SLFRF funds must identify a harm caused or worsened by the pandemic; and be reasonably designed to benefit those persons or groups impacted by the harm and be related and reasonably proportional to the harm experienced. Some presumptions may come into play in applying the general rule to a proposed expenditure.

As was the case with the interim final rule, the final rule provides that certain individuals and groups are presumed to be impacted by a harm caused or worsened by the pandemic. These individuals and groups include those that experienced unemployment or food or housing insecurity, or qualify for certain federal programs for low and moderate income individuals and families. These programs include the Children’s Health Insurance Program, Medicaid, Temporary Assistance for Needy Families, and the Supplemental Nutrition Assistance Program, among many others. Small businesses and nonprofit associations operating in areas designated by the Department of Housing and Urban Development as “qualified census tracts” (i.e., areas substantially populated by these individuals and families) are also presumed to be impacted.

The final rule provides examples of uses of SLFRF funds that are presumed to be “reasonably proportional” to the harm experienced, unless there is evidence that the use is “grossly disproportionate” to the harm. These examples are pulled from the examples of permitted expenditures contained in the interim final rule, with some changes. Most notably, the final rule explicitly authorizes the use of SLFRF funds for capital expenditures, with one important caveat.

Under the final rule, the Treasury will require the recipient of SLFRF funds to prepare a written justification in connection with the decision to use the funds to pay for capital expenditures. The written justification must include, at a minimum: a description of the harm or need to be addressed, an explanation as to why a capital expenditure is appropriate; and a comparison of the proposed capital expenditure to at least two alternative capital expenditures, with an explanation as to why the proposed expenditure is superior.

Written justifications are not required if the total amount of capital expenditures for a project is less than $1 million. In certain cases, the written justification also must be included in the reports required to be filed with the Treasury the recipient.

Premium Pay

The Treasury in the interim final rule provided a number of definitions to determine who qualifies for premium pay, with the goal being to prioritize low- and moderate-income workers for the additional compensation. The final rule keeps the focus on low- and moderate-income workers, but provides greater flexibility by including in its scope any worker not exempt from the overtime provisions of the Fair Labor Standards Act.

Exempt workers may still qualify for premium pay if their total compensation (including premium pay) is less than or equal to 150% of the greater of the state or resident county average annual wage. Providing premium pay to exempt workers in excess of 150% will continue to require the submission of a written justification to the Treasury.

Revenue Loss

The Treasury in the interim final rule established a calculation methodology to determine the amount of “revenue loss” that was eligible for expenditure on government services. Recipients are required to calculate in each year of the program period the amount of revenue loss for that year, and then may use up to that amount for expenditure on government services.

The final rule simplifies things. It adds a standard “revenue loss” allowance of $10 million, which any recipient may use instead of calculating annual revenue loss under the interim final rule. Under this approach, a recipient may assume that its total revenue loss for the entire program period is $10 million. For smaller municipalities that received less than $10 million of SLFRF funds, this means that they may treat all of the funds received as “revenue loss,” and expend it on any government services they wish.

The term “government services” continues to be defined broadly to mean any services traditionally provided by the recipient governments, unless the Treasury has stated otherwise. Examples of government services include: 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 vehicles).

Water, Sewer and Broadband Infrastructure

The Treasury in the interim final rule tied qualifications for water and sewer projects to existing federal requirements under the Federal Water Pollution Control Act and Federal Safe Drinking Water Act. For broadband projects, the interim final rule provided that the project must target unserved or underserved households and businesses and have a minimum 100 Mbps standard for upload and download speeds, although the upload speed could initially be set at 20 Mbps if it was scalable to 100 Mbps in the future.

The final rule expands the scope of permitted water and sewer projects, by adding authorization for certain stormwater management projects, lead line replacement and remediation projects, household water quality testing, drinking water projects to support increased populations, and rehabilitation of dams, reservoirs and private wells.

The scope of broadband projects is also expanded in the final rule, to include cybersecurity infrastructure investments. To qualify, the investments must improve the reliability and resiliency of new and existing broadband infrastructure. The final rule also provides guidance on how a project can satisfy the “unserved or underserved” standard. To qualify, the service provider for the project must either participate in the FCC’s Affordable Connectivity Program (ACP), which provides discounts on broadband service to low- and moderate-income households, or otherwise provide access to a similar program carrying with it commensurate benefits as would be received under ACP.

The final rule goes into effect on April 1. However, recipients may begin relying on it immediately. The attorneys of the McNees public finance and government services practice group are available to assist as SLFRF recipients finalize plans for the expenditure of these funds.

Timothy J. Horstmann is a public finance attorney with the law firm of McNees Wallace & Nurick and practices in the firm’s public finance and government services practice group. The firm has Pennsylvania offices in Harrisburg, Lancaster, Pittsburgh, Devon, Scranton, State College and York. Horstmann can be reached at thorstmann@mcneeslaw.com.