American Rescue Plan & CSLFRF: Calculating revenue loss for governments

The American Rescue Plan Act (ARPA), signed into law in March 2021, provides $350 billion in relief to states and local governments to combat the continued impact of the COVID-19 pandemic. To offer swift guidance on the use of Coronavirus State and Local Fiscal Recovery Funds (CSLFRF), the U.S. Department of Treasury (Treasury) published the Interim Final Rule (IFR) on May 10, 2021, through an expedited rule-making process. The IFR outlines the requirements for CSLFRF and went into effect immediately upon issuance, even though Treasury is seeking comment on all aspects of the rule. If warranted by public comments, the IFR may subsequently be modified, but that doesn’t change its current authoritative status.

Eligible uses of CSLFRF include four broad categories: public health and economic impacts; premium pay; investments in water, sewer, and broadband infrastructure; and revenue loss.

Here, we’ll focus on revenue loss — how to calculate it and its eligible uses. To learn more about eligible uses in the remaining categories, take a look at “The American Rescue Plan Act: Identifying eligible uses by governments.” 

Unlike other federal funding awarded to combat the disruption of COVID-19, CSLFRF for revenue loss require that the community calculate how much funding can be used to provide government services. Although the definition of government services is broad, eligible expenses are still necessary for the use of funds. The calculated revenue loss is not to be considered a direct replacement of lost revenue but rather must be used to provide government services to the extent of the calculated revenue loss.

CSLFRF for revenue loss require that the community calculate how much funding can be used to provide government services.

Steps for calculating revenue loss: 

• Step 1: Identify actual revenues collected in the base year.
• Step 2: Estimate the counterfactual revenue.
• Step 3: Identify actual revenue collected over the past 12 months as of the calculation date.
• Step 4: Calculate the reduction in revenue, which is equal to the counterfactual revenue (from Step 2 above) less the actual revenue. Note: If actual revenue (from Step 3 above) exceeds counterfactual revenue, the extent of the reduction in revenue is set to zero for that calculation date.

Four considerations when using CSLFRF payments for revenue loss

As you work to understand the IFR in its entirety and plan to use CSLFRF payments for revenue loss, here are four key considerations.

• Communities may use CSLFRF for the provision of government services to the extent revenue was reduced due to the COVID-19 public health emergency, with a few exceptions. Funds used to replace revenue loss may be used for a wide range of government services, programs, and projects outside of the eligible uses of CSLFRF for public health and economic impacts, premium pay, and investments in water, sewer, or broadband infrastructure. No matter how you chose to use the funding, documentation of your decision-making will be key.
• The revenue loss calculation should be computed on an entity-wide basis, that is, in the aggregate rather than on a source-by-source basis. The extent of the reduction in revenue can be calculated as of four points in time: Dec. 31, 2020; Dec. 31, 2021; Dec. 31, 2022; and Dec. 31, 2023. The expectation is that the extent of the reduction in revenue will decrease as more time elapses from the base fiscal year. Be mindful that the use of the calendar year-end measurement dates for recipients with a fiscal year-end other than Dec. 31 may present an administrative challenge. Fiscal year-end recipients should carefully consider how revenue data is extracted from the general ledger in the absence of existing tracking or reporting mechanisms as of the required measurement date (provided the Final Rule has not been amended to allow for the use of the fiscal year-end as the measurement date).
• The needs of each community will vary, so it’s imperative to start prioritizing needs to maximize the use of funds for your community and effectively utilize the full amount of the CSLFRF award.
• The latest guidance, the IFR published on May 10, 2021, gives various examples of ineligible uses, including contributions to rainy day funds, payments on outstanding debt, and fees or issuance costs of new debt. Treasury believes that these uses don’t qualify within any of the four broad categories of CSLFRF eligible uses.

Key definitions for the revenue loss calculation

To ensure your calculation of revenue loss complies with the IFR, let’s explore a few key definitions:

• Actual revenues are based largely on the components reported under general revenue from own sources in the Census Bureau’s Annual Survey of State and Local Government Finances. General revenue includes revenue from taxes, current charges, miscellaneous general revenue, and intergovernmental transfers between state and local governments. While general revenue captures a range of different types of tax revenue and other revenue available to support government services, there are several excluded types of revenue.
  • Components of revenue that should be excluded are:
    • Intergovernmental transfers from the federal government, including federal transfers made via a state to a local government.
    • Refunds and other correcting transactions.
    • Proceeds from issuance of debt or the sale of investments.
    • Agency or private trust transactions.
    • Revenue generated by utilities and insurance trusts.
    • Liquor store revenues.
• Base year is the most recent full fiscal year prior to the public health emergency, which for the purposes of this calculation is before Jan. 27, 2020. For instance, a community with a June 30 fiscal year will use the fiscal year June 30, 2019, as the base year.
• Counterfactual revenue is equal to base-year revenue * [(1 + growth adjustment) ^( n/12)], where n is the number of months elapsed since the end of the base year to the calculation date, and growth adjustment is the greater of 4.1% and the recipient’s average annual revenue growth in the three full fiscal years prior to the COVID-19 public health emergency.

Once the revenue loss is calculated using the four-step process noted above, the calculated amount should be expended in accordance with the eligible government services outlined in the IFR.

• Government services can include, but are not limited to:
  • Maintenance or 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.
  • Provision of police, fire, and other public safety services.

• Government services do NOT include the following:
  • Replenishing financial reserves (for example, rainy day or other reserve funds).
  • Expenses associated with obligations under instruments evidencing financial indebtedness for borrowed money.
  • Interest or principal on any outstanding debt instrument.
  • Satisfaction of any obligation arising under or pursuant to a settlement agreement, judgment, consent decree, or judicially confirmed debt restructuring in a judicial, administrative, or regulatory proceeding, except if the judgment or settlement required the provision of government services.

As revenue loss is only one of four broad use categories of CSLFRF, start planning now so you can maximize the use of these funds for your community. As you consider how to spend CSLFRF and navigate its complexities, we’re here to help. Don’t hesitate to reach out.