The American Rescue Plan Act: Identifying eligible uses by 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, despite the fact that 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.

The IFR establishes a framework for determining the types of programs and services eligible under this program, along with examples of uses that state and local governments may consider. These uses build on eligible expenditures under the Coronavirus Relief Fund issued through the CARES Act by recognizing a broad range of additional eligible uses. The objective of CSLFRF is to help governments support the families, businesses, and communities hardest hit by the COVID-19 public health emergency.

Eligible state, territorial, metropolitan city, county, and tribal governments may request their allocation of CSLFRF through the Treasury Submission Portal. Eligible local governments classified as nonentitlement units — generally local governments with populations under 50,000 — will receive this funding through their applicable state government.

With the IFR guidance in mind, we recommend you consider the following as you begin to plan how you’ll use this funding: (1) eligible uses, (2) ineligible uses, and (3) appropriate planning for spending.

Eligible uses of CSLFRF

Eligible uses of CSLFRF fall into four broad categories: 

1. Public health & economic impacts
2. Premium pay
3. Revenue loss
4. Investments in water, sewer, or broadband infrastructure

Expenditures qualifying under public health and economic impact can be used to respond to the public health emergency with respect to COVID-19 or its negative economic impacts, including assistance to households, small businesses, and nonprofits, or aid to impacted industries such as tourism, travel, and hospitality. Eligible uses in this category must be in response to the disease itself or the harmful consequences of the economic disruptions resulting from or exacerbated by the COVID-19 public health emergency.

Expenditures qualifying under public health and economic impact can be used to respond to the public health emergency with respect to COVID-19 or its negative economic impacts.

A nonexhaustive list of eligible expenditures identified in the IFR includes: 

• COVID-19 mitigation and prevention programs (medical care, testing, contract tracing, purchases of PPE, public communication efforts)
• Behavioral health and substance abuse treatment
• Payroll and covered benefits for public health and safety personnel
• Addressing disparities in public health outcomes and responding to negative impacts on households and individuals
• Qualifying business loans and grants
• Rehiring staff for state and local governments
• Aid to impacted industries such as tourism, travel, and hospitality
• Affordable housing in qualifying areas
• Serving the homeless

The IFR also provides flexibility to use CSLFRF payments for programs or services not identified in the nonexhaustive list by providing considerations for evaluating other potential uses.

Premium pay can be provided to eligible workers performing essential work during the COVID-19 public health emergency. A few of the more important aspects in the IFR related to premium pay include the following:

• The ARPA defines premium pay as an amount up to $13 per hour, in addition to wages or remuneration the worker otherwise receives.
• Premium pay is limited to an aggregate amount not to exceed $25,000 per eligible worker.
• Premium pay or grants provided using CSLFRF should prioritize compensation of those lower-income eligible workers who perform essential duties. 
• Premium pay that increases a worker’s total pay above 150% of their residing state’s average annual wage for all occupations or their residing county’s average annual wage, whichever is higher, must be supported by written justification of how the premium pay is responsive to individuals performing essential work during the public health emergency.
• Providing retrospective premium pay is encouraged, where possible, for work performed since the start of the public health emergency (Jan. 27, 2020), recognizing that many essential workers haven’t yet received additional compensation for work conducted over the course of many months.
• Essential workers who have already earned premium pay for essential work performed during the COVID-19 public health emergency remain eligible for additional payments; an essential worker may receive both retrospective premium pay for prior work as well as prospective premium pay for current or ongoing work.

Examples of workers who may qualify for premium pay include:

• Staff at nursing homes, hospitals, and home care settings
• Workers at farms, food production facilities, grocery stores, and restaurants
• Janitors and sanitation workers
• Truck drivers, transit staff, and warehouse workers
• Public health and safety staff
• Childcare workers, educators, and other school staff
• Social service and human services staff

Revenue loss should be used to provide government services to the extent of a reduction in revenue due to the COVID-19 public health emergency. The revenue loss will be measured relative to revenues collected in the most recent full fiscal year prior to the emergency. The IFR provides further guidance and a methodology for this calculation. Note that recipients should look at general revenue in the aggregate, rather than on a source-by-source basis. Given that recipients may have experienced offsetting changes in revenues across sources, this approach is intended to provide a more accurate representation of the effect of the pandemic on overall revenues.

Investments in infrastructure category allows for a broad range of necessary investments in projects that improve access to clean drinking water, improve wastewater and stormwater infrastructure systems, and provide access to high-quality broadband service. Necessary investments include projects that are required to maintain a level of service that, at least, meets applicable health-based standards, taking into account resilience to climate change, or establishes or improves broadband service to unserved or underserved populations to reach an adequate level to permit a household to work or attend school, and that are unlikely to be met with private sources of funds. 

For water and sewer infrastructure, governments have wide latitude to identify investments that are of the highest priority for their own communities, which may include projects on privately owned infrastructure. The guidance aligns with the wide range of types or categories of projects that would be eligible to receive financial assistance through the Environmental Protection Agency (EPA) Clean Water State Revolving Fund or Drinking Water State Revolving Fund.

For water and sewer infrastructure, governments have wide latitude to identify investments that are of the highest priority for their own communities.

For broadband infrastructure, eligible investments are those designed to provide services meeting adequate speeds and provided to unserved and underserved households and businesses. The IFR offers governments flexibility to identify the specific locations within their communities to be served and to otherwise design the project.

Ineligible uses of CSLFRF

The ARPA includes two provisions that define the boundaries of the statute’s eligible uses. First, ARPA prohibits recipients from using the funds for deposit into a pension fund. A deposit under the Act refers to an extraordinary payment into a pension fund for the purpose of reducing an accrued, unfunded liability. More specifically, the IFR doesn’t permit CSLFRF to be used to make a payment into a pension fund if both: (1) the payment reduces a liability incurred prior to the start of the COVID-19 public health emergency, and (2) the payment occurs outside the recipient’s regular timing for making such payments. It’s important to understand that a deposit is distinct from a payroll contribution, which occurs when employers make payments into pension funds on regular intervals, with contribution amounts based on a predetermined percentage of employees’ wages and salaries. Therefore, if an employee’s wages and salaries are an eligible use of CSLFRF, governments may treat the employee’s covered benefits, including pension, as an eligible use as well.

ARPA prohibits recipients from using the funds for deposit into a pension fund.

Second, state and territories may not use CSLFRF 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. Note that this prohibition only applies to entities covered under Section 602 of ARPA, not entities covered under Section 603. Therefore, local governments aren’t subject to this offset limitation.

Although not explicit in ARPA, payments from CSLFRF are also subject to preexisting limitations provided in other federal statutes and regulations. For example, CSLFRF funds may not be used as a source of an entity’s required matching contribution when other federal programs prohibit the use of federal matching funds. It’s important to check eligibility requirements of other federal programs before applying CSLFRF.

Finally, the IFR gives additional examples of ineligible uses — expenditures that Treasury believes don’t qualify within any of the four broad buckets — including contributions to rainy day funds, payments on outstanding debt, and fees or issuance costs of new debt.

Appropriate planning for the best use of CSLFRF for your community

Within the four broad categories of eligible uses, you’ll need to determine the best use of the CSLFRF for your government. The needs for each government will be different, so it’s imperative to quickly begin discussions — both within the walls of your government and with your constituents — to start planning so you can maximize the use of these funds for your community.

The needs for each government will be different, so it’s imperative to quickly begin discussions — both within the walls of your government and with your constituents.

As you engage in robust discussions about spending CSLFRF, here are some other planning considerations to keep in mind:

• Period of performance: Before you begin to plan for spending your CSLFRF award, you must first understand the period of performance, that is, the start of the award and the planned end date. The period of performance or spending period for eligible expenditures begins March 3, 2021, except for retroactive premium pay, which is discussed above. Funds must be obligated by Dec. 31, 2024, and those obligated funds must be spent by Dec. 31, 2026.
• Double dipping: With the influx of increased federal funding, you’ll likely face the challenge of preventing the same costs from being charged to multiple funding sources. The first two broad eligible categories have similar eligible uses as the Coronavirus Relief Fund (CRF) (CFDA 21.019) and the Coronavirus Emergency Supplemental Funding Program (CESF) (CFDA 16.034), which could raise the risk that the same cost is charged to multiple grants. It’s important to establish and ensure adequate cost tracking controls to avoid double dipping.
• Reporting and recordkeeping requirements: Treasury will establish reporting and recordkeeping requirements, including enhanced reporting requirements for certain uses. For certain types of expenditures, the IFR also includes public disclosure requirements. In addition to ensuring the CSLFRF are used on eligible expenditures, it’s also critical for all governments to identify, track, and adhere to the required reporting and public disclosure requirements.
• Funds are subject to single audit: Be aware that these funds are subject to the provisions of the Uniform Guidance (2 CFR Part 200) and therefore a single audit is required when total expenditures equal or exceed $750,000 in a given fiscal year. If you’ll have a single audit for the first time or simply would like a refresher, take a look at the following articles:
  • Top three things to consider if you’ve received COVID-19 funding
  • COVID-19 funding impact on single audits: Key questions and answers
• Documentation: No matter how you choose to use the funding, documentation of any decision-making will be key. The calculation of revenue loss in particular will likely present its own unique challenges in this regard.

Given that the spending period extends to Dec. 31, 2026, projects eligible for CSLFRF can have a lasting impact on communities. In some cases, premium pay and public health expenses may provide more immediate relief while water, sewer, and broadband may provide much-needed services that will benefit constituents well into the future.

Given that the spending period extends to Dec. 31, 2026, projects eligible for CSLFRF can have a lasting impact on communities.

As you consider how to spend your ARPA funds and navigate its complexities, we’re here to help. Don’t hesitate to reach out.