State and Local Fiscal Recovery Funds’ New 2023 Interim Final Rule: What you need to know

On Dec. 29, 2022, the Consolidated Appropriations Act, 2023 was signed into law, amending sections 602 and 603 of the Social Security Act. These amendments give governments more flexibility in how they can use the State and Local Fiscal Recovery fund (SLFRF) that was established under the American Rescue Plan Act. Expanded guidance for the SLFRF was released under the 2023 interim final rule and provides for new eligible use categories in addition to the previous four outlined in the 2022 Final Rule. Under these amendments, SLFRF money can now be used for:

1. Providing emergency relief from natural disasters (new).
2. Making investments in additional infrastructure projects, including:
   • Certain Department of Transportation (DOT) Surface Transportation Projects.
   • Projects eligible under Title I of the Housing and Community Development Act of 1974.

The additional eligible uses for SLFRF described in the 2022 final rule remain unchanged and available to recipients. For an overview of the original eligible uses, please read our article, “U.S. Treasury Adopts final rule for SLFRF: What you need to know now.”

Emergency relief from natural disasters

Recipients may use SLFRF funds to provide emergency relief from natural disasters or the negative economic effects of natural disasters. Eligible expenses under this category include debris removal, infrastructure repair, increased operational and payroll costs of responding to a disaster, certain future disaster mitigation costs, temporary emergency housing, food assistance, financial assistance for lost wages, or other immediate needs. However, recipients must ensure that any financial assistance provided to program beneficiaries doesn’t duplicate financial support those beneficiaries receive from other federal programs, insurance coverage, or any other source.

Recipients may use SLFRF funds to provide emergency relief from natural disasters or the negative economic effects of natural disasters.

When using SLFRF under this category, recipients must:

1. Identify a natural disaster that has occurred or is expected to occur imminently, or a natural disaster that is threatened to occur in the future.
2. Identify emergency relief that responds to the physical or negative economic impacts, or potential physical or negative economic impacts, of the natural disaster. The emergency relief must be related and reasonably proportional to the impact identified.

Defining natural disasters and emergency relief

The 2023 Interim Final Rule includes various examples of what could constitute a natural disaster, including hurricane, tornado, storm, flood, earthquake, snowstorm, drought, or fire attributable to natural causes, “that causes or may cause substantial damage, injury, or imminent threat to civilian property or persons.” However, it also more broadly defines a natural disaster as, “A type of natural catastrophe, attributable to natural causes, that causes, or may cause substantial damage, injury, or imminent threat to civilian property or persons.” This definition provides recipients the flexibility to determine an event to be a natural disaster, even if it’s not a type specifically listed in the 2023 Interim Final Rule.

Emergency relief is defined as “assistance that is needed to save lives and protect property and public health and safety, or to lessen or avert the threat of catastrophe.” Only emergency relief activities that are “reasonably proportional” to the physical or negative economic impact of a natural disaster that has occurred or is expected to occur are eligible under SLFRF.

Identifying natural disasters and emergency relief

When spending SLFRF on emergency relief, it’s important for the recipient to adequately identify the natural disaster that is being addressed. For natural disasters that have occurred or are expected to occur imminently, the event must be the subject of an emergency declaration or designation that covers the recipient’s geographical location. Such a declaration or designation could be made pursuant to federal law, state law, or by a tribal government. Alternatively, the recipient government’s chief executive officer could formally designate an event a natural disaster provided it meets the definition of a natural disaster as provided in the 2023 Interim Final Rule.

When spending SLFRF on emergency relief, it’s important for the recipient to adequately identify the natural disaster that is being addressed.

In addition to responding to natural disasters that have occurred or are imminently expected to occur, recipients can use SLFRF on mitigating activities to lessen or avert the threat of a future natural disaster. When spending funds on these mitigation activities, the recipient should document evidence of historical patterns or predictions of natural disasters that would reasonably demonstrate the likelihood of the future occurrence of a natural disaster in its community. A recipient should use this documentation to support its determination that mitigation activities would be related and reasonably proportional to the threat of a natural disaster that it’s addressing.

Infrastructure projects

The 2023 amendments also expand the types of infrastructure projects SLFRF can be used for, allowing recipients to spend up to the greater of 30 percent or $10 million of their SLFRF award on Department of Transportation Surface Transportations projects and projects eligible under Title I of the Housing and Community Development Act of 1974.

Surface transportation projects

Recipients may use SLFRF funds for eligible surface transportation projects in three different ways:

1. Expansion or support of existing eligible projects that have received funding from DOT or expect to receive such funding by Dec. 31, 2024: Upon approval from DOT, SLFRF awards may be used to expand the project or to cover additional unexpected costs, subject to certain restrictions and requirements described in the 2023 Interim Final Rule. SLFRF amounts spent on these types of projects are subject to DOT’s oversight.
2. Projects that have not and will not receive direct funding from the DOT: Upon approval from the Department of Treasury, SLFRF awards may be used on certain transportation projects that are not direct-funded by DOT. These projects can be partially funded by other sources, so long as direct DOT funds are not used, and must meet certain criteria described in the 2023 interim final rule. SLFRF amounts spent on these types of projects are subject to the Department of Treasury’s oversight.
3. Repaying of loans issued under the Transportation Infrastructure Finance and Innovation Act (TIFIA): Recipients may use SLFRF to repay a TIFIA loan or to satisfy nonfederal-matching requirements for projects under certain eligible programs. Recipients using SLFRF funds to satisfy nonfederal cost share requirements must consult with DOT to understand the applicable nonfederal cost share requirements and how SLFRF funds may be used for these purposes

Title 1 projects

Recipients may now use SLFRF awards on certain projects eligible under Title I of the Housing and Community Development Act of 1974. The most commonly known Title I projects are the activities under the Community Development Block Grant programs available to state and local governments and tribal governments. Recipients may use SLFRF awards on nearly any project that’s eligible under Title I, so long as the SLFRF award isn’t used to supplant any other federal, state, territorial, tribal, and local government funds otherwise available for such uses.

Recipients may now use SLFRF awards on certain projects eligible under Title I of the Housing and Community Development Act of 1974.

Supplement vs. supplant

Recipients using SLFRF funds for Surface Transportation projects and Title I projects must supplement, and not supplant, other federal, state, territorial, tribal, and local government funds (as applicable) otherwise available for such uses. This means that SLFRF recipients may not:

• De-obligate funds that were obligated for specific uses that are eligible Surface Transportation project or Title I project activities and replace those previously obligated funds with SLFRF funds.
• Use SLFRF funds to replace federal or nonfederal funds identified in a federal commitment, such as an award agreement.

Obligation and expenditure deadline

Recipients may use SLFRF funds under these new eligible use categories for costs incurred beginning Dec. 29, 2022, regardless of the date of the declared disaster. The obligation deadline of Dec. 31, 2024, and the expenditure deadline of Dec. 31, 2026, remain the same as communicated in the 2022 Final Rule for expenditures under the emergency relief category. However, for expenditures under the surface transportation and Title I projects, funds must be expended by Sept. 30, 2026, which is three months earlier than the Dec. 31, 2026, expenditure deadline that applies to the other eligible uses.

An overview of the 2023 Interim Final Rule can be found on the U.S. Treasury website. We encourage you to read the IFR to understand the full scope and limitations of these new eligible use categories. Be sure to subscribe to our alerts for additional articles.