On May 10, 2021, the U.S. Department of the Treasury published its interim final rule to implement the Coronavirus State Fiscal Recovery Fund and the Coronavirus Local Recovery Fund (recovery funds). The American Rescue Plan Act (ARPA), which created the recovery funds, provides $350 billion in aid to state, local and tribal governments.
To support governments in using money distributed from the recovery funds, the interim rule provides critical guidance regarding eligible uses of funds. Below are five key items governments need to know about the interim rule.
1. Governments can use money from the recovery funds to provide government services by replacing lost revenues, but cannot use money from the recovery funds to pay debt service or replenish reserves.
Governments that demonstrate losses in general revenues can apply money received from the recovery fund to replace those lost revenues to ensure continuity of vital government services. The interim rule provides a calculation for determining lost revenues, based on a comparison of actual revenue against expected revenue. Expected revenue is based on either (i) the recipient’s average annual revenue growth over the three fiscal years prior to the public health emergency, or (ii) the national average state and local revenue growth rate from 2015-2018, which the interim rule establishes as 4.1 percent. Recovery funds may be used only to the extent of the reduction in revenue resulting from the public health emergency. The interim rule provides governments with flexibility in determining revenue loss by allowing governments to recalculate revenue loss at four different points in time to account for lags in revenue loss.
However, governments cannot use the money to pay debt service for any obligation incurred prior to March 3, 2021, and states are prohibited from using money to offset changes in law that reduce net tax revenues. Governments are also prohibited from using money from the recovery funds to pay principal of or interest or premium on outstanding debt, legal settlements or judgments; make deposits into rainy day funds, financial reserves or pension funds; or fund a portion of other federal programs where the state receives matching funding from the federal government, such as using funds to pay for its portion of Medicaid.
2. Governments with qualified census tracts within their jurisdictions have more latitude in how money from the recovery funds can be expended.
Recognizing that the pandemic has disproportionately impacted low-income families and communities of color, the interim rule grants a range of additional allowable uses for money received pursuant to ARPA to governments within a qualified census tract, to families living in qualified census tracts, and to tribal governments and other populations, households or geographic areas disproportionately impacted by the pandemic. To address the economic and public health impacts in these communities, the interim rule expands allowable uses of funds to include addressing health disparities, investing in housing and neighborhoods, addressing educational disparities and promoting healthy childhood environments.
3. Costs must be incurred between March 3, 2021 and Dec. 31, 2024, with some exceptions.
Governments may use money received from the recovery fund to pay for costs incurred between March 3, 2021 and Dec. 31, 2024. To meet this deadline, governments may consider money that is obligated for projects by Dec. 31, 2024 as “incurred” by such date. If a government opts to obligate money by Dec. 31, 2024, the money must be spent and work be performed by Dec. 31, 2026.
The Department of the Treasury has identified limited exceptions to this requirement, each of which hinges on the date the government actually incurs the cost: (i) premium pay may be paid for work completed prior to March 3, 2021, so long as the premium pay is for work completed during the COVID-19 pandemic and the premium pay was not incurred by the government before March 3, 2021; (ii) assistance to households can be granted for economic harms incurred by the household prior to March 3, 2021, but only if the government's cost to provide such assistance was not incurred prior to March 3, 2021; (iii) revenue loss is to be calculated beginning with the last full fiscal year prior to the COVID-19 health emergency and includes the period ending Dec. 31, 2020, but the use of funds must be forward looking for costs incurred by the government after March 3, 2021; and (iv) investments in water, sewer and broadband projects planned or started before March 3, 2021 are allowable so long as the costs to be covered by the recovery fund were incurred after March 3, 2021.
4. Premium pay may be granted to eligible employees performing essential work during the COVID-19 pandemic in an amount up to $13 per hour and not exceeding $25,000 in the aggregate for any individual employee.
The interim rule clarifies that eligible workers are those employed by the state, local or tribal government and those workers that are needed to maintain continuity of operations of essential critical infrastructure sectors. Examples of eligible employees include staff at medical facilities, sanitation workers, truck drivers, transit staff, social service and human services staff, and public health and safety staff. For government employees to qualify for premium pay, they must also perform essential work, which involves regular in-person interactions or regular handling of items that are handled by others. In other words, employees teleworking from home would not be eligible for premium pay.
The Department of the Treasury has instructed that state and local governments target premium pay first to employees who so far have not received any additional pay for the risk they have undertaken with their work, and they should prioritize lower-income workers. Under the interim rule, certain high-income employees who are otherwise eligible for premium pay cannot receive premium pay unless there is a specific justification for how premium pay responds to these workers performing essential work during the COVID-19 pandemic. Eligible employees can receive premium pay even if they have received hazard pay in the past, and premium pay can be granted retroactively.
5. Governments have less flexibility under ARPA than under the CARES Act in applying money toward reimbursement of payroll expenses.
Under ARPA, governments can cover payroll and benefits expenses for public safety, public health, healthcare, human services and similar employees, only to the extent that the employees’ services are devoted to mitigating or responding to the COVID-19 public health emergency. The interim rule requires that governments determine what portion of time an employee devoted to responding to or mitigating COVID-19. Only certain employees — pubic health and safety employees working in an operating unit or division primarily dedicated to responding to COVID-19 — can be considered entirely devoted to mitigating or responding to COVID-19. In contrast, the CARES Act allowed governments to presume that all payroll costs for public health and safety employees were payments for services substantially dedicated to mitigating or responding to COVID-19. The ARPA standard is more burdensome on governments and requires regular reassessments to ensure compliance.
The interim rule became effective May 17, 2021. Comments on the interim rule must be received on or before July 16, 2021.
McGuireWoods has published additional thought leadership related to how governments can address COVID-19-related legal issues and will continue to monitor the implementation of ARPA (including guidance given to state and local governments on allowable uses of funds). Please contact the authors for additional information and assistance with navigating urgent and evolving legal issues arising from the pandemic.