Treasury’s ARPA guidance provides flexibility, focus on equity

Since releasing its initial guidance for the State and Local Fiscal Recovery Funds included in the American Rescue Plan Act, the U.S. Department of the Treasury continues to provide details that are bringing clarity to the program and its local uses.

Signed into law on March 10, the $1.9 trillion American Rescue Plan, the latest round of federal stimulus funds, includes $360 billion in relief for state and local governments across the country. For Massachusetts, the ARPA provides $2 billion for municipalities and $1.34 billion for counties.

As the agency administering the funds, the Treasury Department released its 151-page Interim Final Rule on May 10, identifying eligible expenditures under the law, and began establishing specific dollar amounts for local government allocations.

Allocation amounts
The Treasury initially released allocation amounts for states, counties and Metropolitan Cities (of which there are 38 in Massachusetts). Two weeks later, on May 24, the Treasury provided allocation amounts for non-entitlement communities, of which there are 313 in Massachusetts.

On June 1, the Executive Office for Administration and Finance’s Federal Funds Office released a spreadsheet with total allocation amounts for all Massachusetts municipalities. Metropolitan Cities will receive funds based on the federal Community Development Block Grant formula. The direct ARPA aid amount for non-entitlement communities (not including county allocations) is approximately $104.67 per capita, based on the 2019 U.S. Census population estimate, with 50% delivered in 2021 and 50% in 2022.

Unlike much of the country, Massachusetts is unique in that it has only five functioning county government structures among the state’s 14 counties.

Where county government has been abolished (Berkshire, Essex, Franklin, Hampden, Hampshire, Middlesex, Nantucket, Suffolk and Worcester), the county’s share of funds will initially be allocated to the state and then redistributed to the county’s communities on a per capita basis. These counties will receive approximately $945 million of the county allocations designated for Massachusetts.

Functioning counties in Massachusetts (Barnstable, Bristol, Dukes, Norfolk and Plymouth) will receive their allocation directly from the U.S. Treasury, through the same process used for counties nationwide. These counties will receive approximately $393 million of the county allocations for Massachusetts.

Baker-Polito administration officials report that they have also applied to the Treasury on behalf of the communities in non-functioning counties, and await further clarification about when to expect those funds.

How and when municipalities will receive funds
Payments to states, counties, Metropolitan Cities, and non-entitlement communities will be evenly divided into two tranches, with the first being allocated in the coming weeks and the second round arriving 12 months after the first.

States, counties, and Metro Cities have already started to receive their first tranche directly from the Treasury. Funding to non-entitlement communities will be distributed first to the respective state government for redistribution to communities.

Officials in the Baker-Polito administration report that the Commonwealth has already applied to the Treasury on behalf of the non-entitlement communities, and that those funds will be distributed through the same pipeline that is used to distribute the state’s local aid to municipalities. The ARPA requires states to allocate the first tranche of funds to non-entitlement communities within 30 days of receipt.

Each non-entitlement community must confirm to state officials its interest in receiving funds. If a municipality wishes to decline federal funding, it must affirm that decision to state finance officials, and the money would be returned to the Treasury.

The state will need to collect certain documentation from non-entitlement communities as required by the Treasury. Additional details will be announced through the Division of Local Services.

On May 19, the Federal Funds Office published a memo outlining steps for Metropolitan Cities to apply for the Coronavirus Local Fiscal Recovery Fund. On June 1, the office issued a memo on steps required for non-entitlement units of government to receive CLFRF allocations.

Eligible expense categories
Treasury guidance provides welcome flexibility for eligible uses among the four main spending categories identified in the statute:
• Response to the public health emergency or its negative economic consequences
• Provision of premium pay to eligible workers
• Revenue replacement
• Investments in water, sewer and broadband infrastructure

In the first category, the guidance provides for a wide range of potential uses, including COVID mitigation and containment, behavioral health care to address situations exacerbated by the pandemic, and public health and safety employee costs.

The guidance around negative economic consequences includes rebuilding public sector capacity, including by rehiring public sector staff, and replenishing unemployment insurance trust funds to pre-pandemic levels. Recipients may also use funding to build internal capacity to successfully implement economic relief programs, with investments in data analysis, targeted outreach and technology infrastructure.

Regarding premium pay for essential workers, the term “essential worker” is very broad and is not limited to municipal employees.

For infrastructure, the American Rescue Plan Act focused on water, sewer and broadband projects. For water and sewer, the Treasury has aligned the types of projects with the wide range of projects that can be supported by the Environmental Protection Agency’s clean water state revolving fund and drinking water state revolving funds. Recipients can use this funding to invest in an array of projects related to drinking water infrastructure, as well as wastewater infrastructure, including managing or treating storm water or subsurface drainage water. In addition, the Treasury guidance allows for spending on cybersecurity aimed at protecting water and sewer infrastructure; projects promoting climate change resilience (for instance reducing energy consumption on water and sewer facilities); and lead line service replacement.

Broadband infrastructure eligibility focuses on households and businesses that do not have an existing wireline connection capable of reliably delivering 25 Mbps download/3 Mbps upload. Last-mile connections and affordable service are key focus areas of the Treasury’s guidance around broadband infrastructure eligible uses.

Under the category of revenue replacement, the Treasury has established a methodology to calculate the reduction in revenue, and allows recipients to recalculate revenue loss at several points throughout the program, supporting municipalities that experienced a lagging impact of the crisis on revenues.

Once a shortfall has been identified, municipalities have broad latitude to use this funding to support government services, up to the amount of lost revenue. Under the Interim Final Rule, 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; and the provision of police, fire, and other public safety services.

The MMA hosted a Zoom webinar on May 20 featuring officials from the National League of Cities and the Baker-Polito administration who presented information on allowable uses of American Recovery Plan Act funds for municipalities.

Ineligible uses of ARPA funds
In general, categories of ineligible expenditures include:
• Using the money for federal matching funds
• Premium pay for employees who were able to telework during the public health emergency
• Funding pension accounts, paying off outstanding debt, or making deposits to reserve accounts or rainy day funds

Providing equity-focused services
The Treasury guidance recognizes that certain communities were harder hit by the public health emergency and allows additional flexibility for spending in areas that were disproportionately impacted. This expanded eligibility includes addressing health and educational disparities, investing in housing and neighborhoods, and promoting healthy childhood environments. Areas that are recognized as Qualified Census Tracts (low-income areas as designated by the U.S. Department of Housing and Urban Development) are presumed to be eligible for these additional fund uses. For areas that are not Qualified Census Tracts, the guidance provides a detailed explanation for how a municipality may determine eligibility criteria for similar funding needs.

Reporting requirements
The covered period for State and Local Fiscal Recovery Funds runs from March 3, 2021, through Dec. 31, 2024. The Treasury guidance permits funds that are obligated by Dec. 31, 2024, to be expended through Dec. 31, 2026.

For Metropolitan Cities, an interim report will be required by Aug. 31, 2021, and expense reports will be filed quarterly thereafter for the duration of the covered period.

Metro Cities with a population above 250,000 will have to file an annual recovery performance report with the Treasury highlighting the outcomes of their expenditures, in addition to the reporting requirements for all Metro Cities.

Non-entitlement communities will have to submit annual project and expenditure reports, with the first being due on Oct. 31, 2021.