Lori A. Lordo, CPA
On January 6th, the U.S. Department of the Treasury issued its Final Rule for Coronavirus State and Local Fiscal Recovery Funds (SLFRF) as part of the 2021 American Rescue Plan Act. The final rule is effective April 1, 2022. Until that time, the interim final rule remains in effect. However, recipients can choose to take advantage of the Final Rule’s flexibilities and simplifications now, even ahead of the effective date. The U.S. Treasury has offered a summary document of the Final Rule, which we encourage you to review.
The Final Rule offers key changes and clarifications in several areas:
Changes In Requirements for Replacing Lost Public Sector Revenue
The Final Rule provides a standard allowance for a loss up to $10 million in revenue depending on the amount of the award. This allows local governments to choose between a standard amount of revenue loss or to complete a revenue loss calculation.
Recipients who elect the standard allowance may use that amount (in many cases their full award) for government services, with streamlined reporting requirements. Government services are defined as any service traditionally provided by a government. This includes programs such as road construction and other infrastructure, public safety programs, and health and educational activities.
Note that the Final Rule has modified the definition of ‘general revenue’ to allow recipients operating utilities as part of their own government to choose whether to include revenue from those utilities in their revenue loss calculation. Furthermore, for utilities or other entities (e.g., certain service districts) that are not part of the recipient government, a transfer from the utility to the recipient constitutes an intergovernmental transfer and therefore is included in the definition of “general revenue.” The U.S. Treasury has also added liquor store revenue to the definition of general revenue.
Funding recipients have two options for the determination of revenue loss. Note that only one of these approaches may be used after a choice is made.
- Recipients may choose a ‘standard allowance’ of $10 million to spend on government services through the period of performance. Recipients may choose to use this standard allowance instead of calculating lost revenue, including those with total allocations of $10 million or lower. Electing to accept the standard allowance of $10 million will not increase or decrease the recipient’s total allocation.
- Recipients may calculate their actual revenue loss according to the formula detailed in the Final Rule. Under this option, recipients calculate revenue loss at four distinct points in time, either at the end of each calendar year (e.g., December 31 for years 2020, 2021, 2022, and 2023) or the end of each fiscal year of the recipient. Recipients can select whether to use calendar or fiscal year dates but must be consistent throughout the performance period. Below is the process for calculating revenue loss:
-Calculate revenues generated in the most recent full fiscal year prior to the pandemic (i.e., last full fiscal year before January 27, 2020), called the base year revenue.
-Estimate counterfactual revenue, which is equal to the following formula, where n is the number of months elapsed since the end of the base year to the calculation date:
𝑏𝑎𝑠𝑒 𝑦𝑒𝑎𝑟 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 × (1 + 𝑔𝑟𝑜𝑤𝑡ℎ 𝑎𝑑𝑗𝑢𝑠𝑡𝑚𝑒𝑛𝑡) 𝑛/12
The growth adjustment is the greater of either a standard growth rate—5.2%—or the recipient’s average annual revenue growth in the last full three fiscal years prior to the pandemic. Treasury increased the growth rate to 5.2% from 4.1% in the Interim Rule due to availability of 2019 published data.
Identify actual revenue, which equals revenues collected over the twelve months immediately preceding the calculation date. Under the final rule, recipients must adjust actual revenue totals for the effect of tax cuts and tax increases that are adopted after January 6, 2022 (date of adoption of the Final Rule). Specifically, the estimated fiscal impact of tax cuts and tax increases adopted after January 6th must be added or subtracted to the calculation of actual revenue for purposes of calculation dates that occur on or after April 1, 2022. Recipients may subtract from their calculation of actual revenue the effect of tax increases enacted prior to January 6th. Note that recipients that elect to remove the effect of tax increases enacted before January 6th must also remove the effect of tax decreases enacted before January 6th, such that they are accurately removing the effect of tax policy changes on revenue.
Revenue loss for the calculation date is equal to counterfactual revenue minus actual revenue (adjusted for tax changes) for the twelve-month period. If actual revenue exceeds counterfactual revenue, the loss is set to zero for that twelve-month period. Revenue loss for the period of performance is the sum of the revenue loss on for each calculation date.
For further guidance on the calculation, please refer to the supplementary information in the Final Rule which provides an example of this calculation in the Revenue Loss section (refer to page 237).
Public Health and Economic Impacts
The Final Rule clarifies recipients can use funds for capital expenditures in support of eligible COVID-19 public health or economic response. As an example, eligible expenses would be certain affordable housing projects, childcare facilities, schools, hospitals, and other projects consistent with final rule requirements.
Recipients must complete and meet the requirements of a written justification for capital expenditures equal to or greater than $1 million. For large-scale capital expenditures ($10 million or more), which have high costs and may require an extended length of time to complete, as well as most capital expenditures for non-enumerated uses of funds, the U.S. Treasury requires recipients to submit their written justification as part of regular reporting.
The Final Rule also has expanded the definition of households and communities considered to be “impacted” and “disproportionately impacted” by the pandemic, thereby allowing recipients to provide a broader response without required additional analysis. The Final Rule has expanded programs of affordable housing, childcare, early learning, as eligible services in all impacted communities along with making certain community development and neighborhood revitalization activities eligible for disproportionately impacted communities.
Lastly, the Final Rule has broadened the activities to support government employment, including hiring above a recipient’s pre-pandemic baseline, providing funds to employees that experienced pay cuts or furloughs, avoiding layoffs, and offering incentives for employee retention.
The Final Rule provides more streamlined options for premium pay by broadening the share of eligible workers eligible to receive premium pay without a written justification while maintaining a focus on lower-income and front-line workers performing essential work.
Water, Sewer & Broadband Infrastructure
The Final Rule expands eligible broadband infrastructure investments to address challenges with broadband access, affordability, and reliability, and adds additional eligible water and sewer infrastructure investments, including an increased range of lead remediation and stormwater management projects.
If you have any questions regarding the clarifications and changes outlined in the Final Rule, please contact us.