Treasury Guidance on $350B State/Local Funding

The U.S. Treasury Department issued a Interim Final Rule (IFR) detailing how the $350 billion in state, local and territorial government funding in the American Rescue Plan Act can be spent. Much of this information can be found on the Treasury's ARPA website and also in helpful FAQ document. Among other things, the IFR notes:

"Sections 602(c)(1)(C) [page 223 of bill text] and 603(c)(1)(C) [page 229 of bill text ] of the Act provide recipients with broad latitude to use the Fiscal Recovery Funds for the provision of government services. 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." (IFR page 60)

Government services-like constructing infrastructure referenced above in a broad manner-are eligible for these funds "to the extent of the reduction in revenue. . .due to the COVID-19 public health emergency relative to revenues collected in the most recent fiscal year for that eligible government." Arguably, any reduction in revenues that are used to fund any type of public infrastructure construction, operations or maintenance are eligible for these funds. So, if general fund revenues, sales tax revenues, gas tax revenues or any other revenues a government entity uses in whole or part to fund public infrastructure (in a broad sense) saw a year-to year decrease, those lost infrastructure funds could be made whole with these funds. As noted in Treasury's FAQ document: "For administrative convenience, Treasury's Interim Final Rule allows recipients to presume that any diminution in actual revenue relative to the expected trend is due to the COVID-19 public health emergency."

It should also be noted that:

"Expenses associated with obligations under instruments evidencing financial indebtedness for borrowed money would not be considered the provision of government services, as these financing expenses do not directly provide services or aid to citizens. Specifically, government services would not include interest or principal on any outstanding debt instrument, including, for example, short-term revenue or tax anticipation notes, or fees or issuance costs associated with the issuance of new debt." (IFR page 60)

AGCA is aware of at least one state DOT used funds from the $10 billion in state DOT COVID-relief secured in the 2020 year-end package towards paying down debt. Such an action is prohibited under this Treasury IRF.

It must be noted however that:

  1. General infrastructure spending is not covered as an eligible use outside of water, sewer, and broadband investments; OR
  2. Above the amount allocated under the revenue loss provision (discussed above).

For example, if state revenues that are used to fund school construction did not decline over the last year, these funds could NOT be used for school construction. That stated, many states utilize their general funds to finance school construction. Arguably, such revenues could possibly go to school construction if there was a decrease in general fund revenues year-to-year.

The funds are not constrained by any funding level as to water, sewer and broadband investment. That stated:

"Treasury encourages recipients to ensure that water, sewer, and broadband projects use strong labor standards, including project labor agreements and community benefits agreements that offer wages at or above the prevailing rate and include local hire provisions" (IFR page 62);

To provide public transparency on whether projects are using practices that promote on-time and on-budget delivery, Treasury will seek information from recipients on their workforce plans and practices related to water, sewer, and broadband projects undertaken with Fiscal Recovery Funds. Treasury will provide additional guidance and instructions on the reporting requirements at a later date.