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On May 10, 2021, the U.S. Department of the Treasury (“Treasury”) issued an Interim Final Rule to provide long-awaited guidance on the Coronavirus State Fiscal Recovery Fund and the Coronavirus Local Fiscal Recovery Fund (“the Fiscal Recovery Funds”) established under the American Rescue Plan Act (“ARPA”).  The Rule became effective on May 17, 2021.  To facilitate the implementation of these funds, this Interim Final Rule establishes a framework for determining the types of programs and services that are eligible under the ARPA along with a list of eligible uses that State, local, and Tribal governments may consider.

Background

In the Fiscal Recovery Funds portion of ARPA, Congress is providing State and local governments with significant financial resources to respond to the COVID-19 public health emergency and its economic impacts.  Through ARPA, Congress amended the Social Security Act to add section 602 and section 603 to determine the eligible uses of these grants, which are the same for every level of government.  The primary difference between the two sections is that section 602 (“the State Fiscal Recovery Fund”) establishes a fund for States, territories, and Tribal governments and section 603 (“the Local Fiscal Recovery Fund”) establishes a fund for metropolitan cities, counties, and “nonentitlement units of local government” (e.g., cities, townships, villages, and small municipalities that generally have fewer than 50,000 inhabitants).

Timeline of Fund Distribution

State and local governments will not receive lump sums of the Fiscal Recovery Funds all at once or at the same time.  Rather, Congress and Treasury established a distribution schedule depending on government level and other factors.  First, local governments will receive funds in two equal tranches—the first tranche will be available in May 2021 and the second tranche/remaining balance will be distributed 12 months later.  For States, the distribution will depend on their unemployment rates.  States that have suffered a net increase in the unemployment rate of more than 2 percentage points from February 2020 will receive their grant in a single payment. States with unemployment levels below this threshold will receive their grants in two equal tranches.  Finally, payments to Tribal governments will arrive in two tranches, with the first payment available in May and the second to be delivered in June 2021.

Eligible Uses of Funds

To assist States and local governments in identifying uses for the funds, Congress created the following categories of “eligible uses” for the grants.  States and local governments will enjoy a significant flexibility to allocate funds for the following purposes:

  1. Supporting public health expenditures, by providing resources for COVID-19 mitigation efforts, medical expenses, behavioral healthcare, and certain public health staff;
  2. Addressing negative economic impacts caused by the COVID-19 crisis, including economic harms to workers, households, small businesses, impacted industries, and the public sector;
  3. Replacing lost public sector revenue to secure government services despite the reduction in public revenue experienced due to the pandemic;
  4. Providing premium pay for essential workers, such as public health and safety staff; and
  5. Investing in water, sewer, and broadband infrastructure to improve access to clean drinking water and to expand access to broadband internet.

Importantly, Congress identified several ineligible uses for these funds.  For example, States and territories cannot offset a reduction in their net tax revenue resulting from a change in law, regulation, or administrative interpretation.  Further, States and local governments cannot deposit funds into any pension fund.  Recipients also cannot use these funds for debt services, legal settlements or judgments, and deposits to rainy day funds or financial reserves.  Finally, States cannot use this financial assistance to fund a portion of funding for other Federal programs where the Federal government provides assistance that matches a State’s funding—e.g., a State cannot use the Fiscal Recovery funding to pay for its share of Medicaid.

Deadline for Use of Funds

Under the terms of the Interim Final Rule, States and local governments may use the Fiscal Recovery Funds to cover costs incurred on March 3, 2021 and onward.

After these funds are received, States and local governments have until December 31, 2024 to allocate the funds.  That said, where States and local governments have obligated funds for their projects, the funds may be used to pay for certain projects with periods of performance that run until December 31, 2026.  In other words, the funds must be obligated before December 31, 2024, even if performance will not occur until later.

Funds to States and Local Governments to be Governed by Federal Rules (2 C.F.R. Part 200)

Similar to other federal grants of funds to States and local governments, the Fiscal Recovery Funds will generally be subject to the requirements of the Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards at 2 C.F.R. Part 200.  In addition, where the funds are used for State and local government contracts and projects, these requirements will generally be flowed down to “subrecipients,” i.e., entities performing the contracts and projects funded by the Fiscal Recovery Funds.

The requirements in 2 C.F.R. Part 200 are set forth in different Appendices of the regulation.  These requirements range from cost accounting and audit principles to record-keeping procedures to prevent and safeguard against the unauthorized use of funds.  Depending on a subrecipient’s financial management practices and accounting procedures, a subrecipient may need to implement new practices and procedures that monitor and track federal grant funding to comply with these requirements.  For example, a subrecipient should have a financial management system that:

  1. Records the source and application of grant funds;
  2. Provides effective control over and accountability for all grant funds and property;
  3. Allows for a comparison of actual expenditures with reported costs and budgeted costs;
  4. Includes procedures to ensure that all expenditures are obligated within the effective grant period;
  5. Includes procedures to minimize the time between receipt and expenditure of grant funds, if applicable; and
  6. Includes procedures to prohibit the transfer of funds between federally funded programs and/or grants.

Similarly, a subrecipient should maintain the following for tracking and managing federal grant funds:

  1. Chart of accounts, written accounting procedures, internal and administrative controls, accounting journals and ledgers;
  2. Payment requests and source documentation (vendor invoices, bills of lading, purchase orders, payment vouchers, payrolls, bank statements and reconciliations); and
  3. Financial statements, correspondence and audit files.

In addition to these cost accounting and record-keeping requirements, subrecipients are also expected to comply with the following list of required flow-down terms.  These terms include:

  1. Equal Employment Opportunity requirements;
  2. Davis Bacon Act (40 U.S.C. §§ 3141-3148);
  3. Anti-Kickback Act (40 U.S.C. § 3145);
  4. Contract Work Hours and Safety Standards (40 U.S.C. §§ 3701-3708);
  5. Rights to Inventions Made Under a Contract or Agreement (37 C.F.R. Part 401);
  6. Clean Air Act (42 U.S.C. §§ 7401-7671q) and Water Pollution Control Act (33 U.S.C. §§ 1251-1387);
  7. Debarment and Suspension (Executive Orders 12549 and 12689);
  8. Byrd Anti-Lobbying Amendment (31 U.S.C. § 1352);
  9. Procurement of recovered materials (2 C.F.R. § 200.323) (pursuant to section 6002 of the EPA’s Solid Waste Disposal Act);
  10. Prohibition on certain telecommunications and video surveillance services or equipment (2 C.F.R. § 200.216); and
  11. Domestic preferences for procurements (2 C.F.R. § 200.322).

Failure to comply may result in Federal grantors taking one of the following actions:

  1. Temporarily withholding cash payments pending correction of the deficiency or more severe enforcement action by the Federal awarding agency;
  2. Denying both use of funds and any applicable matching credit for all or part of the cost of the activity or action not in compliance;
  3. Wholly or partly suspending or terminating the Federal award;
  4. Initiating suspension or debarment proceedings;
  5. Withholding further Federal awards for the project or program; or
  6. Taking other remedies that may be legally available.

The Interim Final Rule is Open for Comments

Although this Interim Final Rule is effective immediately upon its publication, Treasury is seeking comments from State, local, and Tribal governments on this Interim Final Rule to consider and address any potential issues that may arise regarding all aspects of this Interim Final Rule and Treasury’s work in administering the Fiscal Recovery Funds.  The comment period will be open until July 16, 2021, sixty days after the publication of the Interim Final Rule in the Federal Register.

Conclusion

Congress’ allocation of the Fiscal Recovery Funds to State and local governments will inject a very large sum of money into the State/local business marketplace, which will provide opportunities for new projects and procurements in infrastructure and across the healthcare and information technology sectors.  As opportunities arise, contractors as subrecipients of this funding should consider the following:

  1. Pay attention to compliance requirements in 2 C.F.R. Part 200;
  2. Ensure that all subcontractors are familiar and compliant with the applicable requirements stipulated in 2 C.F.R. Part 200;
  3. Establish appropriate financial management systems to monitor, track and manage ARPA funds; and
  4. Create proper record-keeping procedures to prevent and safeguard against the unauthorized use of funds.
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Photo of Peter J. Eyre Peter J. Eyre

Peter J. Eyre is a partner and co-chair of Crowell & Moring’s Government Contracts Group. He is also a member of the firm’s Management Board. Peter was named to BTI Consulting Group’s list of “Client Service All-Stars” in 2016, 2017, and 2019 and…

Peter J. Eyre is a partner and co-chair of Crowell & Moring’s Government Contracts Group. He is also a member of the firm’s Management Board. Peter was named to BTI Consulting Group’s list of “Client Service All-Stars” in 2016, 2017, and 2019 and has been named an Acritas Star, Acritas Stars Independently Rated Lawyers (2016, 2017, 2019). He is nationally ranked by Chambers USA in Government Contracts since 2014, and by Super Lawyers since 2017.

Photo of Laura J. Mitchell Baker Laura J. Mitchell Baker

Laura J. Mitchell Baker is a counsel with Crowell & Moring’s Government Contracts Group in the firm’s Washington, D.C. office.

Laura represents government contractors in litigation and administrative matters, including contract disputes with state and federal entities, suspension and debarment proceedings, mandatory disclosures…

Laura J. Mitchell Baker is a counsel with Crowell & Moring’s Government Contracts Group in the firm’s Washington, D.C. office.

Laura represents government contractors in litigation and administrative matters, including contract disputes with state and federal entities, suspension and debarment proceedings, mandatory disclosures to the government, prime-sub disputes, and False Claims Act investigations. Her practice also includes counseling on federal, state, and local government contracts, government contracts due diligence, and regulatory and compliance matters, as well as conducting internal investigations.

Photo of Olivia Lynch Olivia Lynch

Olivia L. Lynch is a partner in Crowell & Moring’s Government Contracts Group in the Washington, D.C. office.

General Government Contracts Counseling. Olivia advises government contractors on navigating the procurement process, compliance and ethics, commercial item contracting, accessibility, supply chain assurance, and…

Olivia L. Lynch is a partner in Crowell & Moring’s Government Contracts Group in the Washington, D.C. office.

General Government Contracts Counseling. Olivia advises government contractors on navigating the procurement process, compliance and ethics, commercial item contracting, accessibility, supply chain assurance, and various aspects of state and local procurement law.