Treasury Issues Rules for $350 Billion Coronavirus State and Local Fiscal Recovery Funds
Michael Paulsen and Alice Lam, Manatt Health
The Big Picture
A key provision of the American Rescue Plan (ARP) is the establishment of the $350 billion Coronavirus State and Local Fiscal Recovery Funds (Fiscal Recovery Funds) for eligible state, local, territorial and Tribal governments (Recipients) to respond to the COVID-19 public health emergency (PHE). On May 10, the Department of the Treasury (Treasury) released a flurry of information relating to the Fiscal Recovery Funds, including an interim final rule (IFR) with comment period and multiple guidance documents. Recipients may use Fiscal Recovery Funds to stabilize revenue downturns, address budget shortfalls, support public health expenditures, and address negative economic impacts of COVID-19 to lay the foundation for a strong and equitable recovery.
The Fiscal Recovery Funds provide a substantial influx of dollars to states and local governments. States will receive an aggregate $195.3 billion, with individual payments ranging from $906 million (Montana) to $27 billion (California); counties will receive an aggregate $65.1 billion, with individual payments ranging from tens of thousands of dollars to $2 billion (Los Angeles County); and metropolitan cities will receive payments ranging from $1.2 million (Gulf Shores, Alabama) to $4.3 billion (New York city). On May 20, Treasury announced it had distributed $105.3 billion, or 30 percent, of the allocation to the more than 1,500 state, territorial, local and Tribal governments eligible to receive Fiscal Recovery Funds.
Notably, the IFR provides significant discretion to states and localities to use Fiscal Recovery Funds for initiatives to overcome public health and economic impacts stemming from or exacerbated by the COVID-19 PHE, replace lost revenue, provide premium (hazard) pay for essential workers, and invest in water and broadband infrastructure.
The Biden administration emphasizes its focus on promoting health equity by encouraging recipients to use the funds to address systemic public health and economic challenges that contributed to the severe impacts of the pandemic on low-income communities and people of color. In particular, the IFR provides recipients with flexibility to use the funds to address certain social drivers of health in communities where disparities were exacerbated by the COVID-19 PHE. The preamble also encourages recipients to engage constituents and communities in developing plans to use the payments.
Throughout the IFR, which went into effect on May 17, Treasury identifies specific questions for which it is seeking public comment, suggesting a particular openness to modifying certain aspects of the rulemaking over time. All comments are due 60 days from publication of the IFR, or by July 16. (https://mclaneedgers.com) A short summary of the eligible uses, key areas for comment and what to expect next related to Fiscal Recovery Funds follows below.
Eligible Uses of Funding
Based on the eligible uses established in statute, the IFR and guidance provide broad discretion to governments to use Fiscal Recovery Funds to: (1) support public health expenditures and address negative economic impacts, (2) provide premium pay for essential workers, (3) replace recipient revenue losses, and (4) invest in infrastructure related to water, sewer and broadband infrastructure. The IFR provides significant flexibility to recipients to determine the best uses of Fiscal Recovery Funds within and across these categories. The eligible uses established by the IFR also reflect the administration’s focus on addressing disparities. Treasury emphasizes that the funds are meant to provide resources not only to respond to the immediate harms of the pandemic, but also to mitigate the compounding and systemic impacts of COVID-19, which disproportionately impact historically marginalized communities.
Consistent with the American Rescue Plan, the statute and rulemaking prohibit Fiscal Recovery Funds from being used for “deposit into any pension fund,” replenishing financial reserves (e.g., a “rainy day” fund), general infrastructure projects or reducing taxes. Payments are also subject to long-standing limitations on federal funds being used as a nonfederal match for other federal programs; for example, Fiscal Recovery Funds may not be used to satisfy the state’s share of Medicaid expenditures.
Public Health Expenditures
The IFR enumerates dozens of eligible uses that qualify as addressing the public health and economic effects of COVID-19. Although the IFR’s list is vast, the list is nonexclusive. Recipients have flexibility to use the funds for any program or service that “responds to” the disease itself or the harmful consequences of the economic disruptions resulting from or exacerbated by the PHE.
Eligible public health uses range from expenses necessary to respond to and meet emergency public health needs (COVID-19 vaccination, testing and treatment expenses) to services that address public health needs that have been exacerbated by the pandemic (mental health treatment, substance misuse treatment and other behavioral health services). Treasury recently clarified in FAQs that recipients may use Fiscal Recovery Funds for vaccine incentive programs, such as lottery programs that multiple states have adopted. Treasury also recognizes as eligible expenses public health and safety staff responding to the COVID-19 pandemic and improving the design and execution of health and public health programs. The IFR establishes a nonexclusive list of eligible uses that “respond to” the economic impacts of COVID-19, including expenses necessary to help unemployed workers, make deposits into state unemployment trust funds, give aid to impacted industries and provide aid directly to households.
The IFR establishes that an even broader range of services and programs will be presumed to be responding to the PHE when provided in low-income and American Indian communities. These services include, for example:
- Investments in housing and neighborhoods, such as services to address homelessness, housing services to support healthy living environments and neighborhoods conducive to mental and physical wellness, remediation of lead paint, and evidence-based community violence intervention programs.
- Educational supports for lower-income students (e.g., new, expanded, or enhanced early learning services and assistance to high-poverty school districts to advance equitable funding across districts and geographies).
- Investments to promote healthy childhood environments (e.g., new or expanded high-quality child care, home visiting programs and enhanced services for child welfare-involved families).
Treasury is soliciting input relating to this set of eligible uses, including:
- Whether there are other types of services or costs that Treasury should consider; and
- The duration of time that certain types of expenses, such as payroll expenses for public health workers and rehiring of public health staff, should remain in place.
Premium Pay for Essential Workers
The ARP authorizes recipients to use funds to provide premium (hazard) pay to their eligible workers for essential work, or to provide grants to employers so they can pay eligible workers for essential work. The IFR highlights several types of sectors and workers that would be eligible for payments, including those that have borne a disproportionate share of the health and economic impacts of the pandemic, health care (hospital, nursing home and home care staff); public health and safety staff; and social services and human services staff. Recipients must prioritize premium pay for low- and moderate-income persons. Premium pay that would increase a worker’s total pay above 150 percent of the greater of the state or county average annual wage requires the recipient to provide a written justification to the Treasury.
Treasury is seeking input relating to this set of eligible uses, including:
- Whether there are additional sectors Treasury should consider essential critical infrastructure; and
- Whether Treasury should consider additional criteria to ensure premium pay corresponds to essential workers.
Replacement of Revenue Losses
The ARP seeks to avoid cuts to government services by allowing states to use Fiscal Recovery Funds for the provision of government services, to the extent of the reduction in the recipient’s general revenue. Recipients may use these funds to replace lost revenue. The IFR establishes a methodology that each recipient can use to calculate its reduction in revenue and, notably, allows recipients to presume that any reduction in actual revenue relative to the pre-pandemic trend is due to the COVID-19 PHE. In the IFR preamble, Treasury acknowledges the intent and design of the methodology is to minimize the administrative burden on recipients and take into consideration the devastating effects of the COVID-19 PHE.
Importantly, once a shortfall in revenue is identified, recipients will have broad latitude to use this funding to support government services, up to this amount of lost revenue. The IFR lists a wide range of examples of such services, including maintenance, infrastructure, health services, environmental remediation, school or educational services, and public safety services.
Treasury seeks input regarding several questions relating to this set of eligible uses, including:
- Whether Treasury should take other factors into consideration in determining whether the revenue losses are “due to” the COVID-19 PHE—Treasury notes one consideration is the expiration of the PHE;
- Whether recipients anticipate lagged effects of the PHE; and
- Whether paying interest or principal debt—which are not considered government services under the IFR definition—could be considered government services.
Investments in Water, Sewer and Broadband Infrastructure
Consistent with the ARP, Treasury guidance permits recipients to apply Fiscal Recovery Funds to improve access to clean drinking water (building or upgrading facilities and transmission, distribution, and storage systems, including the replacement of lead service lines) and to support vital wastewater and stormwater infrastructure (managing and treating stormwater or subsurface drainage water, facilitating water reuse). The IFR aligns eligible uses of the Fiscal Recovery Funds with the wide range of projects that would be eligible to receive financial assistance through the Environmental Protection Agency’s Clean Water State Revolving Fund or Drinking Water State Revolving Fund. Treasury indicates that this definition provides recipients with considerable flexibility to identify investments in water and sewer infrastructure that are of highest priority for their own communities. The IFR also encourages Recipients to select projects that will improve resiliency to the effects of climate change.
The IFR also permits Recipients to use funds to improve broadband infrastructure in areas that are currently unserved or underserved (lack access to a wireline connection capable of reliably delivering at least minimum speeds of 25 Mbps download and 3 Mbps upload). The IFR identifies eligible investments that must be designed to provide services that meet “adequate” speeds—at least 100 megabits per second wherever practicable—for unserved and underserved households and businesses. Recipients are also encouraged to prioritize projects that achieve last-mile connections to households and businesses. Assistance to households facing negative economic impacts due to COVID-19, including Internet access or digital literacy assistance (if the household has experienced a negative economic impact from the pandemic), is also an eligible use of Fiscal Recovery Funds.
Treasury seeks input regarding several questions relating to this set of eligible uses, including:
- The advantages and disadvantages of setting minimum symmetrical download and upload speeds, and whether other thresholds would be appropriate; and
- Whether Treasury should consider new categories of water and infrastructure to mitigate negative impacts of climate change.
Timeline for Use of Funds
States and localities may use the funds to cover costs incurred between March 3, 2021, and December 31, 2024. Treasury considers a cost to have been incurred if the recipient has obligated—but has not necessarily spent—the Fiscal Recovery Funds by December 31, 2024. Recipients must return any funds that are not obligated by December 31, 2024, and any funds that are not expended by December 31, 2026.
The Fiscal Recovery Funds represent a substantial source of revenue for state, local, territorial and Tribal governments—one that a host of stakeholders are eyeing to support public health, economic and other needs. Local governments and the majority of state governments will receive Fiscal Recovery Funds in two tranches. By statute, local governments will receive the second tranche of funds 12 months after the first payment, and under the IFR, Treasury also adopts this approach for state governments receiving two payments. Territorial governments will receive a single payment, and Tribal governments will receive two payments, in May and June 2021. On May 19, Treasury began distributing funds.
As Recipients digest the IFR and related guidance, they will undoubtedly raise additional questions for Treasury. Treasury may promulgate additional regulations in response to IFR comments, and is likely to issue updates to the FAQs. In addition, because the funds are available to states to incur expenses until December 2024, it is reasonable to expect that some rules of the road may change over time.
 Includes the District of Columbia.
 The IFR clarifies that a recipient would only be considered to have used Fiscal Recovery Funds to offset a reduction in net tax revenue if the recipient could not identify sufficient funds from sources other than Fiscal Recovery Funds to offset any reductions in net tax revenue.
 Preamble pages 96–97.
 Obligation is defined as “an order placed for property and services and entering into contracts, subawards, and similar transitions that require payment.” See § 35.3.