This Week in Federal Funding

Route Fifty's This Week in Federal Funding newsletter provides weekly updates on what's happening with the pandemic-era aid dollars the federal government is sending to states and localities. The newsletter goes out on Tuesdays and Route Fifty Today subscribers receive it automatically. If you don't subscribe to Route Fifty Today and would like to receive This Week in Federal Funding, you can sign up for it here.

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Welcome to Route Fifty's This Week in Federal Funding! I'm Senior Editor Bill Lucia.

From R50 this week: Under the American Rescue Plan Act, thousands of localities with populations smaller than 50,000 are in line to get a share of $19.5 billion in aid—certainly a welcome budget boost for many of these places, known as "non-entitlement units," or NEUs. But some are actually declining the cash, because they're uncertain they can meet complex compliance requirements that come with it. Liz Farmer takes a look at the situation shaping up here. We also have a column from Andrew Kleine, who offers tips on managing ARPA funds. "There is the risk of spending hastily, making structural budget problems worse and failing to properly track dollars," he notes. Kate Queram reports on $20 million in ARPA funding available to states to use for health insurance marketplace upgrades.

What to watch: The rules. The Treasury Department is taking comments until July 16 on the guidance it issued last month for the $350 billion state and local recovery funds program included in APRA. Treasury may further refine and clarify the guidelines based on that feedback. Last week, I caught up with Emily Brock, director of the Government Finance Officers Association's Federal Liaison Center, to discuss what state and local finance officials are saying about the guidance so far. Here's a rundown of some of the key issues that are coming up.

Reporting requirements. It's not just small towns raising concerns here. Brock said GFOA members have characterized ARPA's reporting requirements as "quite onerous," with officials from the state level down to small cities saying they'll need to hire extra help to deliver what the feds are asking for. "Those folks are looking at these reporting requirements and they're thinking to themselves, No. 1, I am unable to do this on my own, and No. 2, the rapid pace at which they're asking for our spend plans is unattainable." 

Date for calculating revenue losses. This may sound esoteric. But state and local finance folks flag it as something that's going to cause them huge headaches if it isn't changed. The rule calls for states and localities to calculate revenue losses at four points in time, all ending on Dec. 31. This calculation is important because it determines how much of a recipient's award falls under a highly flexible part of the program that allows for spending on a wide range of areas that qualify as "government services". The rub is that states and many localities don't run on calendar year budget cycles. That means they'd likely have to complete a laborious accounting process they use to close their books for the fiscal year for the Dec. 31 timeframe as well. "When my people saw that initially, they said, 'this is impossible,'" said Brock. Volusia County, Florida Chief Financial Officer Ryan Ossowski sent Treasury a detailed explanation of why this matters, why it should be revised, and a breakdown of the hundreds of hours in added staff time it will involve for his county if it isn't. (That comment is here if you're interested.)

Single Audit Act. NEUs face the prospect of triggering the Single Audit Act, which requires external audits when states and localities spend federal grant dollars over a certain threshold. That's an added expense these smaller communities will need to think about. And Brock questioned: "Are there even enough CPAs who specialize in state and local government accounting to get those single audits done? I would argue that there's definitely not."

So a consideration for funding recipients that begins to emerge is: How much of their award are they going to have to spend just to comply with federal rules?

Debt issues. In forthcoming comments to Treasury, GFOA is planning to press for leeway to cover costs from debt financing or short-term borrowing—like revenue or tax anticipation notes—that governments took on to maintain adequate cash flows during the pandemic. "It really is a cash management tool for organizations that chose to do that," Brock said. Similarly, GFOA might push for covering longer-maturing debt that is repaid primarily with revenue streams that took some of the biggest hits during the pandemic—hotel taxes, for example. The rules currently include strict prohibitions on using recovery dollars for debt costs. 

Aggregate revenues. Some governments have complained (example here) that Treasury's lost revenue formula looks at overall sums and doesn't account for situations where, say, robust property or sales tax collections mask plummeting taxes and fees tied to things like airports, lodging or arenas. Brock suggested GFOA might ask for changes here, but wasn't very optimistic the department will budge. "I feel like Treasury is firm in their resolve," she said. 

Also of note, if you haven't seen it, GFOA and others partnered on a revenue loss calculator that's meant to align with the Treasury rules. More on that here.

That's it for this week. In the meantime, if you have news tips or feedback on what we should be covering, if you want to share your community's story, or if you just want to say hello, please email us at: editor@routefifty.com. Thanks for reading!

This week's federal funds stories from Route Fifty:

• Why Managing Billions in Federal Aid for Small Towns Will be a Huge Lift

• How to Manage Federal Funds to Ensure Sustainability

• More than $20M in Federal Funds Available for State-Based Insurance Marketplaces to Make Improvements

For last week's edition, with local developments on ARPA spending, click here.