Under the final rule smaller communities like Belmont and Watertown can use all of their Coronavirus Local Fiscal Recovery Fund allotment towards revenue replacement. According to the state’s Department of Administration and Finance the final rule allows “municipalities to now choose between calculating their revenue replacement per the previous rules OR choosing a standard allowance of $10M [which] means that 305 out of 351 municipalities can use their full ARPA allowance on revenue replacement, dramatically increasing flexibility for their ARPA dollars.” See this CSG Summary of the Final Rule.
Most of the rest of this post is obsolete. It explained the interim rule.
The federal American Rescue Plan Act, passed in March 2021, provides financial assistance directly to municipalities through the Coronavirus Local Fiscal Recovery Fund. ARPA also helps municipalities through a number of particular program channels, notably including aid directly to local schools.
The assistance flowing through the Coronavirus Local Fiscal Recovery Fund may only be used for a defined set of purposes, which include replacement of lost revenue due to COVID-19. However, in many instances, the U.S. Treasury rule governing the computation of lost revenue effectively prevents municipalities from using the Coronavirus Local Fiscal Recovery Fund for this purpose (forcing them to use funds for other authorized purposes).
Unfortunately, the clear language of the U.S. Treasury rule on this point seems unlikely to change. The rule bases the revenue computation on source as opposed to intended use and seeks to keep the computation as simple and uniform as possible. A computation that sought to distinguish between intended uses of revenue would be subject to unmanageable variation across the thousands of municipal units in the country.
Relevant Federal Statutory Language
Section 9901 of ARPA, passed in March 2021, adds section 603 to the Social Security Act, creating the Coronavirus Local Fiscal Recovery Fund and capitalizing it with 130 billion dollars. Section 603(c)(1) defines the purposes for which municipalities may use CLFRF grants. Section 603(c)(1)(C) permits use of these funds
for the provision of government services to the extent of the reduction in revenue . . . due to the COVID-19 public health emergency relative to revenues collected in the most recent full fiscal year . . .;ARPA, new section 603(c)(1)(C)
Relevant Federal Rule Making
On May 17, 2021, the U.S. Treasury posted in the federal register an “interim final” rule interpreting the CLFRF language. The rule addresses both the definition of revenue and the computation of revenue loss. The rule defines municipal revenue to include both own-source revenue and intergovernmental transfers.
To assure consistency, the Treasury models its definition of revenue on the definition used in the Census Bureau’s Annual Survey of State and Local Government Finances.
The interim final rule adopts a definition of “general revenue” based largely on the components reported under “General Revenue from Own Sources” in the Census Bureau’s Annual Survey of State and Local Government Finances, and for purposes of this interim final rule, helps to ensure that the components of general revenue would be calculated in a consistent manner. By relying on a methodology that is both familiar and comprehensive, this approach minimizes burden to recipients and provides consistency in the measurement of general revenue across a diverse set of recipients.Treasury Rule, 86 FR 26786, 26799. Footnote replaced with link.
The Census Bureau’s Survey of State and Local Government Finances classifies revenue based on the source of the revenue, not the purpose to which it is allocated.
General revenue comprises all revenue except that classified as liquor store, utility, or insurance trust revenue. The basis for this distinction is the nature of the revenue source involved, not the fund or administrative unit established to account for and control a particular activity.Bureau of the Census Government Finance and Classification Manual (2006), page 4-3 [the most recent version located on the web]
The Classification Manual includes various codes for different taxes by the type of economic activity taxed — sales, property, alcohol, etc., but it includes no codes for the purpose of the tax — school operations, school building, capital or operating budget — consistent with a focus on source, not purpose. The Census Classification Manual does differentiate source codes for different buckets of intergovernmental aid; these may correspond to specific purposes, but the primary distinction is source not purpose. The Treasury rule makes no distinctions based on purpose.
The Treasury rule explains further:
In calculating revenue, recipients should sum across all revenue streams covered as general revenue. This approach minimizes the administrative burden for recipients, provides for greater consistency across recipients, and presents a more accurate representation of the overall impact of the COVID-19 public health emergency on a recipient’s revenue, rather than relying on financial reporting prepared by each recipient, which vary in methodology used and which generally aggregates revenue by purpose rather than by source. . . .
[T]he definition of general revenue focuses on sources that are generated from economic activity and are available to fund government services, rather than a fund or administrative unit established to account for and control a particular activity. . . .Treasury Rule, 86 FR 26786, 26800 (footnotes omitted).
Footnote 117 specifically contrasts the Treasury’s intended source-oriented definition with standard local accounting definitions which reflect distinctions based on fund uses.
Fund-oriented reporting, such as what is used under the Governmental Accounting Standards Board (GASB), focuses on the types of uses and activities funded by the revenue, as opposed to the economic activity from which the revenue is sourced.Treasury Rule, 86 FR 26786, Footnote 117.
Defining Eligible Revenue Loss
Having defined revenue in a broad and simple way based on source, the Treasury rule also defines a straightforward approach to computing revenue loss. See 86 FR 26786, 26800. The Treasury rule allows municipalities to estimate their revenue loss due to Covid based on the deviation between their actual revenue in the COVID years (calendar years 2020 through 2023) and the extension of their revenue trend line from the 2019 base year. Municipalities also have the option of electing a straight 4.1% trend line if that results in a more generous computation or seems more convenient.
Whatever the outcome of the above computation, a municipality then has the option of using ARPA funds for general government services, up to the amount of lost revenue so computed.
However, the definitions of revenue and revenue loss are preventing many Massachusetts municipalities who have received new special purpose revenue during the COVID years (2020 and beyond) from showing revenue loss and so applying ARPA funds to fund general services. Examples would be:
- Municipalities who have received substantial increases in education aid as a result of the Student Opportunity Act.
- Municipalities who have passed overrides or debt exclusions.
- Municipalities who have received substantial state grants, perhaps for a school building.
On the other hand, the effect of the rule is entirely a function of timing — it could advantage some municipalities. Municipalities are not required to specifically show how the deviation from the base year trend relates to the pandemic. If municipalities received one-time special purpose revenue in 2019, the base year, they may show a false revenue loss in 2020 and 2021 which could allow them to apply extra ARPA funds for services.
Although revenue may decline for reasons unrelated to the COVID-19 public health emergency, to minimize the administrative burden on recipients and taking into consideration the devastating effects of the COVID-19 public health emergency, any diminution in actual revenues relative to the counterfactual pre-pandemic trend would be presumed to have been due to the COVID-19 public health emergency.Treasury Rule, 86 FR 26786, 28000
Prospects for Changes in the Rule
The rule is an interim rule and the Treasury received approximately 988 comments on it over the summer comment period. The Massachusetts Secretary of Administration and Finance and some Massachusetts communities pointed out the potentially unfortunate effects of the rule.
- The Massachusetts Secretary of Administration and Finance urged that “Treasury allow recipients the discretion to tailor the definition of state grants to local governments as appropriate for local calculations. While some state grants are recurring (e.g., aid for public schools), other such grants are non-recurring and therefore overstate local annual revenues.”
- New Bedford commented that their badly needed increase in state education aid would work against them. “It is critical to our community that revenue exclusively earmarked for public education be bifurcated from the other sources of general revenue. This would yield a more accurate representation of COVID-19’s impact on general government revenue, which decreased by $5.2 million from the base year to calendar year 2020, exclusive of a $6.1 million increase in Chapter 70 aid over that same period.”
- Arlington commented that their debt exclusion votes would work against them. “The Town of Arlington experienced drops in many other revenue sources, such as meals tax, hotel tax, motor vehicle excise tax, recreation fees, and others, but those drops are substantially wiped out by the increase in Debt Exclusion revenue.”
The rule has not yet been finalized. The comment period closed in July, so a final rule could come down any time. We cannot rule out the possibility of changes, but there are several reasons that I am not hopeful:
- It will be conceptually difficult for Treasury to move from their current simple approach to something allowing more complex tailoring. The alternative to their simple approach might resemble the Internal Revenue Code.
- A consistently tailored approach would hurt as many municipalities as it might help, since the ups and downs are all about timing.
- Municipalities disadvantaged by the current rule do not lose ARPA funds, they just lose latitude in the use of funds — they can still apply the funds for the other authorized purposes (a) COVID-related expenses (public health, economic relief); (b) premium pay for front-line workers; (c) water, sewer and broadband.
- Many municipalities are also receiving funds under several other programs that are quite flexible, notably the ESSER school funding grants.