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MRSC Guidance for CARES Act Grants to Small Businesses


August 5, 2020 by Linda Gallagher
Category: COVID-19

MRSC Guidance for CARES Act Grants to Small Businesses

Editor's note: Some information has changed since this article was originally published:

  • As of September 2, the state Department of Commerce is preparing contract amendments for the CARES Act Coronavirus Relief Fund extending the deadlines for cities, towns, and counties to incur expenses and file for reimbursement by one month. According to Tony Hanson, jurisdictions will be able to receive reimbursement for eligible expenses incurred through November 30 (previously October 31) and the final invoice must be submitted by December 15 (previously November 15).
  • On August 31, Governor Inslee announced that the total Coronavirus Relief Fund distributions to cities, towns, and counties would be increased to over $420 million, with each county receiving a minimum of $300,000 and each city/town receiving a minimum of $30,000. The Department of Commerce has released updated distribution amounts for each city, town, and county.

The original blog post text is below.


By Linda Gallagher and Toni Nelson, MRSC Finance Consultant

Many local governments are allocating a portion of their federal Coronavirus Aid, Relief, and Economic Security (CARES) Act funds for small business support. Although the CARES Act provides a surprising amount of flexibility regarding use of funds, the complexity of documentation requirements and audit standards will vary depending on the structure of the small business grant program that the local government implements. This blog, the second in a two-part series on CARES Act small business assistance, provides resources, samples, and suggestions for a basic approach to establishing these local grant programs.

Small Business Support Using an Eligibility-Based Approach

There are many ways to structure a small business grant program under the CARES Act. For local governments seeking a basic approach that offers minimal paperwork for the small business and may trigger fewer audit issues, MRSC recommends an eligibility-based small business grant program.

Eligibility-based grants are structured such that the grant application itself determines whether a small business request meets the criteria for an eligible cost under CARES Act funding. Because eligibility is determined up front, there is no need for the small business to submit receipts before being reimbursed for costs incurred. These simple grants can work very well when the maximum award for any single business is under $3,000, for example.

Key to an eligibility-based grant is that the disbursements must be related to direct impacts of a business interruption (business closure or severe reduction in operations) on an establishment because it could not operate during the initial phases of the COVID-19 response. An example of a business interruption would be a restaurant or brick and mortar retail establishment that could not operate and had little or no revenue during the initial Stay Home - Stay Healthy Order. Local businesses that sustained this type of business interruption would be eligible for reimbursement of operating costs, such as rent or utilities, that had to be paid during the period of interruption.

An eligibility-based grant application should include verification that the small business is in good standing and operates within the city or county (for example, a copy of state or local business license to affirm good standing), and an attestation by the grant recipient that its operations were shut down or severely curtailed after March 1, 2020, for a defined period of time. Rental and/or utility bills should also be submitted with the application to prove eligibility for the grant amount.

Once eligibility is verified by the local government, the grant payment could be disbursed to the business.

Small Business Support Using a Reimbursement-Based Approach

Any local governments that wish to provide small business support beyond those strictly related to the direct impact of business interruption, may find a reimbursement-based grant approach more appropriate. Reimbursement grants will likely face greater audit scrutiny to ensure that funds were spent on eligible expenses.

The key here is that a grant for a business cost that is considered “prospective”— meaning it is related to reopening the business after the initial business interruption — must be disbursed on a reimbursement basis. Costs related to the purchase of personal protective equipment (PPE) or to reconfiguring a restaurant or retail space to comply with physical distancing requirements would fall into this category.

For these types of prospective costs, grant money cannot be disbursed in advance. The business must submit receipts for the expenditures and the local government must review these receipts for eligibility and verify authenticity prior to submitting to the Department of Commerce (DOC) for reimbursement. This same method of submittal and reimbursement is used by local governments when receiving other forms of federal awards.

The DOC will work with local governments to speed up the reimbursement process as much as possible, but these types of grants will require attention to detail and support documentation in the form of receipts.

Grant Beneficiaries and Subrecipients

For audit purposes, small businesses are the grant ‘beneficiaries’ of CARES Act funding. However, if a local government chooses to contract out the management of small business grants to a third party, then the third party becomes a subrecipient and the local government would be required to carefully monitor the third party's review and recommendation-to-award process to assure compliance with CARES Act award criteria and the receipt of support documentation prior to submittal for reimbursement. 

Examples of subrecipient agreements are local government contracts with organizations such as an Economic Development Council (EDC), Associate Development Organization (ADO), or a local chamber of commerce to administer a reimbursement-based small business grant program. In these examples the local government is responsible for monitoring the subrecipient.

If a city or county directly administers CARES Act reimbursement grants to small businesses the local government itself must establish internal control and monitoring procedures to assure receipt of support documentation that can verify the reimbursement request. In other words, the city or county is the subrecipient and must document all requests for Coronavirus Relief Funds (CRF) to assure compliance with federal auditing requirements.

We have heard that some local government entities are offering both eligibility-based and reimbursement-based grant funding to local businesses under the same grant application. This combined approach of disbursing small business grants is allowable, but it is important to distinguish between the two program types and to assure that proper receipt documentation is received prior to submitting to the DOC for disbursement. This approach may require additional administrative oversight and slow down the disbursement of eligible funding, but it does streamline the applicant process, which enhances the efficiency of the grant programs.

Additional Considerations

Small business grant applicants must attest that no other support, either public or private (e.g., business interruption insurance), has or will be received to cover any of the expenses presented in their CARES Act grant applications. Additionally, conflicts of interest must be addressed: No county, city, or town officials should be involved directly or indirectly with the business applicants in their jurisdiction.

The process for a timely review of completed applications needs to be clear and transparent. Application review can be handled directly or by another jurisdiction’s governing body (city council, board of commissioners) via an interlocal agreement; however, the awarding entity must retain the authority to approve the awards based on recommendations of the review board or panel in order to be compliant with CARES Act guidance.

Local government must handle fund distribution following strong internal control procedures. Documentation, monitoring, and follow through will safeguard the disbursement process, and local government agencies should plan to evaluate and document grant program results.

Document, Document, Document

The Washington State Auditor’s Office (SAO) and the DOC both continue to emphasize how critical it is to sufficiently document these local government CRF-funded grant programs. MRSC wholeheartedly joins in this emphasis. Local governments should keep careful records of the deliberative processes followed and the guidance applied in program creation, design, and implementation. You should either print out or take screenshots of online guidance relied upon, whether it is a federal or state directive, or item in an FAQs, because guidance has changed over time. The flexibility and discretion allowed for these programs brings a level of uncertainty as well. Here is a U.S. Treasury FAQ about documentation:

What records must be kept by governments receiving payment?
A government should keep records sufficient to demonstrate that the amount of Fund payments to the government has been used in accordance with section 601(d) of the Social Security Act.

Concluding Thoughts

We expect there will be ongoing legal and financial guidance from federal and state agencies. The DOC has established an eligibility period that ends October 31, 2020, to allow for entities to submit for reimbursement to the Office of Financial Management (OFM) by the deadline of November 15.

Additional federal funds may be provided in pending federal legislation; however, it would be prudent to consider, manage, and plan using current DOC guidance. When new or continuing federal awards are granted, MRSC will provide additional information on our webpages and via blog posts. Stay tuned for further developments.

We suggest review of the following resources and samples from local government small business grant programs already underway. Consult with your agency’s legal counsel for legal advice about your CRF programs. Be sure to collaborate with your county and neighboring cities and towns by focusing on the shared goals for COVID-19-related measures. We really are all in this together.

Resources

Here are some resources from MRSC:

Here are resources from state agencies:

Here are sample grant programs and associated documents from a few Washington local governments. MRSC’s related topic pages have more examples.


MRSC is a private nonprofit organization serving local governments in Washington State. Eligible government agencies in Washington State may use our free, one-on-one Ask MRSC service to get answers to legal, policy, or financial questions.

About Linda Gallagher

Linda Gallagher joined MRSC in 2017. She previously served as a Senior Deputy Prosecuting Attorney for King County and as an Assistant Attorney General.

Linda’s municipal law experience includes risk management, torts, civil rights, transit, employment, workers compensation, eminent domain, vehicle licensing, law enforcement, corrections, and public health.

She graduated from the University of Washington School of Law.

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