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Treasury Issues Guidance for Local Fiscal Recovery Funds


May 13, 2021  by  Eric Lowell
Category:  Revenues COVID-19

Treasury Issues Guidance for Local Fiscal Recovery Funds

Editor's notes:


On May 10, 2021, the U.S. Department of Treasury issued its guidance for qualified uses of the $350 billion Local Fiscal Recovery Funds (LFRF) included in the American Rescue Plan Act (ARPA) which gives a clearer picture of how these funds can and can’t be spent. The full interim final rule is 151 pages, but the Treasury has also released an 8-page fact sheet summarizing the rule as well as a series of FAQs.

This blog will provide a summary of eligible programs and uses.

Local Fiscal Recovery Funds

LFRF is support provided to eligible state, local, territorial, and tribal governments to help these entities respond to the COVID-19 emergency. States, counties, and metropolitan cities may now request the first “tranche” or installment of their funds directly through the Treasury Submission Portal. All non-metropolitan cities and towns will be receiving their tranches through the state within 30 days unless the state requests a 30-day extension due to “administrative hardship.” (Guidance for how states must distribute funds to these “non-entitlement” cities and towns is expected from the Treasury next week.)

The Local Fiscal Recovery Funds may be used to:

  • Support public health expenditures,
  • Address the negative economic impacts caused by the public health emergency,
  • Replace lost public sector revenue,
  • Provide premium pay for essential worker, and
  • Invest in water, sewer, and broadband infrastructure.

Treasury guidance discusses the types of programs and services eligible for the funds, as well as examples of allowable uses. Local governments seeking to fund programs or services not listed in the guidance can assess whether a program or service may qualify by referring to page 10 of the interim final rule.

Supporting Public Health Expenditures

COVID-19 has required local governments to respond to a variety of public health issues. LFRF may be used to address a wide range of public health needs, including:

  • Services and programs to contain/mitigate the spread of COVID-19, including vaccination programs, medical expenses, testing, contact tracing, isolation and quarantine, and purchases of personal protective equipment (PPE).
  • Services and programs to monitor COVID-19 transmission and treatment, including public health surveillance, enforcement of public health orders, public communication efforts and enhancement of public health data systems.
  • Services or outreach to promote access to health and social services and provision of behavioral services exacerbated by the pandemic, including crisis intervention, mental health treatment and/or substance abuse treatment, and hotlines or warmlines.
  • Enhancement of healthcare capacity in response to the pandemic, including support for prevention, mitigation, or other services in congregate living facilities and schools; capital investments in public facilities to meet pandemic operational needs; and ventilation improvements in key settings.

Additionally, the funds may be used to cover payroll and benefits for employees in public health, healthcare, human services, public safety, and similar professions to the extent that these employees work on the COVID-19 response. LFRF recipients can also use these funds to cover the full payroll and covered benefits costs of public health and safety workers, or operating units or divisions primarily dedicated to the COVID-19 response.

Addressing Negative Economic Impacts Caused by the Pandemic

Due to the significant economic hardships many Americans are facing as a result of the COVID-19 pandemic, LFRF may be used to assist impacted individuals, household, small businesses, and industries. Eligible uses include:

  • Assistance to workers and families, such as aid to unemployed workers or households facing food, housing, or financial insecurity, and support of survivor’s benefits for family members of COVID-19 victims. Direct cash transfers to households are allowed if the amount is proportional to the negative economic impact. Local governments should use amounts previously provided by the federal government in response to their COVID-19 activities as guidance.
  • Support of small businesses through the provision of loans, grants, or in-kind assistance to enable them to rebound and invest in COVID-19 prevention/mitigation, such as changes to enable social distancing, enhanced cleaning efforts, barriers or partitions, or COVID-19 vaccination, testing, or contract tracing programs. Assistance can also be used to support payroll and benefit costs, mortgage, rent or utility costs, and other operating costs.
  • Activities to rebuild public sector capacity, such as rehiring public sector staff, replenishing unemployment insurance trust funds (up to pre-pandemic levels) and building capacity to implement economic relief programs (data analysis, outreach, technology, infrastructure, and impact evaluations).

The Washington State Constitution prohibits gifts of public funds “except for the necessary support of the poor and infirm.” There is a related prohibition in the state constitution on the lending of credit by public entities.

Last year when the CARES Act was passed, the Washington Office of the Attorney General (AGO) issued a memo to state and local governments clarifying that public funds may be spent “for the primary purpose of protecting and promoting health," which may have an incidental benefit on private citizens and entities. The AGO provided further guidance, stating that with sufficient safeguards in place “loans or grants are likely permissible if a local government can establish a clear nexus between such programs and either protecting the local economy or promoting compliance with public health guidelines.”

Serving the Hardest-Hit Communities and Families

The pandemic has affected certain communities disproportionately, particularly low-income families and communities of color.  LFRF can be used to address the public health and economic impacts felt by these communities. Eligible uses of the funds include:

  • Addressing health disparities and social health through funding for community health workers, provision of public benefits navigators, remediation of lead hazards, and community violence programs.
  • Investments in housing and neighborhoods through homelessness assistance, the development of affordable housing, and the provision of housing vouchers, housing navigation assistance, and/or residential counseling.
  • Addressing educational disparities through new or expanded learning services, the provision of additional resources to high-poverty school districts, the support of new or existing tutoring or afterschool programs, or the addition of new services to address social, emotional, and mental health needs of students.
  • Promoting healthy childhood environments through new or expanded high quality childcare, home visitation programs for families with young children, and/ or the provision of enhanced services for child welfare-involved families and foster youth.

Replacing Lost Public Sector Revenue

Many local governments have experienced a shortfall in revenue due to the economic impacts of COVID-19, and LFRF can be used to replace this lost revenue.

Treasury guidance provides more information on what is considered to be a “revenue,” but — generally speaking — it includes revenue from taxes, current charges, and miscellaneous general revenue, including intragovernmental transfers from the state (such as state-shared revenues). However, “revenue” also excludes certain categories, such as refunds and other correcting transactions, proceeds from the issuance of debt or the sale of investments, utility revenues, and federal funding. (The American Rescue Plan Act has separate provisions for utility arrearages.)

Treasury has established a methodology for local governments to assist in determining the shortfall. To compute the reduction in revenue, a local government should pull data from the last full fiscal year prior to the pandemic — which for cities and counties in Washington is the 2019 fiscal year actuals  — and project the revenues forward in one of two ways:

  1. Use the average annual revenue growth over the last three full fiscal years prior to the pandemic (2017-2019), or
  2. Use 4.1%, which is the national average for state and local government revenue growth rate from 2015-2018 (the latest data available).

(Note that local governments may not compare their current revenues to any revenue projections that were created pre pandemic. For instance, if revenues averaged 5% annual growth from 2017-2019 but the original 2020 budget adopted pre pandemic had anticipated 8% annual growth for the next few years, the local government may only use the 5% growth figure.)

The Treasury guidance states that revenue should be calculated on an entity-wide basis, rather than by purpose or revenue source, to minimize the administrative burden, provide greater consistency, and provide a more accurate representation of the net impact of COVID-19 on local government finances.

Recipients are permitted to calculate the extent of the reduction in revenue as of four specific points in time: December 31, 2020 (which the local government may calculate immediately upon receiving LFRF payments); December 31, 2021; December 31, 2022; and December 31, 2023.

If the actual revenues for any of those four years are less than the projected revenues using Treasury’s methodology, the city or county can calculate this revenue shortfall and deploy funds to support government services up to the amount of lost revenue.

To make administration easier, and in recognition of the broad-based economic damage, local governments do not have to prove that COVID-19 caused the revenue shortfall. Instead, any shortfall is presumed to be due to COVID-19.

To help cities, towns, and counties calculate the amount of funds that may be used to replace lost revenues, MRSC has created a Revenue Reduction Calculator (Excel file), with revenue categories based on the categories in the SAO BARS Manual.

Providing Premium Pay for Essential Workers

LFRF may also be used to compensate essential workers with premium pay, either directly to employees or through grants to private employers. The Treasury’s guidance allows for a broad range of essential workers including, among others:

  • Staff at nursing homes, hospitals, and home-care settings;
  • Workers at farms, food production facilities, grocery stores, and restaurants;
  • Janitors and sanitation workers;
  • Public health and safety staff;
  • Truck drivers, transit staff, and warehouse workers;
  • Childcare workers, educators, and school staff; and
  • Social service and human services.

Although private sector employers are allowed to offer the premium pay retrospectively under the federal guidelines, under Washington State law, public employers are not allowed to give employees premium pay for work that has already occurred and been compensated (see Washington State Constitution, Article II, Section 25, as well as AGO 1951 No. 66). The intent for this prohibition is to prevent a gifting of public funds. Despite the circumstance of the pandemic, it is the conservative opinion of MRSC that Washington State law prevents public sector employers from applying premium pay retroactively, although we will be writing more about this issue soon.

Investing in Water, Sewer, and Broadband Infrastructure

The final guidance given by the Treasury concerns the uses of LFRF for infrastructure improvements. One of the greatest deficiencies in many rural communities during the pandemic has been a lack of reliable high-speed broadband coverage. Therefore, eligible uses include:

  • Drinking water infrastructure projects such as building or upgrading facilities and transmission, distribution, and storage systems, including the replacement of lead service lines;
  • Wastewater projects, such as construction of publicly owned treatment infrastructures, managing and treating stormwater or subsurface drainage water, facilitating water reuse, and securing publicly owned treatment works; and
  • Broadband infrastructure that reliably delivers last-mile connections to households and businesses with minimum speeds of 25 Mbps download and 3 Mbps upload. Local governments are advised that projects should deliver reliable 100 Mbps download and 100 Mbps upload unless impracticable due to topography, geography, or financial cost. Fiber optic investment is encouraged.

What is Not Allowed

The guidance from the Treasury explicitly specifies instances where use of LFRF are disallowed. Grantees may not use this funding:

  • To make a deposit to a pension fund,
  • To fund debt service,
  • To pay for legal settlements and judgments,
  • To make deposits to rainy day funds or financial reserves, or
  • To fund infrastructure projects outside of water, sewer, and broadband.

Additionally, state and territories receiving LFRF may not directly or indirectly use these funds to offset a reduction in net tax revenue due to a change in law from March 3, 2021, through the last day of the fiscal year in which the funds provided have been spent.

Documentation and Reporting

As was the case with CARES Act funding, MRSC encourages local governments to have a system in place before expending LFRF and to sufficiently document use of these funds. Local governments should save electronic copies of the guidance used in program creation, design, and implementation, as such guidance may evolve over time. Local governments should also keep records to demonstrate the funds were used in accordance with Treasury’s interim final rule.

Direct federal recipients (counties and metropolitan cities) will be required to provide quarterly project and expenditure reports to Treasury, with an interim report due by August 31, 2021, summarizing activity through July 31. The first quarterly report due on October 31, 2021 will actually include two quarters (April 1, 2021 through September 30, 2021). Subsequent quarterly reports will only include one quarter and are due within 30 days of the end of each quarter. 

Metropolitan cities and counties with a population over 250,000 must also submit an annual recovery plan performance report. The requirements for this annual report can be found in the Treasury’s FAQ on page 15 (see item 46).

All other cities receiving funds through the state will be required to file annual project and expenditure reports, with the first report submitted to Treasury no later than October 31, 2021, summarizing activity through September 30, 2021. (Editor's note: More information on these reporting requirements is provided in the Treasury Compliance and Reporting Guidance, first published June 17 after this blog post was originally published.)

Additional Guidance Forthcoming

One of the areas not covered in this article concerns assistance to the travel, tourism, and hospitality industries. Although assistance to these and other impacted industries is allowed, the current guidance from the Treasury does not give any specific examples of eligible assistance.  The only guidance given states that local governments may provide aid to support safe reopening of these industries and/or aid in the planned expansion or upgrade of tourism, travel, and hospitality facilities that were delayed due to COVID-19.

Many jurisdictions will still have questions about the eligibility of projects they are considering as well. The Treasury hopes to answer more questions with the release of future guidance and will also be opening up a center to address questions from local governments.

MRSC has a topic page on COVID-19 Local Government Fiscal Impacts that includes the latest updates and information on budget impacts, financial reporting, and links related to COVID-19.  We will also update this page as we receive new information regarding Local Fiscal Recovery Funds.  

For additional questions, please do not hesitate to email me, use our online Ask MRSC form, or call us at (206) 625-1300 or (800) 933-6772. 


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 Eric Lowell

Eric Lowell joined MRSC in December 2020 as a Finance Consultant. He has been involved in local government finance for over 13 years, including working in city government as well as for a special purpose district.

Eric received a B.A. in Secondary Education from Arizona State University and a B.S. in Accounting from Central Washington University.

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