New Guidance for Obligating Remaining ARPA Funds

Editor’s note: This blog has been updated to include the circumstances under which personnel costs can be obligated beyond the December 2024 deadline.

In the summer of 2021, cities, towns, and counties began receiving the first tranche of their share of $350 billion in State and Local Fiscal Recovery Funds (SLFRF) authorized by the American Rescue Plan Act. Unfortunately, all good things must end. By December 31, 2024, local governments will need to have obligated these funds (with some exceptions, as explained below) with plans to expend those obligations by the end of 2026. 

In this blog, I’ll discuss the Obligation Interim Final Rule and what it means for local governments that received SLFRF.  

What Are Eligible SLFRF Uses?  

SLFRF initially were required to be used for the following: 

• Responding to the public health and negative economic impacts of the COVID-19 pandemic,
• Offering premium pay for essential workers,
• Replacing lost public sector revenue, and
• Investing in water, sewer, and broadband infrastructure.

In 2023, additional eligible uses were added: 

• Offering emergency relief from natural disasters or their negative economic impacts,
• Supporting eligible surface transportation projects, and
• Supporting ineligible Title I projects under the Community Development Block Grant and Indian Community Development Block Grant programs.

How Is an “Obligation” Defined?  

Last November, the U.S. Department of Treasury (Treasury) issued the Obligation Interim Final Rule, providing a revision to the definition of obligations and offering guidance to provide flexibility and clarity. In this revision, the term “obligation” continues to be defined as "an order placed for property and services and entry into contracts, subawards, and similar transactions that require payment.” 

The Obligation Interim Final Rule clarifies that local governments have incurred an obligation when they become subject to a federal requirement or regulation as a result of receiving or expending SLFRF. Under this definition, local governments can use SLFRF after December 31, 2024, to cover costs related to: 

• Reporting & compliance requirement of SLFRF (including sub-recipient monitoring),
• Single audit costs related to SLFRF,
• Records retention and internal control requirements,
• Property standards,
• Environment compliance requirements, and
• Civil rights and nondiscrimination requirements. 

If local governments are planning to obligate such expenses, they must take the following steps: 

• Determine the amount of SLFRF estimated to be used to cover such expenses. 
• Document how the estimate is reasonable and justified. 
• Report the estimates to Treasury by July 1, 2024 (entities that report to Treasury quarterly) or April 30, 2025 (entities that report to Treasury annually). 
• Report at closeout the final amount expended for these costs. 

An exception for some personnel costs

Additionally, the SLFRF FAQ, which was published on March 29, 2024, states in section 17.7 that SLFRF can be obligated for personnel costs after December 31, 2024. To obligate SLFRF for this purpose, personnel costs can only be paid for positions established and filled prior to December 31, 2024 — Personnel costs for new positions established after December 31, 2024, are not eligible.

Recipients may estimate the personnel costs (salaries and covered benefits) for positions and set aside SLFRF to pay those costs through December 31, 2026. Recipients should document how they developed their estimates.  Estimates must be reported to Treasury by January 31, 2025 (quarterly reporters) or April 30, 2025 (annual reporters).

Can Local Governments Obligate Funds Past the Deadline? 

Once the December 31, 2024, deadline has passed, generally speaking, local governments are not allowed to re-obligate funds or obligate additional funds. However, there are a few instances that would allow a local government to replace a contract or subaward after December 31, 2024, including: 

• The local government terminates a contract due to the contractor/subrecipient defaulting, going out of business, or being unable to perform the contract; 
• The local government and contractor/subrecipient mutually agree to terminate the contract “for convenience;” or 
•  The local government terminates the contract/subaward because it was not properly awarded. 

For further discussion of these obligation requirements as well as common SLFRF questions, read Treasury’s State and Local Fiscal Recovery Funds Frequently Asked Questions.  As always, feel free to reach out to me at elowell@mrsc.org for assistance with your questions.