ARPA Final Rule Increases Flexibility for Cities

The U.S. Department of the Treasury released its 437-page final rule governing State and Local Fiscal Recovery Funds provided through the American Rescue Plan Act (ARPA). Although the final rule will not take effect until April 1, 2022, cities may take advantage of the final rule’s flexibilities and simplifications before the effective date.

Cities can now use a standard allowance of up to $10 million, not to exceed the city’s total award amount, for their revenue loss amount. If the total allocation – the first tranche of funds awarded in 2021 plus the second tranche of funds coming later this year – is less than $10 million, then cities will not need to use the revenue loss calculation prescribed by Treasury.

All but six Kentucky cities have a total allocation amount of less than $10 million. As a result, these cities may assume their entire ARPA allocation counts as revenue loss. The revenue loss portion allows much broader eligible uses, including but not limited to street improvements, law enforcement equipment upgrades, general government administration, and much more. The revenue loss amount may go toward any government service, not just those supporting the public health response to the pandemic.

Cities with total allocations greater than $10 million can use a higher assumed growth rate compared to the interim final rule (IFR) for the revenue loss calculation. Cities can still use the average growth rate over the three fiscal years prior to the pandemic, but now they can use an assumed growth rate of 5.2% instead of 4.1% as outlined in the IFR.

Local governments may also cover the payroll and benefits of employees hired to fill positions that existed before the pandemic but were unfilled or eliminated as of March 3, 2021. Cities can also increase overall employment up to 7.5% above their pre-pandemic baseline for any positions. ARPA funds can also help maintain current compensation levels to prevent layoffs.

The final rule further allows cities to provide worker retention incentives, including reasonable increases in compensation, to persuade employees to remain with the city instead of seeking other employment options. This retention incentive differs from the premium pay provisions and does not necessarily need to connect with essential work performed during the pandemic.

Premium pay provisions remain largely unchanged from the IFR, although the final rule expands the list of eligible workers without a written determination by the city’s chief executive. These employees must still perform essential work, which requires regular in-person interactions and/or physical handling of items handled by others. The final rule does not allow premium pay to go to volunteers.

Cities can now fund certain previously ineligible water and sewer projects, such as repairing culverts or replacing storm sewers. Treasury previously stated that stormwater projects must have a water quality benefit and specifically disqualified work on culverts and similar items. Other stormwater projects such as permeable pavement, green streets, and rain gardens remain eligible in addition to traditional pipe, storage, and treatment systems.

Although Treasury expanded eligibility for broadband networks, it now requires enrollment in a low-income subsidy program for households. The Department will allow cybersecurity investments for existing and new broadband infrastructure, but it does not explicitly allow investing in public wireless systems.

Cities still may not use their ARPA funds to pay for debt service, replenish rainy-day funds, cover legal judgments, or make extra pension payments.

While the final rule contains many more enumerated eligible uses than the interim final rule, it provides a process for city officials to determine whether additional activities would meet the framework determined by Treasury.

The Kentucky League of Cities will continue to review the final rule and additional information provided by the Department of the Treasury. KLC will host webinars and provide updated materials over the coming months. The state’s nine entitlement communities must file their first Project and Expenditure Report by January 31, 2022. All other Kentucky cities must submit their first annual report by April 30, 2022.

Read an overview of the changes in the final rule.

Visit the KLC ARPA Resource Page for additional information.