The American Rescue Plan Act (ARPA) provided cities, towns and villages with a long runway to obligate the allocated funds under the State and Local Fiscal Recovery Funds (SLFRF) program. Under this program, every city, town and village in America was offered a grant out of the $65.1 billion set aside for municipalities.
This bill passed in 2021, and the first money went out the door in May 2021. Now, we are 14 months from the obligation deadline of December 31, 2024. If a municipality has not obligated its ARPA SLFRF funds by the end of 2024, they will have to return the funds to Treasury.
What Is an Obligation?
The SLFRF Frequently Asked Questions published by Treasury explains how this term is used:
As stated in the final rule, obligation means “an order placed for property and services and entering into contracts, subawards, and similar transactions that require payment.”See 31 CFR 35.3.
What this means is that it is not enough for local governments to simply budget the money, they need to go a step further and place an order for property or services that requires payment. In the case of payroll, grantees need to follow state and local established practices.
What Does This Mean for Building Your Budget?
For local government finance directors, this means that they cannot begin identifying expenditures in mid-2024 for fiscal years 2025 or 2026. Contracts or similar transactions need to be executed in the next 14 months, though the dollars do not need to be spent until 2026.
For cities looking to use their money for ARPA Flex (which allows funds to be expended on Community Development Block Grants (CDBG), infrastructure projects, and recovery from natural disaster), those contracts or similar transactions, or subawards, will need to be entered into by December 31, 2024. The expenditure deadline is September 30, 2026.
For clerks, town managers and finance officers, one other thing to keep in mind is that it can take some time to structure an agreement for a housing project (CDBG) or an infrastructure project. Additionally, for infrastructure projects, contracts might need to be signed in a sequence.
If an infrastructure construction project will last until October 2026, some of the contracts for materials or labor may not be signed – because of sequencing reasons – until after December 31, 2024, the obligation deadline.
What Should My City Do Now To Prepare?
In 2020, NLC’s City Fiscal Conditions showed that 24 percent of cities, towns and villages have a starting date of January 1 for their fiscal year. There is a little more than a month before the FY24 budget will be put into force. This means that 24% of cities, towns and villages realistically have about a little over a month to incorporate SLFRF funds into the budget.
The easiest way for municipalities to put the SLFRF funds into their FY24 budget is claim it as lost revenue. A municipality can then use the money for government services.
While it is possible to pass budget amendments during the year to include SLFRF spending in the budget, it would be best to incorporate it now.
54 percent of cities have a July 1 start date for their fiscal year. Between July 1st and December 31st they will have six months to obligate the budgeted money.
When obligating and spending your SLFRF funds, keep these best practices in mind:
- Be mindful of the definition of obligation. It is not just budgeting the money, a municipality must go further and create a contract, subaward or similar transaction requiring payment.
- All municipalities should have a plan to obligate by the deadline.
- Calander year budgeters should be examining their budgets to make sure they are plugging in their SLFRF dollars. The easiest way to do this is to claim lost revenue and use the money on government services.
- Remember that it can take time to negotiate and execute a contract. Include that time in your plans.