For weeks, the nation has been trying to adapt to new changes caused by the COVID-19 virus. While organizations across the board have felt the impact of these changes, state and local governments have felt the hit equally as hard. Governments have been trying to maintain healthcare and other essential services by modifying working practices so that employees can continue to function while reevaluating budgets for the inevitable fall in tax revenues safely.
The challenge of managing budgets has been difficult because revenues are extremely difficult to forecast due to the uncertainty of how long the shutdown will last. A challenge also exists in that it is equally as tough to obtain clarity on exactly what additional funding the federal government will provide in the form of relief funds and spending limitations. Below is a summary of current information relevant to state and local governments.
What Relief Funds are Available to State and Local Governments?
For many state and local governments, the CARES Act (the Act) will be the primary source of relief funding. Other funds have been made available through other federal agencies. You can check out these additional sources here.
The Act provides $150 billion to state and local governments through the Coronavirus Relief Fund (the Fund).
Who is Eligible for Relief Funds?
Out of the entire $150 billion that has been made available by the Fund, $139 billion is estimated to be allocated to states, counties, and municipalities, $8 billion for Tribal governments, and $3 billion for the District of Columbia and U.S. territories.
Of the $139 billion set-aside for states, counties, and municipalities, the majority of the funding will be provided directly to states and then transferred to the local governments. Large counties and cities (those with populations greater than 500,000 people) are eligible to receive their relief funds directly from the federal government, rather than flowing through the state. There are 117 counties and 36 cities that meet this population level, and they will receive approximately $29 billion directly, with the remaining $110 billion flowing through the states.
The basis for allocating the funding is driven by population size, with no state receiving less than $1.25 billion.
What Can it be Spent on?
The Act states that the relief funds can be spent on expenditures which meet all of the following three requirements:
(1) are necessary expenditures incurred due to the public health emergency with respect to the Coronavirus Disease 2019 (COVID-19);
(2) were not accounted for in the budget most recently approved as of March 27, 2020, for the State or government; and
(3) were incurred during the period that begins on March 1, 2020, and ends on December 30, 2020.
The first requirement explains that expenditures must be “necessary expenditures incurred due to the public health emergency.” This explanation is potentially subject to interpretation by each entity that receives the funds. The Treasury has provided an FAQ document on its website, which seeks to clarify what would qualify as “necessary.” Within the Treasury’s literature, they have specified that in addition to the direct costs of responding to the emergency (providing medical and public health services), the funding may be spent on addressing the second-order effects, such as providing economic support to those suffering unemployment or business interruptions.
The Treasury has also provided some examples of specific allowable expenditures. For the full list, you can view the entire literature here on the Treasury website.
This list is a condensed summary of some of the eligible expenditures. For further details, we recommend governments consult the information on the Treasury website or consult with their CPA for more specific detail before concluding whether or not an expenditure is allowable.
What Can it Not be Spent on?
It’s important to note that some specific expenditures are ineligible. You can view the list of these ineligible expenditures here. As most state and local governments are seeing revenues decrease precipitously without a clear path to restoration, then the notion of replacing lost revenue is especially important.
Other Relevant Information
If by December 30, 2020, a government has unspent funds remaining, they must be returned to the Department of the Treasury. Also, if an asset is purchased with relief funds and is subsequently sold prior to December 30, 2020, then the proceeds of the sale are subject to the original eligibility restrictions placed on the funds when initially received. Governments are also required to keep sufficient records to support the amount of relief funds expended but not required to obtain Treasury approval before incurring expenditures.
For state and local governments, recouping losses from the coronavirus will take time and energy as the process has grown to become confusing with new opportunities for available relief funds. If you’re unsure how your governmental entity will be affected, or need more information on the eligibility for these funds and how they can be used, reach out to a CRI advisor for more information.