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State and Local Fiscal Recovery Funds - Compliance Overview

Business man in suit looking at cloud with falling money and sun

Back in March 2021, the American Rescue Plan Act (“ARPA”) created the State and Local Fiscal Recovery Funds (“SLFRF”) program, which provided up to $350 billion to state and local governments to utilize for a variety of expenditure categories and is administered by the Treasury Department. While there are some questions on what the funds can be spent on (here is a link to the U.S. Department of The Treasury website. The focus of this article is on the compliance reporting that is required by the SLFRF program, which has webinars and other resources that give an overview of eligible expenses) with other federal compliance that previously existed and applies to these funds.

This is a high-level overview focused on some of the most impactful compliance rules related to the program.  The most important thing with all of this compliance is good recordkeeping, good internal controls, and setting up the systems/processes to capture this data as expenditures occur, and to build these considerations into the approval process prior to authorizing expenditures.  Recently, Treasury delayed the due dates of the first expenditure report, so there is some additional time to work on that part of the required compliance.

Treasury has released an interim final rule concerning the SLFRF program, which should be finalized this fall.  Treasury has stated that if you followed the interim final rule, if the final rule differs, you will not be penalized, which is good news so you don’t have to wait and can start utilizing the funds soon.

Here are the primary areas this article will cover:
    1. Compliance with Treasury’s specific rules (issued so far) for the SLFRF Program
    2. Compliance with Uniform Guidance (2 Code of Federal Regulations (“CFR”) Part 200)

      a. Single Audit requirements under the CFR

The program specific compliance is issued by the Treasury Department and they have provided great resources so far to assist with determining what reporting is needed, what funds can be spent on, etc.  While there are a few different rules and regulations to follow, here are the highlights.

    1. The ongoing reporting required will be Project and Expenditure Reports

      a. The first one was due October 31, 2021; however, this date has been pushed back.

      i. States, metropolitan cities, and counties the first one is now due on January 31, 2022 reporting through December 31, 2021.

      ii. For non-entitlement units of government (“NEUs”) the first report is now due on April 30, 2022 reporting through March 31, 2022.

      b. After the initial report, these are due quarterly for entities with over 250,000 residents and annually for entities under 250,000 residents.  The due date is 30 days after the quarter end, reporting expenditures through the end of the quarter for the quarterly reports.  For the annual reports the due date is by October 31 reporting on expenditures through September 30.
    2. A “Recovery Plan Report” for entities with a population exceeding 250,000 was due on August 31, 2021 and then is due annually by July 31.  This report is not required for entities with less than 250,000 residents.

The Project and Expenditure Reports require reporting of expenditures by project under the defined expenditure categories.  These will be the most frequently filed reports and contain a significant amount of information.  They also require reporting on the project status, subawards, and depending on the expenditure category required program data.  For example, evidenced based reporting is required for expense categories in Household Assistance and Housing Support, with specific reporting on the number of affordable housing units preserved or developed (this is an example, there are other required performance indicators).  Other expense categories with specific reporting requirements are Negative Economic Impacts, Education Assistance, and Health Childhood Environments.  There are also reporting requirements for infrastructure projects, with more reporting required for projects that are $10 million or more.  An example of the required reporting for these projects (this is not all the reporting, just a couple examples) are reporting on the number of direct or third-party hires and reporting on wages and benefits by worker classification.

The CFR is extensive and because these are federal funds applies this program also.  If you are already spending federal funds, you likely are set up to comply with the CFR to a certain extent.  However, with the amount of SLFRF received, you may trigger parts of the CFR that didn’t originally impact you.  While it is extensive, here are some of the highlights.

    1. These rules apply to subrecipients, so they need to be aware of that fact if they are not familiar with these rules.  Typically, an entity receiving funds as a subaward, not for specific goods or services which would be a contractor, is going to be considered a subrecipient.  

      a. Since some of the subawards could possibly go to a for-profit entity, which is unusual for federal funds, the burden of ensuring compliance will fall on the pass-through entity, which is something to keep in mind when designing a program or determining how to expend the funds.

      b. There are also rules related to subrecipients under the Treasury guidance, primarily with making sure the subrecipient can comply with the reporting requirements as part of the award process and ongoing monitoring the subrecipient.
    2. Financial management and internal controls are a major focus of these rules.  Some examples are:

      a. Adequately identify the source and application of funds

      b. Effective control and accountability for all funds, property, and other assets

      c. Ensure they are only used for authorized purposes

      d. Maintain effective internal control

      e. Evaluate and monitor compliance

      f. Action steps when noncompliance identified

      g. Safeguard protected personally identifiable information and other sensitive information
    3. A single audit relates to compliance with the CFR requirements and here are some highlights for that aspect of the CFR.

      a. Required when federal funding exceeds $750,000 in a fiscal year.  This is cumulative so if you have received other funds that fall into this category, you would need to add that to the SLFRF you received.

      b. This applies to subrecipients also, so some of the entities you may award funds to may need a single audit when they didn’t have to deal with it previously.  They will want to prepare for this in advance.

      c. The major focus is on controls to ensure compliance with the CFR and then the entity’s compliance with the controls they established, along with monitoring to make sure the controls are functioning as intended.

      d. These are typically due 9 months after the entity’s fiscal year end.

As you can see, there are significant compliance requirements related to these funds.  Some entities will have no trouble complying with these requirements as they may already be doing something similar for other programs and have the resources to keep up to date on these requirements.  Other entities may have never dealt with some of this before, may not have the staff capacity to be able to do this and will need more assistance.  Luckily, the SLFRF funds can be used for consultants and assistance with these requirements, so there isn’t an additional compliance burden that other funds need to be found for.

If you’re wondering where to start, we would suggest focus on establishing controls, processes, and procedures for authorizing and tracking the use of the funds.  You may want to start with a high-level determination of what you want to utilize the funds for and then see what specific requirements there may be for the categories those expenditures fall under.  You’ll likely want to involve whatever departments or groups will be administering those programs in helping develop the processes and procedures as they will have a more detailed understanding of the department’s day to day functions.  Once you know what you want to do, creating templates and checklists will be critical to making compliance easier for the personnel involved, and to help make sure nothing is missed.  Please contact us if you wish to discuss any of this more in-depth as this article is only to provide a brief overview of the compliance requirements for the SLFRF program.

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