The American Rescue Plan Act of 2021. Here’s What to Expect
April 12, 2021
Reprinted with permission from the April 8, 2021 edition of The Legal Intelligencer © 2021 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.
On March 11, President Joe Biden signed into law the American Rescue Plan Act of 2021 (ARPA), which provides for almost $2 trillion of new federal spending to combat the ongoing impact of the COVID-19 pandemic. Of particular interest for Pennsylvania is the approximate $350 billion of new funding appropriated to tribal governments, states, territories, and local governments, $14 billion of which is estimated to be received by Pennsylvania and its municipalities. With the U.S. Department of the Treasury mandated to pay out a substantial portion of the funds within 60 days of the enactment of ARPA, Pennsylvania and its municipalities might see initial funding from ARPA as early as May.
Congress through ARPA appropriated $350 billion in new funding to tribal governments, states, territories and local governments to combat the COVID-19 pandemic, with $220 billion going to states, territories, and tribal governments; and $130 billion going to local governments. Congress appropriated an additional $10 billion to establish a Coronavirus Capital Projects Fund, the proceeds of which shall be paid out to states, territories, and tribal governments for capital projects directly enabling work, education and health monitoring in response to the pandemic. Potential applicants will have to submit a grant application, the details of which have yet to be announced, before obtaining any amounts from this project fund.
The $220 billion in funding to states, territories, and tribal governments is further split up such that the states and District of Columbia will receive $195 billion of the total appropriation. The amount of funding received by each state will vary; states with higher unemployment rates during the pandemic will receive more, although ARPA sets a floor for the funding of $500 million to each state.
Prior to receiving any funds under the appropriation, however, a state must submit a certification to the Treasury in which it specifies that the funds are necessary to undertake projects permitted under ARPA, and covenants to use the funds solely for the permitted projects. A state may not obtain funding through ARPA until after its certification is filed; the Treasury has up to 60 days after receipt of the certification to distribute the funds. At the time this article was written, the Treasury was still at work developing the procedures that will govern the certification process, and therefore the certification may require additional information be provided.
ARPA also authorizes the Treasury to withhold up to 50% of the funds appropriated to a state, with any balance withheld to be paid out no later than 12 months after the state’s certification was filed. The determination to withhold a portion of the payment is tied to the unemployment rate in that state at the time of the determination; presumably, states with lower unemployment rates may be at a higher risk of having a portion of the funds withheld. States that do not receive the full allotment of funds upfront will have to submit a second certification before they can receive the balance. More details hopefully will be provided when the Treasury finalizes its guidance on the certification process.
The $130 billion in funding to local governments is split evenly between counties and smaller municipalities, i.e., cities and smaller local governments. Notably, the bulk of these funds will be paid out directly by the Treasury to the recipient—the funds will not be sent to the state for further distribution. Only the smaller local governments (accounting for approximately $20 billion of funding) will be directed first to the states for distribution.
Unlike the state funding, receipt of the local government funding will not be conditioned on completion of a certification process. Instead, ARPA divides the local government funding into two tranches (each tranche representing 50% of the funding approved for distribution). ARPA mandates that the Treasury “to the extent practicable” pay out the first tranche within 60 days of its March 11 enactment date. The second tranche must be paid out within 12 months of the date the first tranche is paid.
For those local governments that will receive their funds from the state, it may take longer to get the money. ARPA requires that the state, upon receipt of the local governments’ funds, must pay them out within 30 days. However, a state can request a 30-day extension if this 30-day mandate constitutes an “excessive administrative burden.” Additional 30-day extensions can be requested, up to a total of 120 days. There is a strong incentive not to delay distribution beyond 120 days: any amounts not paid out by then will be converted into a penalty to be paid by the state from its own source of ARPA funding, i.e., the local government still gets its funding, while the state loses a portion of its funding.
Once the funds are received, what can they be spent on? ARPA outlines four categories of “projects” that may be funded by state or local governments from ARPA funding. These categories are summarized as follows:
- Responses to the public health emergency or its negative economic impacts, including assistance to households, small businesses, and nonprofits, or aid to impacted industries, such as tourism, travel and hospitality;
- The provision of “premium pay” (up to $13/hour on top of regular compensation) to certain essential workers in the public or private sector;
- The provision of government services to the extent of reductions in revenue due to the pandemic (i.e., covering budget deficits due to lost revenues caused by the pandemic); and
- Water, sewer or broadband infrastructure projects.
These four categories of permitted uses will be the subject of additional guidance by the Treasury, which is charged with the duty to promulgate regulations on the use of the funds. It is unclear when such guidance will be made available, although it seems reasonable to expect that at least preliminary guidance (e.g., Q&As) will be made available concurrently with the release by the Treasury of the certification procedures to be followed by the states.
ARPA also prohibits the use of its funds to make deposits to pension funds or to pay for tax cuts. Interestingly, this second prohibition only appears in the context of funds directly paid out to the states or territories; it does not appear to apply to the funds appropriated to local governments (either directly or indirectly). The prohibition on using ARPA funds for tax cuts is already the subject of litigation, with Ohio and Arizona having filed federal lawsuits claiming the prohibition violates the U.S. Constitution. Many other states have expressed grave concerns to the Treasury about the prohibition. Expect the number of states challenging the prohibition to grow.
Regardless of how ARPA funds are spent, state and local governments should maintain detailed records of their expenditures, as the law requires each recipient to file reports detailing how the funds were spent. The exact nature of the reporting scheme is unclear at this time, although ARPA contemplates that reports must be filed by both state and local governmental recipients. An improper use of funds received under ARPA may result in penalties, including the repayment of the funds so misspent.
The clock has already started to run on how to spend the money: funds received by state or local governments under ARPA must be spent by Dec. 31, 2024. State and local governmental officials should start working on their plans for the expenditure of these funds now.
Timothy J. Horstmann is a public finance attorney with the law firm of McNees Wallace & Nurick and practices in the firm’s public finance and government services practice group. The firm has Pennsylvania offices in Harrisburg, Lancaster, Devon, Scranton, State College and York. Contact him at email@example.com.