March 2, 2022

Local Government Update: Treasury's Final Rule on American Rescue Plan Coronavirus State and Local Recovery Funds

Holland & Knight Alert
Nicole M. Elliott | Kenneth W. Parsons | Leslie I. Pollner


  • The U.S. Department of the Treasury released the Final Rule on Jan. 6, 2022, governing the use of Coronavirus State and Local Fiscal Recovery Funds (SLFRF) as established under the American Rescue Plan.
  • To date, the Treasury Department has disbursed more than $350 billion in SLFRF to state, local and tribal
  • To assist governments in navigating the Final Rule, this Holland & Knight alert provides a high-level summary of the changes from the Interim Final Rule (IFR), which governs how recipients of SLFRF may use such.

This alert focuses on local governments. For an alert focusing on tribal governments, please see our Jan. 14, 2022, publication.

The U.S. Department of the Treasury released the Final Rule on Jan. 6, 2022, governing the use of Coronavirus State and Local Fiscal Recovery Funds (SLFRF) as established under the American Rescue Plan. To assist governments in navigating the Final Rule, this Holland & Knight alert provides a high-level summary of the changes from the Interim Final Rule (IFR), which governs how recipients of SLFRF may use such funds.


The American Rescue Plan provided SLFRF to state, local and tribal governments, and to date, the Treasury Department – the agency tasked with oversight – has disbursed more than $350 billion to them. Under law, SLFRF must be used for the following purposes:

  • Responding to COVID-19: to respond to the public health emergency with respect to COVID-19 or its negative economic impacts, including assistance to households, small businesses and nonprofits, or aid to impacted industries such as tourism, travel and hospitality
  • Premium Pay for Eligible Workers: to respond to workers performing essential work during the COVID-19 public health emergency by providing premium pay to eligible workers who are performing such essential work, or by providing grants to eligible employers that have eligible workers who perform essential work
  • Lost Revenue/Government Services: for the provision of government services to the extent of the reduction in revenue of such government due to the COVID-19 public health emergency relative to revenues collected in the most recent full fiscal year of the government prior to the emergency
  • Infrastructure: to make necessary investments in water, sewer or broadband infrastructure

Application of the Rules

In May 2021, the Treasury Department issued an IFR further interpreting eligible uses of SLFRF. Having received public comment on the IFR, on Jan. 6, 2022, the Treasury Department issued its Final Rule. The Final Rule generally provides greater flexibility for recipients to use SLFRF. There are some clarifications and exceptions, however, of which recipients should be aware. If obligated after April 1, 2022, and in most cases if expended after April 1, 2022, SLFRF must be used in conformance with the Final Rule.

Notable Changes in the Final Rule

Overall, the Final Rule provides greater flexibility to recipients on the use of SLFRF. In an effort to make the rules simpler and clearer, however, the Treasury Department has announced bright- line rules. Many of these new rules are highlighted in the breakdown immediately following.

The Treasury Department did not change the timeline under which recipients must obligate and spend SLFRF. That is, SLFRF must be obligated by Dec. 31, 2024, and spent by Dec. 31, 2026.

  • Responding to COVID-19: The Final Rule creates new presumptions of what stakeholders are deemed to be "impacted" or "disproportionally impacted" by the COVID-19 pandemic, eliminating the need to conduct additional analysis and provides an expanded list of what programs and services are eligible. The Final Rule clarifies that SLFRF can be used for certain capital expenditures, not just services and
  • Premium Pay: The Final Rule expands those who are eligible to receive premium pay and the conditions under which premium pay can be
  • Lost Revenue/Government Services: The Final Rule allows recipients to elect a standard allowance of revenue loss of $10 million that can be used on government service, rather than completing a full revenue loss This new flexibility will be important to recipients who did not suffer a revenue loss or to recipients who received a relatively small amount of SLFRF.
  • Infrastructure: The Final Rule expands the definition of eligible water, sewer and broadband For example, the Final Rule clarifies that eligible water projects include aid to private wells, septic units, lead remediation and stormwater projects. For broadband, recipients can use SLFRF to address internet access, affordability and digital literacy.

Breakdown of Final Rule

Responding to COVID-19

Under statute, SLFRF can be used to respond to the public health emergency – either the virus itself or the negative economic impacts. In all cases under this category, recipients must identify the impact, design a response that addresses the impact and ensure that the response is reasonable and related compared to the impact. While the Final Rule provides many examples, this is a broad category and therefore only a summary is provided below.

  • Public health response. Recipients may use SLFRF to respond to the public health emergency in a myriad of The Final Rule enumerates several expenditures that the Treasury Department will presume respond to COVID-19. These include, among others, vaccination programs and incentives, testing programs, contact tracing, isolation and quarantine, mitigation and prevention practices in congregate settings, acquisition and distribution of medical equipment for prevention and treatment of COVID-19, and installation and improvement of ventilation systems in congregate settings, health facilities or other public facilities. Recipients are not limited to the examples provided in the Final Rule. Recipients may also identify other harms or impacts caused or exacerbated by the public health emergency or its negative economic impacts and design a program or service that responds to such harms or impacts.
  • Assistance to households. Recipients can provide assistance to households, including support for food, rent, mortgage payments and utilities as well as direct cash assistance. As with all eligible expenditures under this category, cash assistance must be reasonably proportional to the negative economic impact they Although the Final Rule does not provide a specific dollar amount for permissible cash assistance, the Treasury Department has stated that recipients may "consider and take guidance from the per person amounts previously provided by the Federal Government in response to the COVID-19 crisis," and transfers "grossly in excess of such amounts" are not eligible.
  • Assistance to small businesses and nonprofits. Under the Final Rule, SLFRF can be used to aid small businesses and nonprofits. This includes support for prevention and mitigation strategies as a response to the public health crisis. It also includes aid, in the form of grants if there has been a negative economic impact, that is to those small businesses and nonprofits that have been impacted or disproportionally impacted. The Final Rule provides helpful presumptions to determine which small businesses have been disproportionally impacted, including small businesses or nonprofits located in a Qualified Census Tract. The Treasury Department provides a broader set of eligible uses, specifically, rehabilitation of commercial properties; storefront and façade improvements, that can be made available to those entities that have been disproportionally
  • Aid to impacted industries such as tourism, travel and hospitality. Recipients can provide assistance to tourism, travel, hospitality or other impacted industries. The Final Rule provides the presumption that industries in the travel, tourism or hospitality sector have been economically impacted. To designate whether other industries have been negatively impacted, recipients can designated those industries that 1) experienced an 8 percent or greater employment loss during the pandemic or 2) are experiencing comparable or worse economic impacts as the tourism, travel and hospitality industry by a totality of economic The Final Rule requires that aid can only be provided to entities operating prior to the COVID-19 pandemic and that were affected by closures or other efforts to contain COVID-19. Aid must be broadly available to those in impacted industries and designed to address the harm. Aid can include programs, services and payroll support.

A special note on capital expenditures: In the Final Rule, the Treasury Department clarified that recipients can use SLFRF for capital expenditures, i.e., investments in property, facilities or equipment. Like other expenditures, they must respond to the COVID-19 pandemic's health or economic impacts and must be related and reasonably proportional. In the Final Rule, the Treasury Department requires a written justification of such expenditures of more than $1 million – for projects over $10 million the justification may need to be submitted to Treasury Department. In the Final Rule, the Treasury Department expresses some trepidation over the use of SLFRF in this context given the long lead time usually needed for large capital expenditures and, as a result, whether they would truly be responsive to COVID-19.

Premium Pay

Under the statute, SLFRF can be used to provide premium pay for essential workers. The Final Rule clarifies that premium pay can be provided to eligible workers performing essential work. Premium pay must be provided in addition to a worker's normal wages or remuneration.

Importantly, the Treasury Department allows recipients to provide premium pay retroactively; providing premium pay is an exception to the general rule, as SLFRF must be used for costs incurred after March 3, 2021. Under the statute, premium pay means an amount up to $13 per hour, not to exceed $25,000 per worker.

Under the statute, an eligible worker is one who is needed to maintain continuity of operations of essential critical infrastructure sections and additional sectors as each government designates as critical to protect the health and well-being of residents. Under the Final Rule, the Treasury Department has confirmed that all public employees are included in this definition and maintained the rule that a recipient has the discretion to designate additional non-public sectors as critical. This designation must come from the recipient's chief executive or equivalent.

Essential work is defined as work that is not performed through telework but rather involves regular in-person interactions or the physical handling of items that are also handled by others.

As a final requirement, premium pay must "respond" to the COVID-19 pandemic. The Treasury Department has interpreted this statutory requirement by requiring recipients to meet one of two conditions or alternatively, submitting a written justification to the Treasury Department.

Specifically, in order to be responsive:

  1. the eligible worker's total wages and remuneration – when taking into account the premium pay – is less or equal to 150 percent of the state's or county's average annual wages for all occupations as defined by the Bureau of Labor Statistics Occupational Employment and Wage Statistics or
  2. the eligible worker receiving premium pay must be eligible for overtime under the Fair Labor Standards Act (FSLA).

If one of these two conditions is not met, a written justification must be provided to the Treasury Department illustrating the premium pay is responsive to the COVID-19 pandemic.

Lost Revenue/Government Services

Recipients may use SLFRF to provide government services to the extent of the recipient's reduction in revenue experienced because of the COVID-19 public health emergency. Reduction in revenue is measured relative to the revenue collected in the most recent full fiscal year prior to the COVID-19 public health emergency (2019).

The Final Rule prescribes the methodology to be used and compares actual revenue to anticipated revenue in 2020, 2021, 2022 and 2023. The calculation assumes at least 4.1 percent growth annually. Once the reduction in revenue is identified, recipients can use SLFRF with broad latitude to support government services. This category is the broadest one and is generally defined by exclusion. For example, debt service is not an allowable use.

To ease the burden for recipients with smaller amounts of SLFRF and those who found their revenue did not decrease significantly, the Final Rule offers recipients the opportunity to elect a baseline lost revenue amount of $10 million (or the amount of the recipient's SLFRF, if less than $10 million). This standard loss calculation can be claimed by any recipient, including those who do not wish to reveal their revenue history before and during the pandemic period.


The Final Rule provides that recipients may use SLFRF on necessary water, sewer and broadband projects. Necessary investments are those that are responsive to an identified need and a cost-effective means for meeting that need.

  • Water and Sewer. For water and sewer infrastructure projects, the IFR defined qualifying investments as those that would be eligible for the Environmental Protection Agency's (EPA) Clean Water State Revolving Fund (CWSRF) or the Drinking Water State Revolving Fund (DWSRF). The Final Rule expands upon this definition of eligible water and sewer projects to include those that are eligible under certain programs established by the EPA under the Water Infrastructure Improvements for the Nation Act (WIIN Act). Projects under this scope include rehabilitation of private wells, testing initiatives to identify contaminants in wells and treatment activities and remediation strategies that address contamination. The Treasury Department also clarified that the following projects are eligible uses of funds: replacing galvanized pipes downstream of a lead service line, the rehabilitation of dams and reservoirs if the primary purpose of the dam or reservoir is for drinking water supply and the rehabilitation project is necessary for continued provision of drinking water supply, projects to accommodate for increases in populations in certain instances and a broad range of lead remediation and stormwater management
  • Broadband. For broadband projects, the Final Rule requires eligible projects to reliably deliver minimum speeds of 100 megabits per second (Mbps) download and 100 Mbps upload. The Final Rule also adds a requirement that broadband infrastructure funding be used to address the affordability needs of low-income consumers in accessing broadband networks.

Holland & Knight Can Help

Holland & Knight has experience in all areas related to COVID-19 response, from employment matters to healthcare matters. The team assists numerous clients to navigate the proper use and documentation of the American Rescue Plan SLFRF, to consider the tax implications of assistance to individuals and businesses, and to maximize the use of other federal funding sources. For additional information or questions, contact the authors or another member of the Holland & Knight team.

DISCLAIMER: Please note that the situation surrounding COVID-19 is evolving and that the subject matter discussed in these publications may change on a daily basis. Please contact your responsible Holland & Knight lawyer or the authors of this alert for timely advice.

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