The US Treasury Interim Final Rule published May 10, 2021 governing the Fiscal Recovery Fund program is broadly permissive. State, Tribal, and local governments are given a variety of eligible uses for funds in order to best meet the recovery needs of their local context. In most cases, for most activities, recipients can treat these funds as largely unrestricted and eligible to support most activities. This document reviews the specific exceptions to that rule.
What uses of funds are specifically ineligible?
- Extraordinary deposits into a pension fund for the purpose of reducing accrued unfunded liability.
- For State and territorial governments, using the funds to pay for a tax cut.
What qualifies as a pension fund deposit?
Deposits are an extraordinary payment for the purpose of reducing accrued unfunded liability. Deposits made in the course of funding an employer contribution as part of the salary and benefits of an employee are not considered a deposit, but instead a “payroll contribution” and are allowed.
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the Interim Final Rule does not permit this assistance to be used to make a payment into a pension fund if both: 1. the payment reduces a liability incurred prior to the start of the COVID-19 public health emergency, and 2. the payment occurs outside the recipient’s regular timing for making such payments. Under this interpretation, a “deposit” is distinct from a “payroll contribution,” which occurs when employers make payments into pension funds on regular intervals, with contribution amounts based on a pre-determined percentage of employees’ wages and salaries.US Treasury Interim Final Rule, p.79, May 10, 2021
Do employee benefits count as pension fund deposits?
No. Treasury clarifies the language to clearly allow payroll contributions to pension funds as eligible expenses when those payroll contributions are eligible costs under the other provisions of the law.
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Accordingly, if an employee’s wages and salaries are an eligible use of Fiscal Recovery Funds, recipients may treat the employee’s covered benefits as an eligible use of Fiscal Recovery Funds. For purposes of the Fiscal Recovery Funds, covered benefits include costs of all types of leave (vacation, family-related, sick, military, bereavement, sabbatical, jury duty), employee insurance (health, life, dental, vision), retirement (pensions, 401(k)), unemployment benefit plans (Federal and State), workers’ compensation insurance, and Federal Insurance Contributions Act taxes (which includes Social Security and Medicare taxes).US Treasury Interim Final Rule, p.80, May 10, 2021
How is Treasury defining revenue to support a tax cut?
Treasury clarifies this provision only applies to State and territorial governments – not local or Tribal governments. A tax cut is referred to by Treasury as a “reduction in net tax revenue.” The rule goes into great detail about how Treasury will monitor and verify this provision. The intent of the rule is to avoid fiscal recovery funds being used to reduce government spending and deny funding to much needed recovery efforts in State and territorial governments.
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Moreover, this approach recognizes that, because money is fungible, even if Fiscal Recovery Funds are not explicitly or directly used to cover the costs of changes that reduce net tax revenue, those funds may be used in a manner inconsistent with the statute by indirectly being used to substitute for the State’s or territory’s funds that would otherwise have been needed to cover the costs of the reduction. By focusing on the cost of changes that reduce net tax revenue—and how a recipient government is offsetting those reductions in constructing its budget over the covered period—the framework prevents efforts to use Fiscal Recovery Funds to indirectly offset reductions in net tax revenue for which the recipient government has not identified other offsetting sources of funding.US Treasury Interim Final Rule, p.82-83, May 10, 2021
How will Treasury identify funds used to support a tax cut?
Treasury identifies a 4 step process in the Interim FInal Rule that will be used to verify that funds were not used to offset tax cuts.
- Recipients will identify and value the changes in law that would result in a reduction of tax revenue and the sum of these values is the amount to be “paid for” with sources other than Fiscal Recovery Funds.
- If the total value of the reductions in tax revenue is below a minimum threshold (1%) then no sources of funding are needed.
- If the tax revenue in any year is greater than the amount of the tax revenue for the fiscal year ending in 2019 adjusted for inflation then there is no net reduction in tax revenue.
- If neither #2 or #3 is true, then the recipient government needs to identify tax changes that would increase the general fund revenue and spending cuts in areas not being replaced by Fiscal Recovery Funds to offset the total value of covered tax changes.
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A recipient government will not be required to repay to the Treasury an amount that is greater than the recipient government’s actual tax revenue shortfall relative to the baseline (i.e., fiscal year 2019 tax revenue adjusted for inflation). This “revenue reduction cap,” together with Step 3, ensures that recipient governments can use organic revenue growth to offset the cost of revenue reductions.US Treasury Interim Final Rule, p.84, May 10, 2021
Further details and clarifications of this process that are helpful to affected recipients (State and territorial government officials) are available on p.85-88 of the Interim Final Rule.
Are there other restrictions on funds?
Yes. Fiscal Recovery Funds are subject to other limitations and restrictions provided by Federal statutes. Most importantly, Fiscal Recovery funds cannot be used as non-Federal matching funds for Federal programs that bar the use of Federal funds for meeting matching requirements. (p. 96)
Also, recipients should be aware that the Universal Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (2 CRF 200 of the Uniform Guidance) apply to Fiscal Recovery Funds as well.
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As provided for in the award terms, payments from the Fiscal Recovery Funds as a general matter will be subject to the provisions of the Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (2 CFR 200) (the Uniform Guidance), including the cost principles and restrictions on general provisions for selected items of cost.US Treasury Interim Final Rule, p.97, May 10, 2021
If a recipient violates the eligible uses of Fiscal Recovery Funds, how will funds be recovered?
Treasury will review all required reporting of Fiscal Recovery Fund uses in order to ensure compliance with these regulations and the statute. Treasury notes that compliance failure will be identified based on reporting provided by recipients. But, Treasury also reserves the right to consider other information to aid it in identifying a violation such as information from members of the public. Once a violation has been identified, a multi-step process of fact-finding will begin (p.100) to determine how much, if any, funding is to be recouped.
- Treasury will submit a notice to a recipient government informing them of its finding of ineligible uses of funds and the amount of money to be recovered.
- Recipient has 60 calendar days to submit a a request for reconsideration (an appeal) of the decision by Treasury. This request should include:
- A full explanation of why the finding should be reconsidered
- Submission of all relevant additional information to support the request
- Additional information relevant to determining if a violation occurred (e.g. evidence of eligible uses of funds)
- Within 60 calendar days of receipt of the appeal the recipient will be notified by the Secretary of Treasury of the decision to affirm, withdraw, or modify the notice of recoupment. This decision is final.
- This notice will include an explanation of the decision including responses to the recipient’s supporting reasons and considerations of additional information.
- Any amount subject to recoupment must be paid within 120 calendar days of receipt of any final notice. If there is no request for reconsideration payment must be made within 120 calendar days of the initial notice.