Put Your State & Local Fiscal Recovery Funds To Work

| June 14, 2022

Many entities just received their second tranche of State & Local Fiscal Recovery Funds. Here are four critical points to know.

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Last week, many eligible entities received their second tranche of State & Local Fiscal Recovery Funds (SLFRF) as a part of the American Rescue Plan. The receipt of these funds is in chorus with the Federal Reserve meeting this week as they continue to try and fight the highest inflation rate in over four decades. The Fed has indicated that they will raise short-term interest rates by at least a half-percentage point (0.50%) for the second time. However, many financial market analysts believe the Fed signaled yesterday they would raise interest rates by three-quarters of a percentage point (0.75%) to help fight inflation.

Here are four critical points our clients say have been most helpful for them to know:

(1) Local Fiscal Recovery Funds CAN be invested, and any interest earned does not need to be remitted back to the U.S. Treasury.[1] In addition, there are no restrictions on how an entity spends the interest earned on the funds.[2]

three+one-cashvest-State-Local-Fiscal-Recovery-FundsActive liquidity management and cash-flow forecasting are vital. By understanding how you can better invest these funds you can provide necessary revenue for your public entity in the future. Accruals and budgeted figures should not be a substitute for liquidity management—only cash is spendable and investable. Do you know the time horizon for your cash? You need to be fully aware and current on how much your strategic liquidity, cash cushion, and ongoing working capital are. How do Local Fiscal Recovery Funds impact your liquidity and how can you maximize the value of those funds?

The current 1-year T-Bill is paying 3.05% (as of 6/14/22). If you invested $1 million in a 1-year T-Bill, you would generate nearly $31,000 in additional revenue; that’s money you don’t have to raise in taxes.

Remember to use all the tools allowable in your financial toolkit. Don’t be satisfied using just one of the tools available. Rather, have a strategy to match the appropriate investment tool with the appropriate time horizon. Would you use a drill to pound a nail? Or a hammer to bore a hole?

(2) Funds must be used for costs incurred on or after March 3, 2021. Costs must be obligated by December 31, 2024, and fully expended by December 31, 2026.

Public entities nationwide continue to crunch ideas on how best to spend their ARP Funds. The National

Association of Counties (NACo) provides a collection of how entities are using their ARPA Recovery Funds here.

The Brookings Institution, in partnership with the National League of Cities, provides a resource on how communities are investing ARP Funds. To learn more, click here..

(3) SLFR Funds cannot be used:

  • To offset a reduction in net tax revenue
  • To pay any pension payment or costs
  • For debt service or replenishing financial reserves
  • To satisfy any settlements and judgments
  • For any project that undermines COVID-19 mitigation efforts or that is not in line with CDC guidance

(4) It is highly recommended that localities do not create ongoing liabilities with one-time funds. 

When you spend SLFR Funds, remember additional ongoing funding is not probable, and your entity should have a plan to maintain and fund such community investments, if necessary.

These funds and current interest rates provide a once-in-a-generation opportunity to stabilize your communities, work together to invest in future prosperity, and create an inclusive recovery from the COVID-19 pandemic.

 

[1] U.S. Treasury ARPA FAQ 9.5

[2] U.S. Treasury’s ‘Compliance and Reporting Guidance

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