Continuing our series of articles reviewing the lesser publicized aspects of the new American Rescue Plan Act (ARPA)1 guidance (hence, the “B-sides” moniker), we address the U.S. Treasury’s issued guidance as to using federal stimulus funding to seed local governments’ revolving loan funds (RLFs). Specifically, we have clearer guidance, via the final rule clarifying an earlier FAQ issued by the Treasury, as to the mechanics of seeding RLFs using ARPA fiscal recovery funds.
For a general overview of the U.S. Treasury’s final guidance in the use of state and local fiscal recovery funds, please see its high-quality overview document.
As we know, counties, metropolitan cities and nonentitlement units of local government (i.e., non-metro cities and townships in Ohio) may use their ARPA local fiscal recovery fund payments under four buckets of use set forth in the statute.2 Among the listed eligible uses, the first and third buckets are relevant in the context of using federal stimulus to provide funds to eligible borrowers: “a) To respond to the public health emergency[‘s] negative economic impacts, including assistance to… small businesses, and nonprofits…; c) For the provision of government services to the extent of the reduction in revenue due to the COVID-19 public health emergency”.3
This discussion addresses capitalizing a local government’s new RLF with individual, discrete loans. Put another way, if an ARPA recipient intends to provide a $500,000 loan to XYZ Corporation, that loan (and the calculated eligible expenditure under ARPA) serves to capitalize the local government’s RLF. Here, we do not contemplate seeding a RLF with a simple up-front slug of cash, which then sits in a loan fund waiting for a future borrower. Each loan must be properly accounted for (using a net-present value calculation of loan payments from borrowers) as a transfer from the local government’s ARPA special revenue fund account to the new RLF fund account.
As a response to the pandemic’s negative economic impacts (i.e., the first bucket)
A local government may seed a RLF with its ARPA funds, so long as the resulting loans are for uses that are otherwise eligible under ARPA. Under the first bucket of use, in response to COVID-19, loaned ARPA funds must be used by the borrowing businesses to mitigate their financial hardships from the COVID-19 pandemic, such as declines in revenues or impacts of periods of business closure.4 Local governments must be mindful that under the first bucket of use, the Treasury is adamant that ARPA funds are not to be used for “general economic development,” which is “generally not… eligible.”5 Given we often see RLF loans in the area of economic development, care must be taken to demonstrate the loaned funds are responsive to the impacts of the pandemic.
Therefore, the local government recipient’s audit file for seeded RLF loans must describe some connecting point between any such loans and the pandemic: either as a loan to assist a business in need because of COVID-19’s effect on the economy, or as a government service provided by the local government (addressed below).
To build a case under the first bucket of eligible use, local governments are to follow the U.S. Treasury’s two-part framework: (1) there must be a negative economic impact resulting from or exacerbated by COVID-19; and (2) the local government’s response must be designed to address the identified economic impact, and such response must be “reasonably proportional” (i.e., the scale of the response as compared to the scale of the harm).6
As a provision of government services (i.e., the third bucket)
A local government may source loans from its ARPA revenue fund as a provision of government services to the extent of the reduction in that local government’s general revenue resulting from the public health emergency. Note under the final rule, local governments may deem $10 million of their respective local fiscal recovery fund allocations under the “standard allowance” by the U.S. Treasury as due to COVID-19’s revenue impact.7 The Treasury allows local jurisdictions to deploy up to that amount to the provision of government services, defined generally as “services provided by the recipient governments… unless Treasury has stated otherwise”.8
Calculating the amount of a loan charged to a local government’s ARPA revenue fund
Here, we discuss RLF loans that will mature after December 31, 2026.9
The Treasury has directed local government recipients to charge their ARPA revenue funds under its concept of the “projected cost of the loan” and the “subsidy cost of the loan.” That is, in determining the proper amount to be charged to a local government’s ARPA allocation as an eligible expenditure, under a proposed RLF, for each loan made that will mature out beyond December 31, 2026, the recipient is to consider as one option (of two10): the subsidy cost of the loan.11 Importantly, the amount charged to the local government’s ARPA fund is not merely the principal amount loaned out.
This subsidy cost calculation method is referenced in the Treasury’s FAQ Item 4.11 as “based on the interest rates of securities with a similar maturity to the cash flow being discounted that were recently issued by the recipient.” This somewhat obtuse statement received additional treatment by Treasury in its final rule.12
A key point here is that any loaned amount, in theory, will be paid back by the borrower. Therefore, the Treasury is seeking to only assist, via ARPA funds, the time value of money “expended” by the local government as it awaits full repayment of its loan.
To arrive at such time value of the loan’s repayment, the Treasury defines the subsidy cost as the net present value (NPV) of “cash flows” (that is, loan repayments, comprised of both principal and interest) per a given loan’s amortization schedule.
By way of example, under a typical amortization spreadsheet prepared for a loan, if we assume a 10 year, $500,000 loan, we would calculate cash flows to the local government in the form of principal and interest payments made during the loan term of NPV $166,784.75 (using a 2.75 percent discount rate). As such, the local government recipient would charge its ARPA special revenue fund for its $166,784.75 subsidy cost of the loan as the local government awaits full repayment of the $500,000 loaned out. The balance of the loan principal would be sourced from the local government’s general fund or other revenue stream.
1 H.R. 1319, Public Law 117-2.
2 See ARPA, Title IX Sec. 603(c)(1)(A) through (D).
3 U.S. Treasury, Final Rule, Supplementary Information, at pages 4-5 (emphasis added).
4 See 31 CFR 35.6(b)(3)(ii)(B)(1).
5 U.S. Treasury, Final Rule, Supplementary Information, at page 218.
6 See 31 CFR 35.6(b)(1); see also U.S. Treasury, Final Rule, Supplementary Information, at pages 21 – 22, and at page 194.
8 See U.S. Treasury, Final Rule, Supplementary Information, at page 259.
9 It matters if such loans go beyond December 31, 2026. The U.S. Treasury uses that date to toggle between imposing, or not imposing, restrictions on local governments’ use of repaid loan amounts (e.g., interest payments received) under concepts of program income.
10 This article does not address the other option offered by the Treasury to determining the proper amount to be charged as an ARPA expenditure: the Current Expected Credit Loss (CECL) to measure discounted cash flow.
11 See U.S. Treasury, Coronavirus State and Local Fiscal Recovery Funds, Frequently Asked Questions, as of November 15, 2021, Item 4.11.
12 See U.S. Treasury, Final Rule, Supplementary Information, at pages 366 – 368.
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