On November 20, 2023, the Treasury Department issued an interim final rule that makes changes to the regulations that govern the Coronavirus State and Local Fiscal Recovery Funds. The new rule clarifies how state, local, and tribal entities can comply with the requirement that they “obligate” SLFR Funds by December 31, 2024. The new rules are effective November 20, 2023.

The American Rescue Plan Act of 2021 established SLFR Funds to provide financial assistance to state and local governments, as well as federally recognized tribes, in their efforts to mitigate the impacts of COVID-19. Though a broad range of projects can be paid for with these funds, the monies must be “obligated” by December 31, 2024, and expended by September 30, 2026.

The new rule provides additional clarity and flexibility as to what qualifies as “obligating” SLRF Funds in three general areas:

Compliance Costs. The new rule states that a recipient is

considered to have incurred an obligation by December 31, 2024, with respect to a requirement under federal law or regulation or a provision of the SLFRF award terms and conditions to which the recipient becomes subject as a result of receiving or expending SLFRF funds.

As explained by Treasury, this means that fund recipients can use the money for compliance purposes, so long as the recipient:

• Determines the amount of SLFR Funds the recipient estimates it will use to cover such expenditures. They may not include within the estimate any expenditure made after December 31, 2026, other than administrative expenditures necessary to close out the award in accordance with the Uniform Guidance.
• Documents a reasonable justification for the estimate
• Reports the amount to Treasury by April 30, 2024, with an explanation of how it was determined
• Reports at closeout the final amount expended for these costs

The type of compliance expenditures that may be “obligated” in this manner is broad and includes:

• Reporting and Compliance Requirements. Funds expended to comply with SLFR reporting and compliance requirements, including in connection with the preparation and submission of recipients’ required reports, review of sub-award reports or sub-recipient monitoring generally, maintenance of data and reporting tools, and review and processing of invoices.
• Single Audit Costs. Funds expended for the conduct of audits required by the Single Audit Act, including money spent for audit costs, preparation for such audits, and audit resolution, including funds disbursed by pass-through entities to carry out their responsibilities related to audit resolution of sub-awards.
• Record Retention and Internal Control Requirements. Expenditures to comply with records retention requirements and other expenditures necessary to ensure program integrity through the closeout.
• Property Standards. Expenditures on insurance, inventory and other recordkeeping requirements, and maintenance of equipment and other outlays made to comply with the property standards of the Uniform Guidance.
• Environmental Compliance Requirements. Expenditures to comply with environmental requirements, including to obtain environmental permit renewals.
• Civil Rights and Nondiscrimination Requirements. Outlays to comply with civil rights and nondiscrimination requirements, including the investigation of complaints that may arise from SLFR-funded projects.

Replacement of Contract or Sub-award after December 31, 2024

In recognition of potential issues with contract performance that require replacement of a contractor or sub-awardee after the December 31, 2024, deadline to “obligate” funds, Treasury is also permitting recipients to replace a contractor or sub-awardee after December 31, 2024, under the following specific circumstances:

• The recipient terminates the contract or sub-award because of the contractor or sub-awardee’s default, the contractor or sub-awardee goes out of business, or the recipient otherwise determines the contractor or sub-awardee will not be able to perform under the contract or carry out the sub-award; or
• The recipient and contractor or sub-recipient mutually agree to terminate the contract or sub-award for convenience; or
• The recipient terminates the contract or sub-award for convenience if the contract or sub-award was not properly awarded (such as if the contractor was not eligible to receive the contract), there is clear evidence that the contract or sub-award was improper, the recipient documents a determination that the contract or sub-award was not properly awarded, and the original contract or sub-award was entered into by the recipient in good faith. A contract will be considered made in good faith if the parties followed standard procurement or sub-award practices, as applicable, and the contract or sub-award was not entered into for the purpose of evading the obligation deadline.

A recipient that re-obligates funds to a new contractor or sub-recipient after the obligation deadline will be treated as having used its funds to cover an obligation incurred prior to the deadline if any of the three situations above are present and if the contract or sub-award being replaced was started by December 31, 2024.

Sub-recipients are Not Subject to the December 31, 2024, “Obligation” Deadline

Treasury also clarifies that while all sub-awards must be made by December 31, 2024, the recipient of those sub-awards—a sub-recipient—is not subject to the December 31, 2024, obligation deadline and can obligate SLFR Funds after December 31, 2024:

Recipients have asked whether the December 31, 2024, obligation deadline applies to subrecipients. Treasury is clarifying that subrecipients are not subject to this deadline. As stated in the SLFRF rule and as referenced above, Treasury defined obligation to include entry into a subaward. A cost is considered to have been incurred once a recipient enters into a subaward that obligates the recipient to cover that cost. Once a recipient has obligated funds, the requirement in the statute and Treasury’s rule to obligate funds by December 31, 2024, has been satisfied, such that subrecipients need not themselves also obligate funds received under a subaward by December 31, 2024. (Contractors also do not need to obligate funds received under a contract by December 31, 2024.) It remains the case that all SLFRF award funds must be expended by the recipient and any subrecipients by 2026, given the termination of the period of performance on December 31, 2026.

This article summarizes aspects of the law and does not constitute legal advice. For legal advice for your situation, you should contact an attorney.