As the recovery from COVID-19 continues, local governments find themselves caught in the middle of the federal relief plan – quite literally. Much of the funding earmarked for local constituents in the $1.9 trillion American Rescue Plan (ARP) requires administration by states and municipalities. The aid is crucial, yet understanding its requirements is more complicated than the CARES Act relief plan that preceded it.
“That money was pushed out to the municipalities with little direction and limited time to spend it. This time, it’s more planned,” says Lee Strom, senior vice president and government banking division manager for U.S. Bank Corporate and Commercial Banking. “They have to submit an application, there are more restrictions on spending, and some of the funds come in increments – 50 percent now, 50 percent later.”
Although many valuable lessons were learned while administering the CARES Act funds, the additional requirements for ARP funds created a whole new set of questions and concerns for local government administrators.
Congress passed ARP in March of 2021 to provide COVID relief and stimulus funding. The $1.9 trillion relief package includes a total of $350 billion in state, local and tribal aid. Under the legislation, eligible uses for the relief funds include increased expenditures, lost revenue replacement and economic harm mitigation due to the COVID-19 pandemic.
The legislation provides $195.3 billion to states and the District of Columbia. It also provides $130.2 billion to local governments, including:
The funds are distributed to state and local governments in two equal tranches. The first 50% was distributed within 60 days of enactment. The remainder can be delivered no earlier than one year later. State and local government recipients can use the funds to cover costs incurred by Dec. 31, 2024.
Receiving the funds in staggered tranches has many local governments wondering about strategies to manage that money before spending it. After all, half of it won’t arrive until spring of 2022, yet it must all be spent according to ARP’s deadlines.
“They realize they have about three and a half years to spend it, but they have so many questions,” Strom explains. “What can they spend it on? How can they invest it? What opportunities are there to invest it short term, intermediate and laddered out?”
“Municipalities would love to earn a return on those funds while available, but most entities just don’t know how they’re going to spend it or how quickly they’ll spend it,” says Jason Glidden, managing director of institutional sales at U.S. Bancorp Asset Management. “We have plenty of channels to help them invest the funds in the meantime.”
Dividing the funds can allow for a balance between liquidity and higher yielding opportunities. “If they’re getting $220 million, for example, they could keep $100 million of that liquid in a money market fund that provides daily access to those funds. Then they could place the remaining $120 million in laddered, longer dated securities or consider a separately managed portfolio to be actively managed by a professional money manager.”
One of the lessons learned during the first wave of COVID relief is that there are many ways to disburse funds that are more effective and less expensive than issuing paper checks.
ACH payments are quick, seamless and a much more efficient way to pay citizens with bank account information on file. Meanwhile, a growing number of state and local governments have discovered the benefits of prepaid cards for disbursing funds, especially for the unbanked.
“There is a whole population of people that don't have access to traditional banking services. They're heavily dependent on cash and they're heavily dependent on check cashing agencies,” says James Homer, vice president of national sales & relationship management at U.S. Bank. “For the under and unbanked, it’s quite common to have to pay check cashing fees.”
Funds loaded on a prepaid card can be spent virtually anywhere with no cost to the consumer. Depending on the type and frequency of the disbursement, prepaid rewards cards or reloadable debit cards may be the best option.
The U.S. Department of Treasury published updated FAQs pertaining to the Coronavirus State and Local Fiscal Recovery Funds (CSFRF/CLFRF).
In addition, Treasury published a web page focused on recipient compliance and reporting responsibilities.
Finally, Treasury also set up an email address for general questions about CSFRF/CLFRF: SLFRP@treasury.gov
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