What the American Rescue Plan Act means for local governments

UPDATE: Since this blog was first published, SEMCOG hosted a webinar, “Senator Peters discusses the American Rescue Plan Act.” You can watch the recording here:

For local government officials, there is much more to understand about the recently signed American Rescue Plan (ARP) Act than knowing that most people are going to receive a $1,400 check from the federal government. The essential provision of the federal act for local government officials is that the bill contains $350 billion for state and local governments. Unlike the CARES Act of 2020, every county, city, village, and township will receive funds under the plan. This blog answers four questions:

1. How will ARP funds be distributed?
2. When will ARP funds be distributed?
3. How may ARP funds be used?
4. What time period does the ARP cover?

How will ARP funds be distributed?

Of the $350 billion in the ARP Act, Michigan and its local governments will receive $10.3 billion. Of that amount, $5.655 billion will be retained by the state. Another $250 million will be set aside for capital projects, and the remainder will be distributed to local governments.

Local government revenues will be distributed through three different programs.

Counties

Counties will receive revenues from the ARP based on the latest population estimate from the US Census. All told, Michigan counties will receive $1.937 billion dollars distributed on a per capita basis.

Metropolitan Cities

Distribution of funds to Michigan’s municipal governments is more complicated. The ARP sets up two distribution programs. The first distribution program is for Metropolitan Cities. Michigan has 34 cities and three townships that qualify for funding under this program. Funds are distributed using a modified Community Development Block Grant (CDBG) formula. The CDBG formula is very focused on the economic profile of the population within the community. Michigan’s Metro communities will receive $1.782 billion under the ARP. Distributions to counties and Metropolitan communities will be made directly to those governmental units.

Non-entitlement Communities

The final amount distributed is for all other cities, villages, and townships. This pot contains $686 million. These communities, referred to as non-entitlement communities under the act, will split the revenue based on population; about $105 per person. There are some different distribution procedures under this section of the law.

Distributions for non-entitlement governmental units will be made to the state, and the state is required to distribute the funds to those communities within 30 days of receiving the funds. Distributions to non-entitlement communities are also different in that they may not exceed 75 percent of a government’s budget from the last fiscal year. Directions on how this cap is to be calculated will likely be established at the federal level in the future. This issue may specifically impact townships, especially those that fund services such as fire or police through authorities that have their own taxing authority.

This spreadsheet lists the estimated distributions to all local governments in Michigan. The spreadsheet separates the Metro communities from the remainder of the communities in the state. Noticeably absent from the spreadsheet are villages. Funds for villages are included in estimated distribution to the underlying township(s). A procedure will need to be established to properly apportion the funds to the village and the township.

When will ARP funds be distributed?

The final key point under distribution is the timing of payments. The ARP specifies that U.S. Treasury is to release the funds within 60 days of enactment of the law. For non-entitlement communities, the state would have an additional 30 days to distribute the funds. It is also important to note that all of the funds will not be released at once. The U.S. Treasury is allowed to withhold up to 50 percent of the funds during the first distribution and then release the remainder within 12 months.

How may ARP funds be used?

The following language is copied from the ARP to describe how the funds may or may not be used. The language applies to all local governments:

“(A) to respond to the public health emergency with respect to the Coronavirus Disease 2019 (COVID-19) or its negative economic impacts, including assistance to households, small businesses, and nonprofits, or aid to impacted industries such as tourism, travel, and hospitality;

“(B) to respond to workers performing essential work during the COVID-19 public health emergency by providing premium pay to eligible workers of the metropolitan city, non-entitlement unit of local government, or county that are performing such essential work, or by providing grants to eligible employers that have eligible workers who perform essential work;

“(C) for the provision of government services to the extent of the reduction in revenue of such metropolitan city, non-entitlement unit of local government, or county due to the COVID-19 public health emergency relative to revenues collected in the most recent full fiscal year of the metropolitan city, non-entitlement unit of local government, or county prior to the emergency; or

“(D) to make necessary investments in water, sewer, or broadband infrastructure.

“(2) PENSION FUNDS.-No metropolitan city, non-entitlement unit of local government, or county may use funds made available under this section for deposit into any pension fund.

“(3) TRANSFER AUTHORITY.-A metropolitan city, non-entitlement unit of local government, or county receiving a payment from funds made available under this section may transfer funds to a private nonprofit organization (as that term is defined in paragraph (17) of section 401 of the McKinney-Vento Homeless Assistance Act (42 U.S.C. 11360(17)), a public benefit corporation involved in the transportation of passengers or cargo, or a special-purpose unit of State or local government.

“(4) TRANSFERS TO STATES.-Notwithstanding paragraph (1), a metropolitan city, non-entitlement unit of local government, or county receiving a payment from funds made available under this section may transfer such funds to the State in which such entity is located.

Discussion of the Uses

The above language opens many avenues for the use of the funds. It is hard to imagine a situation where a local government would choose to transfer the money back to the state as found in (4).

(A) makes it clear that the counties and municipalities have a fairly broad opportunity to assist their local citizens and businesses who have been impacted by COVID-19. This offers local governments the ability to identify and solve problems on a much more informed manner than a state or federal program could ever accomplish.

(B) follows the pattern established last year with providing salary support to essential workers.

(C) is a critical piece to this legislation. It allows local governments to replace lost revenues due to COVID-19. At the same time, the language leaves some questions to be answered. Is this provision measured on an overall budget level, or is it implemented on a source-by-source basis? Some parts of a local government’s budget probably increased, but many components were likely impacted in a negative manner. Building permits were restricted last year; revenues from senior or recreational programs were also impacted; local income tax revenues were also greatly diminished; and even fuel tax revenues under PA 51 were diminished. This section offers significant assistance.

(D) is not only found in the local government section, but also the state language as well. “Make necessary investments in water, sewer or broadband infrastructure.” This may be the most intriguing provision of the act. This language does not have a restriction that it be based on some form of a COVID-19 test, at least in its enacted form. This would seem to offer significant opportunity to deal with certain infrastructure issues.

(2) is very straight forward. You can’t use this money to pay down your unfunded pension liabilities.

(3) This section is very important to other local government entities. It will allow counties or municipalities to assist other local governments. This will be very important to authorities such as district libraries or fire authorities, which have their own source of revenues but may be negatively impacted by COVID-19. Of course, it could also mean funding private nonprofits in the community to support their efforts to assist the citizens of the community.

What time period does the ARP cover?

Funds under this act must be expended by December 31, 2024.

Final Observations

This blog is intended to provide an overview of the ARP provisions for local governments. Every provision of the act likely generates a laundry list of questions. As an example: the law states that a non-entitlement community can receive only 75 percent of its prior year’s revenues in payments; that issue alone will need considerable interpretation. The federal government will need to develop guidance on this question and many more before the distributions begin to take place in the next few months. SEMCOG will continue to be a partner with you in finding answers to the many questions we all have on this new law.