ARPA Final Rule – The “Collection of B-sides”: Seed Revolving Loan Funds | Bricker & Eckler LLP
Continuation of our series of articles reviewing the less publicized aspects of the new American Rescue Plan Act (ARPA)1 guidelines (hence the nickname “B-sides”), we discuss guidelines issued by the US Treasury regarding the use of federal stimulus funds to seed local government revolving loan funds (RLFs). Specifically, we have clearer guidance, via the final rule clarifying an earlier FAQ issued by the Treasury, as to the mechanisms for priming RLFs using ARPA fiscal stimulus funds.
For a general overview of the U.S. Treasury’s final guidance on the use of state and local fiscal stimulus funds, please see its high-quality report Document synthesis.
As we know, counties, metropolitan cities and local government units without right (that is to say, non-metropolitan cities, and Ohio townships) may use their local ARPA tax adjustment fund payments within the four usage bands set forth in the statute.2 Of the eligible uses listed, the first and third tranches are relevant in the context of using federal stimulus to provide funds to eligible borrowers: “a) To respond to the health emergency[‘s] negative economic impacts, including helping small businesses and nonprofits…; vs) For the delivery of government services to the extent of the decline in revenue due to the COVID-19 public health emergency”.3
This discussion is about capitalizing a local government’s new RFL with individual, discrete loans. In other words, if an ARPA beneficiary intends to make a $500,000 loan to XYZ Corporation, that loan (and qualifying expenditures calculated under ARPA) is used to fund the RLF. of local government. Here, we are not considering seeding an RLF with a simple initial sum of money, which then sits in a loan fund waiting for a future borrower. Each loan must be properly accounted for (using a calculation of the net present value of borrower loan repayments) as a transfer from the local government’s ARPA special revenue fund account to the new RLF fund account.
In response to the negative economic impacts of the pandemic (that is to say, the first bucket)
A local government can initiate an RLF with its ARPA funds, as 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 are to be used by corporate borrowers to alleviate their financial hardships due to the COVID-19 pandemic, such as declining revenues or impacts of business closure periods.4 Local governments should keep in mind that under the first bucket of use, the Treasury is adamant that ARPA funds should not be used for “general economic development”, which does not is “generally not…eligible”.5 Given that we often see FRR loans in the area of economic development, care must be taken to demonstrate that the funds lent respond to the impacts of the pandemic.
Therefore, the local government recipient’s audit file for initiated RLF loans must describe a point of connection between these loans and the pandemic: either as a loan to assist a business in need due to the effect of COVID -19 on the economy, either as a government service. provided by local government (discussed below).
To build a case in the first eligible use tranche, local governments must follow the U.S. Treasury’s two-part framework: (1) there must be an adverse economic impact resulting from or exacerbated by COVID-19; and (2) the local government response must be designed to address the identified economic impact, and that response must be “reasonably proportionate” (i.e. the scale of the response relative to the harm scale).6
As a provision of government services (that is to say, the third bucket)
A local government may obtain loans from its ARPA revenue fund as a delivery of government services to the extent of the reduction in that local government’s general revenue resulting from the public health emergency. Note that under the final rule, local governments can consider $10 million of their respective local fiscal stimulus fund allocations under the US Treasury’s “standard allocation” to be due to impact on revenue from COVID-19.seven The Treasury allows local jurisdictions to deploy up to this amount for the provision of government services, broadly defined as “services provided by recipient governments…unless otherwise specified by the Treasury”.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 directed local government recipients to charge their ARPA revenue funds according to its concept of “Projected Cost of Loan” and “Subsidy Cost of Loan”. That is, to determine the appropriate amount to be charged against a local government’s ARPA allocation as an eligible expense, under a proposed RLF, for each granted loan that will mature beyond December 31, 2026 , the beneficiary must consider as an option (of twoten): the loan cost subsidy.11 It is important to note that the amount charged to the local government ARPA fund is not simply the principal amount loaned.
This grant cost The method of calculation is referenced in Section 4.11 of the Treasury FAQ as “based on the interest rates of securities of similar maturity to the discounted cash flow that have recently been issued by the beneficiary”. This somewhat obtuse statement was given additional treatment by the Treasury in its final rule.12
A key point here is that any amount lent, in theory, will be repaid by the borrower. Therefore, the Treasury seeks to assist, via ARPA funds, only the time value of the money “spent” by the local government while waiting for full repayment of its loan.
To arrive at this time value of loan repayment, the Treasury defines the grant cost as the net present value (NPV) of “cash flows” (i.e. loan repayments, consisting of both principal and interest) over the amortization schedule of a given loan.
As an example, in a typical amortization worksheet prepared for a loan, if we assume a $500,000 loan over 10 years, we would calculate the cash flows to local government in the form of principal payments and interest earned during the term of the loan of $166,784.75. (using a discount rate of 2.75%). As such, the local government beneficiary would charge its ARPA Special Revenue Fund for its $166,784.75 grant cost of the loan while the local government awaits full repayment of the $500,000 loaned. The loan principal balance would come from the general fund of the local government or another source of revenue.
1 HR 1319, Public Law 117-2.
2 See ARPA, Title IX Sec. 603(c)(1)(A) to (D).
3 United States Treasury, Final Rule, Supplementary Information, pages 4-5 (emphasis added).
4 See 31 CFR 35.6(b)(3)(ii)(B)(1).
5 US Treasury, Final Rule, Supplementary Information, at page 218.
6 See 31 CFR 35.6(b)(1); see also US Treasury, Final Rule, Supplementary Information, at pages 21 and 22, and at page 194.
seven See 31 CFR 35.6(d)(1).
8 See US Treasury, Final Rule, Supplementary Information, at page 259.
9 It is important that these loans go beyond December 31, 2026. The US Treasury uses this date to toggle between imposing or not imposing restrictions on local governments’ use of repaid loan amounts (for example, interest payments received) according to program income concepts.
ten This article does not discuss the other option offered by the Treasury to determine the appropriate amount to charge as an ARPA expense: the current expected credit loss (CECL) to measure discounted cash flow.
11 See US Treasury, Coronavirus State and Local Fiscal Recovery Fund, Frequently Asked Questions, as of November 15, 2021, item 4.11.
12 See US Treasury, Final Rule, Supplementary Information, pages 366-368.