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    ARPA final rule – The “B-sides collection”: Seeding revolving loan funds

    (Updated May 13, 2022)[1]

    Continuing our series of articles reviewing the lesser publicized aspects of the new American Rescue Plan Act[2] guidance (hence, the “B-sides” moniker), here 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 new guidance, via an updated set of FAQs issued under Treasury’s Final Rule, as to the mechanics of seeding RLFs using ARPA fiscal recovery funds. Not for the timid, the new FAQ Item 4.9 sheds some light on this subject, albeit using verbiage that may require a Master’s degree in finance to understand.

    For a good 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.[3] 

    This discussion addresses capitalizing a local government’s new RLF with individual, discrete loans. 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. And the new FAQ Item 4.9 authorizes a more permissive manner of capitalizing such loans under the third bucket (as a provision of government service) than under the other three buckets (i.e., response to COVID, premium pay, and necessary infrastructure).

    If an ARPA recipient intends to loan $500,000 loan to XYZ Corp., all or a portion of that loan constitutes an eligible expenditure under ARPA, depending on the eligible use rationales, and therefore helps 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.)

    As a response to the pandemic’s negative economic impacts (i.e., the first bucket)

    Under the first bucket of use, in response to COVID, 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, 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 under the first bucket of use to demonstrate the loaned funds are responsive to the impacts of the pandemic. In such cases, the local government recipient’s audit file for seeded RLF loans must describe some connecting point between any loans and the pandemic; for example, as a loan to assist a business in need because of COVID-19’s effect on the economy.

    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; and (2) the local government’s response must be designed to address the identified economic impact, which 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 U.S. Treasury as due to COVID-19’s revenue impact.[7] And in so doing, 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]

    As noted, the Treasury’s new FAQ Item 4.9 authorizes a more permissive manner of capitalizing such loans under this third bucket. Note the broad approach granted in such instances is derived from a careful reading of the FAQ’s verbiage: “any contribution of revenue loss funds to a revolving loan fund may… follow the approach of loans funded under the revenue loss eligible use category,” which in turn directs that loaned ARPA funds “may be considered to be expended at the point of disbursement to the borrower, and repayments on such loans are not subject to program income rules.”[9] In effect, RLF loans funded under third-bucket rationale (i.e., government services to the extent of revenue loss) are deemed by Treasury to be expended in full, and therefore are to be charged for the full amount against the recipient's ARPA special revenue fund account at the time of disbursement. These loans are not restricted as to purpose.

    Compare and contrast: calculating the amount of a loan charged to a local government’s ARPA special revenue fund [10]

    Example 1: ARPA funds a $10 million economic development loan (from third bucket)

    Assume a $10,000,000 RLF loan is wholly disbursed at closing (i.e., entire amount is paid to borrower), for a period of 20 years, interest free (0 percent), to XYZ Corporation for economic development purposes (e.g., new facility construction). 

    The amount charged to the local government’s ARPA revenue fund under this third bucket of eligible use is $10,000,000. 

    Example 2: ARPA funds a $10 million loan for necessary water infrastructure (i.e., first bucket rationale)

    Assume a $10,000,000 RLF loan is wholly disbursed at closing, made with a reasonable expectation as to full repayment, for a period of 20 years (i.e., will mature after December 31, 2026[11]), interest free (0 percent). The recipient (lender) charges $50,000 in administrative expenses, up front. The recipient recently has obtained financing in other deals at 4.0 percent.[12] This loan hypothetically represents the only such loan made over the life of the local government’s RLF fund.

    The amount charged to the local government’s ARPA revenue fund under this fourth bucket of eligible use is not merely the principal amount loaned out. Rather, the local government recipient is to charge its ARPA special revenue fund at loan closing / time of loan disbursement in an amount of $3,254,837.

    The reduced figure – the only amount that may be charged to the ARPA revenue fund – is calculated by projecting the loan’s cost according to its estimated “subsidy cost.”[13] That is, the present value of the cash coming from the recipient (lender), less administrative expenses, is $10,000,000 (entire amount of the loan is disbursed from the recipient all at once at the closing table). From that amount, we minus the estimated present value of cash flows to the recipient (lender), which are comprised of the “contractual cash flows” (loan repayments of both principal and interest, adjusted for expected deviations in repayment), per the loan’s 20-year amortization schedule. Here, this amount is $6,795,163, or the net present value of loan repayments to the lender, discounted at its cost of borrowing (4.0 percent). The resulting net figure, $3,204,837, is the subsidy cost. Add to that the one-time administrative expense of $50,000. This results in a total amount "charged to" the ARPA special revenue fund of $3,254,837.


    [1] The author expresses appreciation to fellow public finance attorney, Jonathan Cox, with Eckert Seamans Cherin & Mellott in Harrisburg, Pennsylvania, who provided valuable collaboration in deciphering the latest U.S. Treasury guidance on RLFs.

    [2] H.R. 1319, Public Law 117-2.

    [3] See ARPA, Title IX Sec. 603(c)(1)(A) through (D).

    [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.

    [7] See 31 CFR 35.6(d)(1).

    [8] See U.S. Treasury, Final Rule, Supplementary Information, at page 259. 

    [9] U.S. Treasury, Coronavirus State and Local Fiscal Recovery Funds, Final Rule: Frequently Asked Questions, as of April 27, 2022, Item 4.9, discussion entitled, “Loans funded with SLFRF funds under the revenue loss eligible use category.”

    [10] This article does not address the other option offered by 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] 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. Note under the Final Rule: FAQs, federal program income rules are inapplicable to loans sourced from a recipient’s revenue loss (i.e., third bucket of use), no matter such loans’ dates of maturity.

    [13] A key point here is that any loaned amount, in theory, will be paid back by the borrower. Therefore, Treasury is seeking to only assist, via ARPA funds, the discount – or subsidized – amount offered by the recipient to a RLF borrower. See U.S. Treasury, Coronavirus State and Local Fiscal Recovery Funds, Final Rule: Frequently Asked Questions, as of April 27, 2022, Item 4.9.

    This is for informational purposes only. It is not intended to be legal advice and does not create or imply an attorney-client relationship.

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