Under the American Rescue Plan Act (ARPA), the Federal government provided $350 billion to state, local, and Tribal governments to support any initiative that aids in the response to and/or recovery of the Covid-19 pandemic. These funds are known as the Coronavirus State and Local Fiscal Recovery Funds (SLFRF). 

The goal of the act was to disperse the funds quickly, so they drafted the policy with broad discretion on how funds can be used. This has led some states to choose to fund projects that are diverse and controversial. A few examples include: the construction of new prisons, expanding broadband access to rural areas, infrastructure like highways and roads, and even piloting several Universal Basic Income projects.  

While the catalog of greenlit ideas is extensive, there are a few specific areas that are off limits. So, instead of going over the long list of items state, local, and Tribal governments can use the SLFRF for, here are the 5 main policies that Congress has mandated the funds cannot be used for. 

1. Offset a Reduction in Net Tax Revenue 

At the top of the list, governments are barred from utilizing the money to offset tax cuts, either directly or indirectly. What this means is that a state, local, or Tribal government cannot institute any measure of lower taxes and then supplement the lost revenue with the SLFRF. If a local agency does decide to cut taxes, they need to demonstrate how they paid or will pay for the cuts from sources other than the SLFRF. The penalty for cutting taxes without compensating the lost revenue through some other source is the repayment of all incorrectly used relief funds back to the Treasury department.  

    2. Deposits into Pension Funds 

Next, the Treasury has determined that no recipients may use the SLFRF to boost their pension funds. Now, just because a local authority accepted these funds doesn’t mean they have to start worrying that any normal pension deposit they make will come under Federal scrutiny. Rather, the Treasury department explains that only payments that are larger than normal and/or occur outside routine deposits will be regarded as suspicious and merit further investigation. 

Notably, though state and local agencies are forbidden from using the funds for pension relief, Tribal governments are exempt.  

    3. No Debt Service or Replenishing Financial Reserves 

This one is as straightforward as it sounds. Recipients of SLFRF cannot use the funding to service debt or to create a reserve of cash for future projects. Beneficiaries must either spend the money before time is up or lose out on the funding. 

     4. No Satisfaction of Settlements and Judgements 

Local authorities cannot use the funds to fulfil a settlement agreement (I.e., if a city gets sued and has to pay out). An exception to this is if a settlement requires the recipient of funds to provide a service that does fall under an eligible use for SLFRF. Therefore, if a city is sued and has to pay out a million dollars, they cannot use SLFRF. However, if as a result of a settlement a city has to build new broadband for its constituents, then that project would be eligible for funding. 

      5. Undermining Covid-19 mitigation practices 

Lastly, the SLFRF cannot be used to enact policies contrary to official CDC recommendations and guidelines to mitigate the spread of Covid-19. For example, local governments are not allowed to use the funds to pay off fines that businesses may have incurred for violation of Covid-19 vaccination or safety policies, or to force local business to enact anti-masking rules as a condition of receiving the funds. 

As long as any state, local, or Tribal governments avoid these 5 SLFRF bans and comply with existing Federal regulations, they are free to be as creative as they want in using these funds.  Happy spending!