Why Managing Billions in Federal Aid for Small Towns Will be a Huge Lift

The shot clock to distribute more than $19 billion in American Rescue Plan Act funding to small towns and counties has started and states and municipal organizations are working to ensure these localities gets their share and understand the rules for spending the funds. 

But not every town wants the money.

“When I ask, it’s generally they just don’t have the infrastructure to support the reporting requirements required under the law,” said Emily Brock, director for the Government Finance Officers Association’s Federal Liaison Center. “Which is understandable. They don’t want to be in a position where they [spend it and then] have to give it back.”

Unprescendented Funding and Reporting

While many “entitlement” governments began receiving their ARPA funding directly from the U.S. Treasury Department last month, states are responsible for distributing funding to the more than 19,000 “non-entitlement units,” or NEUs, with populations smaller than 50,000. Most states didn’t receive that money until this month and are just now pushing it out to their small towns. 

“I’ve been here for 20 years and we’ve never seen anything like this before,” said Tom Reynolds, Maryland Municipal League’s director of education services. “This is a really important moment...and we don’t want anyone to be left out.”

But the unprecedented nature of the funding is a double-edged sword: Many small municipalities have never dealt with this level of federal funding. In some cases, the total funding equals 75% of a town’s annual operating budget. 

At least one municipality in Maryland has declined its distribution, according to Marc Nicole, deputy secretary at the Maryland Department of Budget and Management. Brock said she has also received emails from a few members who said they want to decline the money. 

The level of accounting required for how the money is spent is a big administrative lift for many places not used to dealing with federal funds. Small governments have to send annual reports to the federal government, with the first one due in October.

Nicole said the town in Maryland that declined funding has a population of 500. “A lot of towns that size only have one or two full-time staff,” he said. “They and the elected officials have to make a decision about whether they have the capacity to deal with that.”

What’s more, the federal Single Audit Act requires that any government spending $750,000 or more of federal awards in a year must commission and submit an external audit to verify it spent the money according to the statutory guidelines. Although the act has been around for nearly 40 years, it’s a new concept for communities that have never broken that threshold before, said Brock.

“It’s a cost-benefit question for some of these folks,” she said. “‘Have I had a sufficient loss of revenue where I can really use these proceeds, and do I have another $10,000 to spend on the audit?’” 

In California, the state municipal league’s executive director said she hasn’t yet heard of any town refusing the money but that the accounting requirements are “top of mind” for a lot of members. The League of California Cities and other state leagues are talking with the National League of Cities about creating tools to help smaller governments, including a revenue loss calculator and a grant tracking tool. 

“We’re having some good conversations about what reporting tools might look like that would mirror the guidance, be easy to access and not only give individual cities some important data about the use of dollars but also provide aggregate data from across the country,” said Carolyn Coleman, executive director of the California league.

Meanwhile, the detailed reporting that’s required of grant recipients is giving some states pause. About one-third of states have yet to certify to receive their NEU distribution in part because of lingering questions about who is ultimately responsible for making sure small government recipients know all the spending rules. 

“Treasury has sent out a lot of dispatches about this and finance officers for these smaller towns aren’t reading all of them,” Brock said. “So, they don’t know all the rules and the state kind of owns that a bit in the sense that they don’t want their towns to get in audit trouble.”

The NLC and other municipal associations are producing webinars and posting guidance on their websites about the ARPA requirements and other relevant information for their members.

Some states want more clarification on whether they have to return money to the federal government that is declined or whether they can redistribute that among the rest of their small government recipients.

As of the latest Treasury update, Arkansas, Hawaii, Illinois, Indiana, Iowa, Missouri, New Mexico, Oklahoma, Oregon, South Carolina, South Dakota, Tennessee, Texas, Utah and Vermont had not begun distributing money to their NEUs.

In other states, small governments that have submitted the necessary documentation can expect to receive their money sometime in July. States have 30 days to distribute the money once they receive their NEU allocation and only can apply for a 30-day extension. Many are likely to do that, given the amount of time it will take to contact all the NEUs and line up paperwork. That means most small governments can expect to receive their money by September.

Word of Caution

Although many local leaders are asking lots of questions about how they can spend the money, municipal organizations are cautioning them not to move too quickly -- just concentrate on getting the money first. Cities have until Dec. 31, 2024 to allocate the money and up to the end of 2026 to spend it and for all projects to be completed. 

“Take your time, be deliberate,” said Reynolds, noting that community feedback can also help officials determine where their greatest needs are. “There are elements in the ARPA that encourage partnerships and collaboration. Look to see where you can allocate to nonprofits that do work in the community or to [county] projects within your community.”