The Accounting Burden for Spending Federal Stimulus Funds

If you ask local government officials what challenges they face as they manage their communities out of the Covid-19 pandemic, the answer varies depending on what part of the country you are in, the size of the government, and on what drives the local economy.

But one concern is nearly universal: how to stay on top of the financial reporting requirements of the $350 billion from the American Rescue Plan Act flowing to localities and states. For smaller governments, it's the prospect of being subject to new accountability auditing that will be daunting for many jurisdictions. For larger governments, ARPA requires sophisticated performance and outcomes reporting that most don’t regularly do.

“This is not normal, traditional stuff,” said Stockton, California, city manager Harry Black. “In some of these expenditures, you’re not going to know what the return on investment is until way after the pandemic is over. … We’ll do our darndest to meet the requirements and do what we can -- but we’re going to be pragmatic about it.”

Recovery Plan Reporting

Last month, the U.S. Treasury Department issued a detailed guide to compliance and reporting for state and local governments spending recovery funds over the next five years. In addition to the annual and quarterly spending reports, governments with a population of 250,000 or more must submit annual performance reports. Governments have to explain their plans for their funds, what’s been spent so far, and how those expenditures support a “strong and equitable recovery from the COVID-19 pandemic and economic downturn.”

For example, if recovery funds are used to issue premium pay to public employees or local workers, the report should include the goals of the program, occupations served, and how the approach prioritized low-income workers.

Among other things, the guide requires governments to describe:

• Efforts to promote equitable outcomes.
• How they engaged the community to capture feedback.
• What performance indicators they used to measure outputs and outcomes. 

Some performance measures are required for certain expenses. For example, if a locality uses ARPA funds for an eviction protection program, it must report the number of people or households receiving services.

Looking beyond what money was spent to its impact and outcomes is a worthy goal. But it’s also a difficult task for governments, many of which don’t have the institutional expertise or IT systems in place to make that easily happen, said Justin Marlowe, a research professor at the University of Chicago’s Harris School of Public Policy. It’s akin to tax expenditure reporting, an optional assessment some governments do to track whether their tax giveaways to companies spurred the jobs and income growth expected.

One place on the leading edge in this area is Washington state, where Marlowe formerly served five years on the commission involved in the reporting. It was a “struggle,” he said, to definitively say whether certain investments directly led to jobs, or whether a large capital investment by a company was a result of preferential tax treatment.

“You can make rough estimates, you can make guesses,” he said. “But decades of experience in analyzing these issues tells us it’s very difficult to answer that relationship between expenses and outcomes. There’s nothing wrong with asking, but you do have to have an appreciation for how difficult it is to do.”

Single Audit Triggers

Smaller governments face a different challenge. Many are receiving a windfall of federal funds unlike anything they’ve ever dealt with—up to 75% of their annual budgets in many cases. Those that spend $750,000 or more of federal awards in any given year will be subject to the federal Single Audit Act, which requires they submit an external audit to verify they’ve spent the money according to the guidelines. Nonprofits, many of which are receiving ARPA dollars from their area governments, are subject to the act, too. 

It’s too early to tell how many entities will have to submit a single audit thanks to ARPA, but Mary Foelster, senior director for the Association of International Certified Professional Accountants, estimates “it will be in the thousands.” She said the auditing community is gearing up for a huge uptick in volume in the coming years. “We do worry a bit about workload compression,” she said. “There’s going to be a lot of these at the same time.”

Single audits are a specialized field and in rural areas, there’s a concern that there won’t be enough local auditors who have the experience. But during the height of the pandemic, remote audits became much more common, and Foelster noted that rural governments now have more options. “That’s going to allow for these towns and cities to search for an auditor who may not be within a 10-mile radius. That’s what our hope is.”

Single audits also don’t have to be a headache. For example, if a small government decides to spend all its ARPA money on upgrading its sewer and wastewater system—something many towns are considering—a single audit of one major expense can be straightforward. That was the case when Accident, Maryland, population 335, underwent a single audit last year after using federal grant money to upgrade its sewer system. Town Clerk Ruth Ann Hahn said all the accounting information for the project was uploaded to Intuit QuickBooks and then transferred electronically to the auditor.

Time is another mitigating factor. Because the ARPA reporting period is over several years but the single audit threshold applies to one year, some governments could avoid a single audit. For example, a locality receiving $2.5 million wouldn’t trigger a single audit if the money was spent evenly over four years. 

Enhanced Spending Transparency

During the Great Recession, tracking and reporting how federal stimulus dollars were spent was done in part through a website that essentially created an open checkbook of where the money went. Marlowe said while it increased accountability and public awareness, it also created a mountain of raw data. “In some ways,” he said, “it was almost less transparent because information was buried in all this detail.”

An increased focus on outcomes and auditing means that it’ll likely be easier to answer the all-important question of whether the pandemic federal stimulus worked as intended. Stakeholders such as municipal associations and civic technology organizations like the nonprofit U.S. Digital Response are looking at ways to support that work, and Marlowe said Treasury is even discussing offering a data input form to ease the process.

But ultimately the data collection and reporting burden will fall on state and local governments.