Beaumont City Council
October 17, 2023

Federal Register / Vol. 87, No. 18 / Thursday, January 27, 2022 / Rules and Regulations 4391
feasible. Where relevant, recipients
should compare the proposal against the
alternative of improving existing capital
assets already owned or leasing other
capital assets. Recipients should use
quantitative data when available,
although they are encouraged to
supplement with qualitative
information and narrative description.

Recipients that complete analyses with
minimal or no quantitative data should
provide an explanation for doing so.

In determining whether their
proposed capital expenditure is superior
to alternative capital expenditures,
recipients should consider the following
factors against each selected alternative.
a. A comparison of the effectiveness of
the capital expenditures in addressing
the harm identified. Recipients should
generally consider the effectiveness of
the capital expenditures in addressing
the harm over the useful life of the
capital asset and may consider metrics
such as the number of impacted or
disproportionately impacted individuals
or entities served, when such
individuals or entities are estimated to
be served, the relative time horizons of
the project, and consideration of any
uncertainties or risks involved with the
capital expenditure.
b. A comparison of the expected total
cost of the capital expenditures.

Recipients should consider the expected
total cost of the capital expenditure
required to construct, purchase, install,
or improve the capital assets intended to
address the public health or negative
economic impact of the public health
emergency. Recipients should include
pre -development costs in their
calculation and may choose to include
information on ongoing operational
costs, although this information is not
required.

Recipients should balance the
effectiveness and costs of the proposed
capital expenditure against alternatives
and demonstrate that their proposed
capital expenditure is superior. Further,
recipients should choose the most cost-
effective option unless it substantively
reduces the effectiveness of the capital
investment in addressing the harm
identified.

As an example, a recipient
considering building a new diagnostic
testing laboratory to enhance COVID-19
testing capacity may consider whether
existing laboratories sufficiently meet
demand for COVID-19 testing,
considering the demand for test results
(along with their turnaround time) as
well as the impact of current testing
availability on the spread of COVID-19.

Recipients may also consider other
public health impacts of the level of
diagnostic testing capacity, for example
if insufficient capacity has decreased
testing for other health conditions. The
recipient may consider alternatives such
as expanding existing laboratories or
building a laboratory of a different size.

In comparing the effectiveness of the
capital expenditures, examples of
factors that the recipient may consider
include when the facilities will become
operational and for how long; the daily
throughput of COVID-19 tests; and the
effect on minimizing delays in test
results on the populations that such
tests will serve. In comparing costs, the
recipient may compare the total
expected cost of the new laboratory
(including costs of acquisition of real
property, construction of the laboratory,
and purchase of any necessary
equipment needed to operationalize the
lab), against the expected costs of
expanding existing laboratories
(whether by replacing current
equipment with higher throughout
devices or physically expanding space
to accommodate additional capacity) or
building a new laboratory of a different
size, including by leasing property. As
a reminder, recipients should only
consider alternatives that are potentially
effective and reasonably feasible.

Because, in all cases, uses of SLFRF
funds to respond to public health and
negative economic impacts of the
pandemic must be related and
reasonably proportional to a harm
caused or exacerbated by the pandemic,
some capital expenditures may not
eligible. For example, constructing a
new correctional facility would
generally not be a proportional response
to an increase in the rate of certain
crimes or overall crime as most
correctional facilities have historically
accommodated fluctuations in
occupancy.251 In addition, construction
of new congregate facilities, which
would generally be expected to involve
expenditures greater than $1 million,
would generally not be a proportional
response to mitigate or prevent COVID-
19, because such construction is
generally expected to be more costly
than alternative approaches or capital
expenditures that may be equally or
more effective in decreasing spread of
231 See, e.g., "Economic Perspectives on
Incarceration and the Criminal Justice System,"
Council of Economic Advisers (April 2016), pg. 36-

43. the disease.252 These alternatives
include personal protective equipment,
ventilation improvements, utilizing
excess capacity in other facilities or
wings, or temporary facility capacity
expansions.

Large capital expenditures intended
for general economic development or to
aid the travel, tourism, and hospitality
industries —such as convention centers
and stadiums —are, on balance,
generally not reasonably proportional to
addressing the negative economic
impacts of the pandemic, as the efficacy
of a large capital expenditure intended
for general economic development in
remedying pandemic harms may be very
limited compared to its cost.253
Presumptions on Capital Expenditures
For administrative convenience, the
final rule provides presumptions on
whether a Written Justification is
required —and required to be submitted
to Treasury through reporting —based on
the type and size of the capital
expenditure, as detailed in the table
below.

As discussed above, Tribal
governments are not required to
complete the Written Justification for
applicable capital expenditures, but the
associated substantive requirements
continue to apply, including the
requirement that a capital expenditure
must be reasonably designed to benefit
the individual or class that experienced
the identified impact or harm and must
be related and reasonably proportional
to the extent and type of impact or
harm.
252 For instance, the CDC has published detailed
recommendations for nursing homes, long-term care
facilities, and correctional and detention facilities,
on infection prevention and control. Many of these
recommendations are relatively low cost, such as
proper use of PPE. In addition, increasing
vaccination rates among nursing home staff is
among the most important ways to decrease the
spread of the disease. Centers for Disease Control
and Prevention, Interim Infection Prevention and
Control Recommendations to Prevent SARS—CoV-
2 Spread in Nursing Homes (September 10, 2021),
https://www.cdc.gov/coronavirus/2019-ncov/hcp/
l ong-term-care. h tml # an ch or -1631030153 017.
233 For instance, researchers have found no
consistent positive relationship between building
sports facilities and local economic development.

As Siegfried and Zimbalist (2000, 103) write in a
review of the literature, "independent work on the
economic impact of stadiums and arenas has
uniformly found that there is no statistically
significant positive correlation between sports
facility construction and economic development."
John Siegfried and Andrew Zimbalist, The
Economics of Sports Facilities and Their
Communities, Journal of Economic Perspectives 14,
no. 3 (Summer 2000): 95-114, https://
www.aeaweb.org/artieles?id=10.1257/jep.14.3.95 .

4392 Federal Register / Vol. 87, No. 18 /Thursday, January 27, 2022 /Rules and Regulations If a project has total expected cap-
ital expenditures of
and the use is enumerated by Treasury as eligible,
then 254
and the use is beyond those enumerated by Treas-
ury as eligible, then 255
Less than $1 million
Greater than or equal to $1 million,
but less than $10 million.
$10 million or more
No Written Justification required
Written Justification required but recipients are not
required to submit as part of regular reporting to
Treasury.

Written Justification required and recipients must
submit as part of regular reporting to Treasury.

No Written Justification required.

Written Justification required and recipients must
submit as part of regular reporting to Treasury.

In selecting these thresholds, Treasury
recognized that capital expenditures
vary widely in size and therefore would
benefit from tiered treatment to
implement eligibility standards while
minimizing administrative burden,
especially for smaller projects. For
example, Treasury selected $1 million
as a threshold for whether a recipient
needs to complete a Written
Justification as well as a threshold
under which capital expenditures
would be presumed reasonably
proportional. Treasury estimates that $1
million would encapsulate the costs of
a significant portion of equipment or
small renovations. These types of
smaller projects are often a necessary
and reasonably proportional part of a
response to the public health
emergency; therefore, the $1 million
threshold provides a simplified pathway
to complete smaller projects more likely
to meet the eligibility standard. At the
same time, Treasury selected $10
million as the threshold for more
intensive reporting requirements,
estimating that projects larger than $10
million would likely constitute
significant improvements or
construction of mid- or large -sized
facilities. As discussed above, given
their scale and longer time to
completion, these types of larger
254 Whether or not a Written Justification is
required, recipients should still determine that the
response is related and reasonably proportional to
the public health emergency and its negative
economic impacts. Treasury recognizes that
enumerated eligible uses are "related" to the public
health emergency and its negative economic
impacts and presumed to be reasonably
proportional, except recipients pursuing projects
with expected total capital expenditures equal to or
greater than $1 million should still independently
determine that the expenditures are a reasonably
proportional response. Enumerated projects with
total expected capital expenditures under $1
million receive a safe harbor and deemed to meet
the related and reasonably proportional standard.
255 Whether or not a Written Justification is
required, recipients should still determine that the
response is related and reasonably proportional to
the public health emergency and its negative
economic impacts. Treasury presumes that projects
with total expected capital expenditures under $1
million are reasonably proportional in size to
responding to the public health emergency and its
negative economic impacts; however, recipients
should determine that the response otherwise meets
the requirements of the standard, including that the
response is related to the public health emergency
and its negative economic impacts.
projects may be less likely to be
reasonably proportional responses. The
$10 million threshold also generally
aligns with thresholds in other parts of
the SLFRF program, such as for
enhanced reporting on labor practices.

Expenditures from closely related
activities directed toward a common
purpose are considered part of the scope
of one project. These expenditures can
include capital expenditures, as well as
expenditures on related programs,
services, or other interventions. A
project includes expenditures that are
interdependent (e.g., acquisition of land,
construction of the school on the land,
and purchase of school equipment), or
are of the same or similar type and
would be utilized for a common
purpose (e.g., acquisition of a fleet of
ambulances that would be used for
COVID-19 emergency response).

Recipients must not segment a larger
project into smaller projects in order to
evade review. A recipient undertaking a
set of identical or similar projects (e.g.,
development of a number of new
affordable housing complexes across the
recipient jurisdiction) may complete
one Written Justification
comprehensively addressing the entire
set of projects.

Projects Enumerated as Eligible by
Treasury
Under the public health and negative
economic impacts eligible use category,
the final rule provides a non-exclusive
list of eligible uses of funding for
projects that respond to the public
health emergency or its negative
economic impacts. Treasury has
determined that these enumerated
projects are related to the public health
emergency and its negative economic
impacts; however, recipients (other than
Tribal governments) undertaking these
projects with total expected capital
expenditures of $1 million or greater
must still complete and meet the
substantive requirements of a Written
Justification as part of their
demonstration that the project is a
related and reasonably proportional
response to the harm identified.
• Projects with total expected capital
expenditures of under $1 million:

Treasury provides a safe harbor for
projects with total expected capital
expenditures of less than $1 million and
will not require recipients to complete,
submit, or meet the substantive
requirements of a Written Justification
for the capital expenditure. In essence,
recipients may pursue an enumerated
project with total expected capital
expenditures of under $1 million
without having to undergo additional
assessments to meet SLFRF
requirements.
• Projects with total expected capital
expenditures of at least $1 million but
under $10 million: Recipients should
complete a Written Justification for the
capital expenditure and make an
independent assessment of whether
their proposed capital expenditure
meets the substantive requirements of
the Written Justification. Recipients will
not be required to submit the Written
Justification as part of regular reporting
to Treasury but should keep
documentation for their records.
• Projects with total expected capital
expenditures of at least $10 million:

Similar to the above, recipients should
complete a Written Justification of the
capital expenditure and make an
independent assessment of whether
their proposed capital expenditure
meets the substantive requirements of
the Written Justification. Further,
recipients will be asked to submit the
Written Justification as part of regular
reporting to Treasury. Similar to other
parts of the SLFRF program, such as on
reporting on labor practices, Treasury
recognizes that projects with expected
total capital expenditures of at least $10
million may be less likely to meet
eligibility requirements and therefore
requires recipients to provide an
enhanced level of information to
Treasury.

Projects Beyond Those Enumerated as
Eligible by Treasury
As with all uses, recipients that
undertake capital expenditures beyond
those enumerated as eligible by
Treasury must meet the two-part
framework under Standards:

Designating a Public Health Impact and
Standards: Designating a Negative
Economic Impact under General
Provisions: Structure and Standards,

Federal Register / Vol. 87, No. 18 / Thursday, January 27, 2022 / Rules and Regulations 4393
including the requirement that
responses are related and reasonably
proportional to the harm or impact
identified. As part of that assessment,
these recipients may also be asked to
complete a Written Justification.

Recipients (other than Tribal
governments) are subject to the
following presumptions for the Written
Justification of the capital expenditure,
based on the total expected capital
expenditures of the project:
• Projects with total expected capital
expenditures of under $1 million:

Treasury provides a safe harbor for
unenumerated projects with total
expected capital expenditures of under
$1 million and will not require
recipients to complete, submit, or meet
the substantive requirements of a
Written Justification of the capital
expenditure. Recipients should still
make a determination as to whether the
capital expenditure is part of a response
that is related and reasonably
proportional to the public health
emergency or its negative economic
impacts.
• Projects with total expected capital
expenditures of $1 million or over:

Recipients should complete a Written
Justification of the capital expenditure
and make an independent assessment
that their proposed capital expenditure
meets the substantive requirements of
the Written Justification. Further,
recipients will be asked to submit the
Written Justification as part of regular
reporting to Treasury.

Treasury employs a risk -based
approach to overall program
management and monitoring, which
may result in heightened scrutiny on
larger projects. Accordingly, recipients
pursuing projects with larger capital
expenditures should complete more
detailed analyses for their Written
Justification, commensurate with the
scale of the project.

Additional Provisions, Standards, and
Definitions
Strong Labor Standards in Construction
Treasury encourages recipients to
carry out projects in ways that produce
high -quality work, avert disruptive and
costly delays, and promote efficiency.

Treasury encourages recipients to use
strong labor standards, including project
labor agreements (PLAs) and
community benefits agreements that
offer wages at or above the prevailing
rate and include local hire provisions.

Treasury also recommends that
recipients prioritize in their
procurement decisions employers who
can demonstrate that their workforce
meets high safety and training standards
(e.g., professional certification,
licensure, and/or robust in-house
training), that hire local workers and/or
workers from historically underserved
communities, and who directly employ
their workforce or have policies and
practices in place to ensure contractors
and subcontractors meet high labor
standards. Treasury further encourages
recipients to prioritize employers
(including contractors and
subcontractors) without recent
violations of federal and state labor and
employment laws.

Treasury believes that such practices
will promote effective and efficient
delivery of high -quality projects and
support the economic recovery through
strong employment opportunities for
workers. Such practices will reduce
likelihood of potential project
challenges like work stoppages or safety
accidents, while ensuring a reliable
supply of skilled labor and minimizing
disruptions, such as those associated
with labor disputes or workplace
injuries. That will, in turn, promote on -
time and on -budget delivery.

Furthermore, among other
requirements contained in 2 CFR 200,
Appendix II, all contracts made by a
recipient or subrecipient in excess of
$100,000 with respect to a capital
expenditure that involve employment of
mechanics or laborers must include a
provision for compliance with certain
provisions of the Contract Work Hours
and Safety Standards Act, 40 U.S.C.
3702 and 3704, as supplemented by
Department of Labor regulations (29
CFR part 5).

Treasury will seek information from
recipients on their workforce plans and
practices related to capital expenditures
undertaken under the public health and
negative economic impacts eligible use
category with SLFRF funds. This
reporting will support transparency and
competition by enhancing available
information on the services being
provided.

Environmental, Uniform Guidance, and
Other Generally Applicable
Requirements
Treasury cautions that, as is the case
with all projects using SLFRF funds, all
projects must comply with applicable
federal, state, and local law. In the case
of capital expenditures in particular,
this includes environmental and
permitting laws and regulations.

Likewise, as with all capital expenditure
projects using the SLFRF funds, projects
must be completed in a manner that is
technically sound, meaning that it must
meet design and construction methods
and use materials that are approved,
codified, recognized, fall under standard
or acceptable levels of practice, or
otherwise are determined to be
generally acceptable by the design and
construction industry.

Further, as with all other uses of
funds under the SLFRF program, the
Uniform Guidance at 2 CFR part 200
applies to capital expenditures unless
stated otherwise. Importantly, this
includes 2 CFR part 200 Subpart D on
post -federal award requirements,
including property standards pertaining
to insurance coverage, real property,
and equipment; procurement standards;
sub -recipient monitoring and
management; and record retention and
access.

Definitions
Treasury adopts several definitions
from the Uniform Guidance at 2 CFR
200.1 under this section, including for
capital expenditures, capital assets,
equipment, and supplies.

Per the Uniform Guidance, the term
"capital expenditures" means
"expenditures to acquire capital assets
or expenditures to make additions,
improvements, modifications,
replacements, rearrangements,
reinstallations, renovations, or
alterations to capital assets that
materially increase their value or useful
life." The term "capital assets" means
"tangible or intangible assets used in
operations having a useful life of more
than one year which are capitalized in
accordance with [Generally Accepted
Accounting Principles]."
Capital assets include lands, facilities,
equipment, and intellectual property.

Equipment means "tangible personal
property (including information
technology systems) having a useful life
of more than one year and a per -unit
acquisition cost which equals or
exceeds the lesser of the capitalization
level established by the non -Federal
entity for financial statement purposes,
or $5,000." Supplies, which means all
tangible personal property other than
those included as "equipment," are not
considered capital expenditures.

Recipients may also use SLFRF funds
for pre -project development costs that
are tied to or reasonably expected to
lead to an eligible capital expenditure.

For example, pre -project costs
associated with planning and
engineering for an eligible project are
considered an eligible use of funds.
c. Distinguishing Subrecipients Versus
Beneficiaries
Under the interim final rule, state,
local, and Tribal governments that
receive a federal award directly from a
federal awarding agency, such as
Treasury, are designated as "recipients,"

4394 Federal Register / Vol. 87, No. 18 / Thursday, January 27, 2022 /Rules and Regulations and state, local, and Tribal governments
are authorized to transfer funds to other
entities, including private entities like
nonprofits. The interim final rule stated
that, "[a] transferee receiving a transfer
from a recipient under sections 602(c)(3)
and 603(c)(3) will be a subrecipient.

Subrecipients are entities that receive a
subaward from a recipient to carry out
a program or project on behalf of the
recipient with the recipient's Federal
award funding."
For funds transferred to a
subrecipient, the interim final rule
noted that "[r]ecipients continue to be
responsible for monitoring and
overseeing the subrecipient's use of
SLFRF funds and other activities related
to the award to ensure that the
subrecipient complies with the statutory
and regulatory requirements and the
terms and conditions of the award.

Recipients also remain responsible for
reporting to Treasury on their
subrecipients' use of payments from the
SLFRF funds for the duration of the
award."
Public Comment: Treasury received
many comments requesting clarification
about which entities qualify as
subrecipients and are, in turn, subject to
subrecipient monitoring and reporting
requirements. For example, commenters
sought clarification about whether a
nonprofit that received a grant to
provide services under a program to
carry out an enumerated eligible use
would qualify as a subrecipient and be
subject to subrecipient monitoring and
reporting requirements. Similarly,
commenters also wondered if a
nonprofit that received a grant in
recognition of experiencing a negative
economic impact of the public health
emergency would also be a subrecipient
and subject to subrecipient reporting
requirements.

Treasury Response: Treasury is
clarifying the distinction between a
subrecipient and beneficiary in the final
rule. The Uniform Guidance definitions
for subaward and subrecipient inform
Treasury's distinction between
subrecipients and beneficiaries.

First, per 2 CFR 200.1 of Uniform
Guidance "[s]ubaward means an award
provided by a pass -through entity 256 to
a subrecipient for the subrecipient to
carry out part of a Federal award
received by the pass -through entity. It
does not include payments to a
contractor or payments to an individual
that is a beneficiary of a Federal
program. A subaward may be provided
through any form of legal agreement,
ass In this context, a pass -through entity means a
recipient of SLFRF funds.
including an agreement that the pass -
through entity considers a contract."
Further, 2 CFR 200.1 of the Uniform
Guidance defines a subrecipient, in that
"[s]ubrecipient means an entity, usually
but not limited to non -Federal entities,
that receives a subaward from a pass -
through entity to carry out part of a
Federal award; but does not include an
individual that is a beneficiary of such
award. A subrecipient may also be a
recipient of other Federal awards
directly from a Federal awarding
agency." Treasury is aligning the
definition of subrecipient in the final
rule with the definition of subrecipient
in the Uniform Guidance.

Treasury is maintaining the
monitoring and subrecipient reporting
requirements outlined in the final rule.

Per 2 CFR 200.101 (b)(2) of the Uniform
Guidance, the terms and conditions of
federal awards flow down to subawards
to subrecipients. Therefore, non-federal
entities, as defined in the Uniform
Guidance, must comply with the
applicable requirements in the Uniform
Guidance regardless of whether the non-
federal entity is a recipient or
subrecipient of a federal award. This
includes requirements such as the
treatment of eligible uses of funds,
procurement, and reporting
requirements.

The Uniform Guidance definitions for
both subaward and subrecipient specify
that payments to individuals or entities
that are direct beneficiaries of a federal
award are not considered subrecipients.

The final rule adopts this definition of
a beneficiary and outlines that
households, communities, small
businesses, nonprofits, and impacted
industries are all potential beneficiaries
of projects carried out with SLFRF
funds. Beneficiaries are not subject to
the requirements placed on
subrecipients in the Uniform Guidance,
including audit pursuant to the Single
Audit Act and 2 CFR part 200, subpart
F or subrecipient reporting
requirements.

The distinction between a
subrecipient and a beneficiary,
therefore, is contingent upon the
rationale for why a recipient is
providing funds to the individual or
entity. If the recipient is providing
funds to the individual or entity for the
purpose of carrying out a SLFRF
program or project on behalf of the
recipient, the individual or entity is
acting as a subrecipient. Acting as a
subrecipient, the individual or entity is
subject to subrecipient monitoring and
reporting requirements. Conversely, if
the recipient is providing funds to the
individual or entity for the purpose of
directly benefitting the individual or
entity as a result of experiencing a
public health impact or negative
economic impact of the pandemic, the
individual or entity is acting as a
beneficiary. Acting as a beneficiary, the
individual or entity is not subject to
subrecipient monitoring and reporting
requirements.
d. Uses Outside the Scope of This
Category
Summary of the Interim Final Rule and
Final Rule Structure
In the interim final rule, Treasury
noted that certain uses of funds are not
permissible under the eligible use
category of responding to the public
health and negative economic impacts
of the pandemic. In the final rule, these
uses remain impermissible, but
Treasury has re -categorized where they
are addressed to increase clarity.

Specifically, the interim final rule
provided that the following uses of
funds are not eligible under this eligible
use category: Contributions to rainy day
funds, financial reserves, or similar
funds; payment of interest or principal
on outstanding debt instruments; fees or
issuance costs associated with the
issuance of new debt; and satisfaction of
any obligation arising under or pursuant
to a settlement agreement, judgment,
consent decree, or judicially confirmed
debt restructuring plan in a judicial,
administrative, or regulatory
proceeding, except to the extent the
judgment or settlement requires the
provision of services that would
respond to the COVID-19 public health
emergency. These uses of funds remain
ineligible under the final rule; Treasury
has re -categorized these issues to the
section Restrictions on Use, which
describes restrictions that apply to all
eligible use categories, to clarify that
these uses are not eligible under any
eligible use category of SLFRF. Treasury
responds to public comments on this
issue in the section Restrictions on Use.

As noted above, the interim final rule
also posed several questions on what
other types of services or costs Treasury
should consider as eligible uses to
respond to the public health and
negative economic impacts of COVID-
19, including in disproportionately
impacted communities. In this section,
Treasury addresses proposed uses of
funds suggested by commenters that
Treasury has not included as
enumerated eligible uses of funds in this
eligible use category.

General Eligible Uses
Public Comment: Commenters
proposed a wide variety of additional
recommended enumerated eligible uses

Federal Register / Vol. 87, No. 18 / Thursday, January 27, 2022 /Rules and Regulations 4395 in all sections of the public health and
negative economic impacts eligible use
category, including in impacted and
disproportionately impacted
communities. The proposed additional
uses included general categories of
services (e.g., legal and social services,
long-term investments to remediate
long-term disparities, response to
natural disasters). Other suggested uses
of funds respond to needs widely
experienced across the country (e.g.,
access to and affordability of health
insurance). Finally, other suggested uses
of funds were highly specific (e.g.,
healthcare equipment for a specific
health condition, fire hydrants, weather
alert systems) or most applicable to the
particularized needs to certain
populations or geographic areas of the
United States (e.g., senior citizens,
immigrants, formerly incarcerated
individuals, responding to
environmental issues in certain
geographic regions). Other commenters
generally requested a high degree of
flexibility to respond to the particular
needs of their communities.

Treasury Response: Given the large
number and diversity of SLFRF
recipients, Treasury has aimed to
include as enumerated eligible uses
programs, services, and capital
expenditures that respond to public
health and negative economic impacts
of the pandemic experienced widely in
many jurisdictions across the country,
making it clear and simple for recipients
to pursue these enumerated eligible uses
under the final rule. This provides
enumerated eligible uses that many
recipients may want to pursue, while
including uses that are responsive to the
pandemic's impacts across the diverse
range of SLFRF recipients. In the final
rule, Treasury has clarified several
additional uses that generally respond
to pandemic impacts experienced
broadly across jurisdictions and
populations.

Treasury has not chosen to include as
enumerated uses all uses proposed by
commenters; given the significant range,
and in some cases highly specific
nature, of the proposed uses Treasury
was not able to assess that the proposed
uses would respond to negative
economic impacts experienced
generally across the country, supporting
an enumerated eligible use available to
all recipients presumptively.

However, Treasury emphasizes that
the enumerated eligible uses are non -
exhaustive and that other uses, beyond
those enumerated, are eligible. Treasury
recognizes that the impacts of the
pandemic vary over time, by
jurisdiction, and by population; as such,
the final rule provides flexibility for
recipients to identify other public health
or negative economic impacts to
additional households, small
businesses, or nonprofits, including
classes of these entities, and pursue
programs and services that respond to
those impacts. Treasury also notes that
some populations are presumed to be
impacted or disproportionately
impacted by the pandemic, and thus
eligible for responsive services; these
presumed eligible populations may
encompass many individuals in the
specific populations for whom
commenters recommended services. For
details on these issues, see section
General Provisions: Structure and
Standards.

Infrastructure, Community
Development, and General Economic
Development
Some potential additions to
enumerated eligible uses were also
recommended by several commenters
each but are not included as enumerated
eligible uses in the final rule.

Public Comment: Infrastructure: In
the interim final rule, Treasury noted
that a "general infrastructure project, for
example, typically would not be
included [in this eligible use category]
unless the project responded to a
specific pandemic public health need."
Numerous commenters requested that
Treasury permit investments in
infrastructure as a response to the
public health and negative economic
impacts of the pandemic. While these
comments most commonly
recommended that constructing and
maintaining roads and surface
transportation infrastructure be eligible,
the proposed uses for infrastructure
ranged widely and included parking
lots, bridges, traffic management
infrastructure, solid waste disposal
facilities, and utility infrastructure
(outside of water, sewer, and
broadband).

Many commenters argued that
infrastructure development and
maintenance is a pressing need in their
communities and that their
communities had less need for water,
sewer, and broadband infrastructure or
other eligible uses to respond to the
public health and negative economic
impacts of the pandemic. Other
commenters argued that these uses
would stimulate the economy, attract
businesses, or allow for tourist
movement; these commenters argued
that, by generally supporting a stronger
economy or facilitating conditions that
are more conducive to business activity
and tourism, these uses respond to the
negative economic impacts of the
pandemic.

Treasury Response: In the final rule,
Treasury is maintaining the approach
under the interim final rule that general
infrastructure projects, including roads,
streets, and surface transportation
infrastructure, would generally not be
eligible, unless the project responded to
a specific pandemic public health need
or a specific negative economic impact.

The ARPA expressly includes
infrastructure if it is "necessary" and in
water, sewer, or broadband, suggesting
that the statute contemplates only those
types of infrastructure. Further,
responding to the public health and
negative economic impacts of the
pandemic requires identifying whether,
and the extent to which, there has been
a harm that resulted from the COVID-
19 public health emergency and
whether, and the extent to which, the
use would respond or address this
harm. Uses of funds intended to
generally grow the economy and
therefore enhance opportunities for
workers and businesses would not be an
eligible use, because such assistance is
not reasonably designed to impact
individuals or classes that have been
identified as having experienced a
negative economic impact. In other
words, there is not a reasonable
connection between the assistance
provided and an impact on the
beneficiaries. Such an activity would be
attenuated from and thus not reasonably
designed to benefit the households that
experienced the negative economic
impact.

Note, however, that Treasury has
clarified that capital expenditures that
are related and reasonably proportional
to responding to the public health and
economic impacts of the pandemic are
eligible uses of funds, in addition to
programs and services; for details on
eligibility criteria for capital
expenditures, see section Capital
Expenditures in General Provisions:

Other.

Public Comment: Community
Development Block Grant: Several
commenters recommended that
Treasury enumerate as eligible uses
those eligible under the Department of
Housing and Urban Development's
Community Development Block Grant
(CDBG) or the Housing and Community
Development Act of 1974, which
established the CDBG program.

Commenters requested that these uses
be eligible either to respond to the
negative economic impacts of the
pandemic, or in the alternate the
disproportionate negative economic
impacts of the pandemic in certain
communities. Under the CDBG program,
recipient governments may undertake a
wide range of community and economic

4396 Federal Register / Vol. 87, No. 18 / Thursday, January 27, 2022 /Rules and Regulations development services and projects.

Commenters reasoned that many state
and local governments are familiar with
this program, and that aligning to its
eligible uses may help recipients easily
understand and pursue eligible projects.

Commenters also noted that Treasury
had chosen to align with existing federal
programs in other eligible use
categories, namely water infrastructure,
in the interim final rule.

Treasury Response: In the final rule,
Treasury is not including all categories
of projects permissible under CDBG as
enumerated eligible uses to respond to
the public health and negative economic
impacts of the pandemic. Because CDBG
permits such a broad range of activities,
including services to individual
households, communities, small
businesses, general economic
development activities, and capital
expenditures, Treasury determined that
it was more appropriate to assess the
underlying types of projects eligible
within CDBG and whether each type of
project responds to the negative
economic impacts of the pandemic. In
other words, Treasury considered
whether various types of community
and economic development projects
respond to the impacts of the pandemic
in different communities and
circumstances. In the final rule,
Treasury addresses the eligibility of
these various types of projects in each
relevant eligible use category within
public health and negative economic
impacts under SLFRF, including
assistance for impacted households,
disproportionately impacted
households, disproportionately
impacted small businesses, and capital
expenditures.

Public Comment: General Economic
Development: Treasury provided
guidance following the interim final
rule that general economic development
or workforce development would
generally not be eligible as it does not
respond to a negative economic impact
of the COVID-19 public health
emergency.

Some commenters recommended that
Treasury expand enumerated eligible
uses to include general economic
development activities, beyond those
that respond to negative economic
impacts of the pandemic, such as
creating an economic development
strategy for the jurisdiction's overall
economic growth, creating a general
workforce development strategy, or
providing funds to businesses that did
not experience negative economic
impacts to carry out economic
development activities or to incentivize
the addition or retention of jobs.

Commenters supportive of assistance to
businesses for general economic
development activities argued that
subsidies to businesses increase job
growth and that, in some cases,
assistance to companies that excelled
during the public health emergency
would help create more job
opportunities for workers or expand the
jurisdiction's tax base and produce
funds to support government services.

In contrast, other commenters argued
that academic research consistently
finds that economic development
subsidies have a negligible, or even
negative, economic effect, citing
research findings to this effect.257
Treasury Response: In the final rule,
Treasury maintains the interim final
rule's approach that general economic
development or workforce development,
meaning activities that do not respond
to negative economic impacts of the
pandemic and rather seek to more
generally enhance the jurisdiction's
business climate, would generally not
be eligible under this eligible use
category. As noted above, to identify an
eligible use of funds under this category,
a recipient must identify a beneficiary
or class of beneficiaries that experienced
a harm or impact due to the pandemic,
and eligible uses of funds must be
257 See, e.g., Matthew D. Mitchell et al., The
Economics of a Targeted Economic Development
Subsidy (Arlington, VA: Mercatus Center at George
Mason University, 2019), 5, available at https://
w w w. m erc a t u s. org/publications /go vern m en t- spending/econ omics-targeted-econ omic-
development-subsidy, Timothy J. Bartik, Who
Benefits from Economic Development Incentives?
How Incentive Effects on Local Incomes and the
Income Distribution Vary with Different
Assumptions about Incentive Policy and the Local
Economy (Upjohn Institute Technical Report No.
13-034, W.E. Upjohn Institute for Employment
Research, March 1, 2018), available at: https://
research.upjohn.org/up_technicalreports/34/; Cailin
Slattery and Owen Zidar, Evaluating State and
Local Business Tax Incentives, Journal of Economic
Perspectives 34, no. 2 (2020): 90-118, available at:
https://www.aeaweb.org/articles7id=10.1257/
jep.34.2.90; Kenneth Thomas, The State of State and
Local Subsidies to Business (Mercatus Policy Brief,
Mercatus Center at George Mason University,
Arlington, VA, October 2019), available at: https://
www.mercatus.org/system/files/thomas_-_policy_
brief-_the_state_of state_and_local_subsidies_to_
business_-_v1.pdf• Dennis Coates, Growth Effects of
Sports Franchises, Stadiums, and Arenas: 15 Years
Later (Mercatus Working Paper, Mercatus Center at
George Mason University, Arlington, VA,
September 2015), available at: https://
www.mercatus.org/system/files/Coates-Sports-
Franchises.pdf; Dennis Coates and Brad R.

Humphreys, Do Economists Reach a Conclusion on
Subsidies for Sports Franchises, Stadiums, and
Mega -Events?, Econ Journal Watch 5, no. 3 (2008):
294-315, available at: https://econjwatch.org/
articles/do-economists-reach-a-conclusion-on-
subsidies for-sportsfranchises-stadiums-and-mega-
events; Matthew D. Mitchell, Daniel Sutter, and
Scott Eastman, The Political Economy of Targeted
Economic Development Incentives, Review of
Regional Studies 48, no. 1 (2018): 1-9, available at:
h ttps: //www. m erca to s.org/publications/corpora te- wel fare/political-economy-targeted-economic-
d e vel o pm en t-i n cen ti ves.
reasonably designed to respond to the
harm, benefit the beneficiaries that
experienced it, and be related and
reasonably proportional to that harm or
impact.

As noted above, recipients should
analyze eligible uses based on the
beneficiary of the assistance, and
recipients may not provide assistance to
small businesses or impacted industries
that did not experience a negative
economic impact. Provision of
assistance to a business that did not
experience a negative economic impact,
under the theory that such assistance
would generally grow the economy and
therefore enhance opportunities for
workers, would not be an eligible use,
because such assistance is not
reasonably designed to impact
individuals or classes that have been
identified as having experienced a
negative economic impact. In other
words, there is not a reasonable
connection between the assistance
provided and an impact on the
beneficiaries. Such an activity would be
attenuated from and thus not reasonably
designed to benefit the households that
experienced the negative economic
impact. Research cited by some
commenters finding that business
subsidies have limited or negative
economic impact also suggests that such
a response may not be reasonably
designed to benefit households and
other entities impacted by the
pandemic. Similarly, planning activities
for an economic development or
workforce strategy regarding general
future economic growth do not provide
a program, service, or capital
expenditure that responds to negative
economic impacts of the pandemic.

However, Treasury notes that the final
rule includes as enumerated eligible
uses many types of assistance that
respond to negative economic impacts
of the pandemic and may produce
economic development benefits. For
example, see sections Assistance to
Unemployed Workers, Assistance to
Small Businesses, and Capital
Expenditures.

B. Premium Pay
Background and Summary of the
Interim Final Rule
Sections 602(c)(1)(B) and 603(c)(1)(B)
of the Social Security Act, as added by
the ARPA, provide that SLFRF funds
may be used "to respond to workers
performing essential work during the
COVID-19 public health emergency by
providing premium pay to eligible
workers of the . . . government that are
performing such essential work, or by
providing grants to eligible employers

Federal Register / Vol. 87, No. 18 / Thursday, January 27, 2022 / Rules and Regulations 4397 that have eligible workers who perform
essential work."
Premium pay is designed to
compensate workers that, by virtue of
their employment, were forced to take
on additional burdens and make great
personal sacrifices as a result of the
COVID-19 pandemic. Premium pay can
be thought of as hazard pay by another
name.258
During the public health emergency,
employers' policies on COVID-19-
related premium pay or hazard pay have
varied widely, with many essential
workers not yet compensated for the
heightened risks they have faced and
continue to face.259 Many of these
workers earn lower wages on average
and live in socioeconomically
underserved communities as compared
to the general population.260 A recent
study found that 25 percent of essential
workers were estimated to have low
household income, with 13 percent in
high -risk households.261 The low pay of
many essential workers makes them less
able to cope with the financial
consequences of the pandemic or their
work -related health risks. As Americans
return to work and governments relax
certain rules, essential workers will
continue to bear the brunt of the risk of
maintaining the ongoing operation of
vital facilities and services. The added
health risk to essential workers is one
prominent way in which the pandemic
has amplified pre-existing
socioeconomic inequities. Premium pay
is designed to address the disparity
between the critical services provided
by and the risks taken by essential
workers and the relatively low
compensation they tend to receive.

The interim final rule established a
three-part framework for recipients
seeking to use SLFRF funds for
premium pay. First, to receive premium
pay one must be an eligible worker.

Second, an eligible worker must also
perform essential work. Finally,
premium pay must respond to workers
performing essential work during the
COVID-19 public health emergency.

Most of the comments received by
Treasury pertaining to premium pay
related to these three requirements.

Comments also addressed the definition
of premium pay generally and posed
256 See U.S. Department of Labor, Hazard Pay,
https://www.dol.gov/general/topic/wages/
hazardpay (last visited October 18, 2021).
259Economic Policy Institute, Only 30% of those
working outside their home are receiving hazard
pay (June 16, 2020), https://www.epi.org/press/only-
30-of-those-working-outside-their-home-are-
receiving-hazard-pay-black-and-hispanic-workers-
are-most-concerned-about-bringing-the-
coronavirus-home/.
269 McCormack, supra note 65.
2611d.
questions regarding premium pay
program structuring. This section
responds to the comments by addressing
the three requirements in turn, then the
overall definition of premium pay and,
finally, program structure.

Eligible Workers
The ARPA defines "eligible workers"
as "those workers needed to maintain
continuity of operations of essential
critical infrastructure sectors and
additional sectors as each . . .
[government] may designate as critical
to protect the health and wellbeing of
[its] residents." The interim final rule
supplemented this definition by
identifying a list of "essential critical
infrastructure sectors" whose workers
are eligible workers, based on the list of
sectors in the HEROES Act, a bill
introduced in the House of
Representatives in 2020 that would have
provided premium pay to essential
workers.262 In addition to the critical
infrastructure sectors defined in the
interim final rule, the chief executive (or
equivalent) of a recipient government
may designate additional non-public 263
sectors as critical so long as doing so is
necessary to protecting the health and
wellbeing of the residents of such
jurisdiction.

Public Comment: Treasury received
multiple comments on the definition of
"eligible worker" included in the
interim final rule. Many commenters
agreed with the definition of eligible
worker adopted by Treasury. Other
commenters sought clarification about
or changes to the definition of eligible
worker, including the definition of
eligible sectors, the inclusion of
government workers in the definition of
eligible workers, and the process for
designating additional non-public
sectors as eligible.

Some commenters asked Treasury to
change how it identifies eligible sectors,
including suggestions to add to or
subtract from the list of eligible sectors.

For example, some commenters asked
Treasury to consider using Bureau of
Labor Statistics (BLS) -Standard
Occupational Classifications to identify
specific sectors or occupations, in
contrast to the approach taken in the
interim final rule, which included a
mixture of economic sectors, industries,
and occupations. Many commenters
asked Treasury to explicitly clarify that
a particular industry or occupation is
covered by the definition of "essential
critical infrastructure sector." Some of
262 See H.R. 6800, 116th Cong. (2020).
263 Note that the sectors defined in the interim
final rule already include all state, local, and Tribal government employees.
these commenters represented public
employees, e.g., employees of facilities
and public works; public utilities;
courthouse employees; police, fire, and
emergency medical services; and waste
and wastewater services. Others were a
mixture of public and private sector
employees, e.g., coroners and medical
examiners; transportation infrastructure
(specifically electric vehicle
infrastructure and supply equipment);
electric utilities, natural gas, and steam
supply; and grocery employees. Other
commenters requested that Treasury
prohibit certain occupations currently
included in the eligible workers
definition (e.g., police and corrections
officers) from receiving premium pay for
performance of regular duties.

Commenters also asked Treasury to
clarify which government workers are
included in the definition of eligible
workers. The interim final rule included
as an essential critical infrastructure
sector, "any work performed by an
employee of a State, local, or Tribal
government." Some commenters
requested that Treasury adopt a
definition of eligible worker that
includes all employees of the recipient
government; however, all public
employees of state, local, and Tribal
governments are already included in the
interim final rule definition of "eligible
worker." Commenters asked whether
this includes governments that did not
receive SLFRF funds (i.e., "non
recipient governments"). Many
commenters from Tribal governments
requested that the definition of eligible
worker, which includes "any work
performed by an employee of a . . .

Tribal government," also include an
employee of a "Tribal enterprise" to
remove uncertainty regarding which
employees are included.

Finally, commenters made
suggestions for the process by which the
chief executive (or equivalent) of a
recipient government may designate
additional non-public sectors as critical.

Commenters asked that Treasury adopt
a requirement that Treasury must
approve or deny any additional non-
public sector identified by the chief
executive of a recipient government
prior to implementation of the
recipient's program.

Some commenters asked Treasury to
clarify whether their chief executive (or
equivalent) could designate particular,
and in some cases all, employees of the
recipient government as eligible for
premium pay.

Treasury Response: In the final rule,
Treasury will preserve the definition of
"eligible worker" as it was defined in
the interim final rule with minor
modifications to clarify that all public

4398 Federal Register / Vol. 87, No. 18 / Thursday, January 27, 2022 / Rules and Regulations employees of recipient governments are
already included in the interim final
rule definition of "eligible worker." A
more specific eligibility system (e.g.,
linking eligibility to specific
occupational or industry codes) would
have provided more certainty but would
have been much more rigid. In contrast,
the current definition is flexible enough
to give recipients the ability to tailor
their premium pay programs to meet
their needs while ensuring that
programs focus on sectors where
workers were forced to shoulder
substantial risk as a result of the
COVID-19 pandemic. Furthermore, the
critical infrastructure sectors defined in
the interim final rule already include
many of the occupations that
commenters requested be added. For
example, Treasury received many
comments from public workers asking
to be included in the definition of
"eligible worker" even though these
workers already fall within the scope of
"any work performed by an employee of
a State, local, or Tribal government."
Treasury has clarified in the final rule
that the chief executive's discretion to
designate additional sectors as critical
relates only to "non-public" sectors,
since all public employees of recipient
governments are already included in the
definition of "eligible worker." While
all such public employees are "eligible
workers" and the chief executive (or
equivalent) of a recipient government
may designate additional non-public
sectors as critical, in order to receive
premium pay, these workers must still
meet the other premium pay
requirements (e.g., performing essential
work).

Treasury recognizes that the list of
"essential critical infrastructure sectors"
includes both occupations and sectors.

Recipients, if uncertain which
occupations are included in a critical
infrastructure sector, may consult
government occupational classifications
if helpful but are not required to do
so.264 Furthermore, a recipient
government does not need to submit to
Treasury for approval its designation of
a sector as essential critical
infrastructure; rather, Treasury will
defer to the reasonable interpretation of
the recipient government and the
discretion of the recipient's chief
executive in making such designations.

If a recipient is unsure if a non-public
sector is covered by the definition in the
264 See, e.g., sources such as Bureau of Labor
Statistics, Occupational Outlook Handbook,
which provide information on which
professions or occupations are typically
included in interpretations of a sector, https://
www.bls.gov/ooh/ .
final rule,265 the chief executive (or
equivalent) of a recipient government
may also identify the non-public sector
as critical so long as the chief executive
deems the non-public sector necessary
to protecting the health and wellbeing of
residents. Treasury has, where possible,
clarified the definition of "essential
critical infrastructure sectors." For
instance, Treasury has clarified in the
final rule that work performed by an
employee of a Tribal government
includes an employee of a Tribal
enterprise and discussed in this
Supplementary Information how a
recipient may qualify other non-public
sectors as essential critical
infrastructure.

Essential Work
The interim final rule defined
"essential work" as work that (1) is not
performed while teleworking from a
residence and (2) involves either (i)
regular, in -person interactions with
patients, the public, or coworkers of the
individual that is performing the work
or (ii) regular physical handling of items
that were handled by, or are to be
handled by, patients, the public, or
coworkers of the individual that is
performing the work. Treasury adopted
this definition of essential work to
ensure that premium pay is targeted to
workers that faced or face heightened
risks due to the character of their work
during a pandemic.

Public Comment: Some commenters
found the definition unclear and asked
Treasury to clarify what constitutes
"essential work." Others disagreed with
the essential work test altogether,
arguing that it forces recipients to
distinguish between essential and non-
essential employees, which may be
difficult to do. Accordingly, these
commenters asked Treasury to allow
recipients to determine which workers
qualify as essential. Treasury also
received several requests that specific
occupations be explicitly deemed
essential, including all public
employees, veterinarians, election
administrators, detention staff and
sheriff's deputies, and employees of
utilities, such as electric power, natural
gas, steam supply, water supply, and
sewage removal.

Several commenters requested that
Treasury not distinguish between
remote and in -person work or amend
the standard so that employees
providing essential services would still
be eligible even if they worked
remotely. Finally, a few commenters
requested clarification as to the
265 Public sector workers are "eligible workers"
under the interim final rule and final rule.
definition of "regular" in -person
interactions and whether Treasury
could clarify which job functions merit
more (or less) premium pay.

Treasury Response: Treasury is
maintaining the definition of "essential
work" in the final rule without
modification. The test adopted in the
interim final rule was designed to
compensate workers facing
disproportionate risk due to the
pandemic. COVID-19 is transmitted
through person -to -person interactions,
and therefore, workers with regular in -
person interactions are the primary
group facing increased health risks.

Although COVID-19 is not transmitted
primarily by people handling items,
such work may present increased risk in
certain cases, and the final rule
maintains the interim final rule's
inclusion of such work in order to give
recipient governments the flexibility to
include workers performing such work
as they determine appropriate. Changing
the test as some commenters suggested,
e.g., by eliminating the in -person work
requirement or allowing recipients to
designate which employees are
essential, even if not working in person,
would no longer focus the program on
workers taking on additional health
risks and instead allow premium pay to
be awarded to individuals who
experienced relatively little risk of
exposure to COVID-19. To maintain
flexibility, Treasury is not defining the
term "regular" with regard to in -person
interactions, allowing recipients to
develop programs based on the specific
workforce to be served and local
circumstances. Generally speaking,
however, recipients are encouraged to
consider an eligible worker's risk of
exposure in designing premium pay
programs.

Respond To
As required by the ARPA, the interim
final rule required that premium pay
programs "respond to" eligible workers
performing essential work during the
COVID-19 public health emergency.

Premium pay responds to eligible
workers performing essential work if it
prioritizes low- and moderate -income
persons, given the significant share of
essential workers that are low- and
moderate -income and may be least able
to bear added costs associated with
illness. The level of the award limit —up
to $13 per hour not to exceed $25,000
in aggregate —in the ARPA supports this
reasoning.

Accordingly, the interim final rule
required written justification for how
premium pay to certain higher -income
workers responds to eligible workers
performing essential work: If a recipient

Federal Register / Vol. 87, No. 18 / Thursday, January 27, 2022 / Rules and Regulations 4399 (or grantee) uses SLFRF funds to
provide premium pay to an employee
and the pay or grant would increase a
worker's total pay above 150 percent of
their residing state or county's average
annual wage for all occupations, as
defined by the BLS Occupational
Employment and Wage Statistics,
whichever is higher, on an annual basis,
then the recipient must provide,
whether for themselves or on behalf of
a grantee, written justification to
Treasury detailing how the award
responds to eligible workers performing
essential work.

Public Comment: Treasury received
numerous comments on the wage
threshold and the written justification
requirement. Several commenters
supported the threshold as a way to
encourage recipients to target premium
pay to lower -income, eligible workers.

Some commenters even asked Treasury
to make the wage threshold a firm
restriction, above which an eligible
worker could not receive premium pay.

Others agreed with the threshold but
also requested flexibility to use existing
worker classifications as an
administratively simple way to identify
workers for whom premium pay would
be responsive. For instance, a few
commenters asked Treasury to allow
recipients or grantees to presume that
premium pay "responds to" eligible
workers performing essential work
when it is provided to employees who
are not exempt from the Fair Labor
Standards Act (FLSA) overtime
provisions —a test that employers are
routinely required to apply.266
In contrast, several commenters
disagreed with the threshold and the
requirement for written justification. A
few commenters thought the threshold
was too low to capture employees in
certain critical infrastructure sectors
(e.g., public safety, waste collection) and
that it did not sufficiently account for
the variance in economic need across
different geographic areas and family
structures. Some smaller communities
argued that the threshold was difficult
to calculate and apply.

Other commenters proposed revisions
for how the threshold is calculated. For
instance, a few commenters asked
Treasury to consider using alternative
earnings measures such as median
income. Similarly, another commenter
asked Treasury to consider the incomes
of workers with different levels of
seniority in developing any income
266 See generally 29 U.S.C. 207(a); U.S.

Department of Labor, Overtime Pay Requirements of
the FLSA (Fact Sheet No. 23), https://www.dol.gov/
agencies/whd/fact-sheets/23-flsa-overtime-pay.
thresholds for permitting or reporting on
premium pay.

Finally, there was also some
uncertainty as to the threshold and the
requirement for written justification.

Some commenters interpreted the
threshold as a hard cap on who was
eligible for premium pay, which is not
the case. Relatedly, some commenters
also requested further guidance on what
recipients should include in the written
justification submitted to the Secretary.

Treasury Response: The final rule
makes some modifications to the
determination of when premium pay
"responds to" eligible workers
performing essential work during the
public health emergency. Under the
interim final rule, premium pay was
responsive if either the workers' pay
was below a wage threshold or, if the
pay was above a wage threshold, the
recipient submitted written justification
to Treasury explaining how the
premium pay was responsive. The final
rule retains these two means of
establishing premium pay in response to
workers performing essential work and
adds an additional means of
demonstrating that premium pay is
responsive. Under the final rule, a
recipient may also show that premium
pay is responsive by demonstrating that
the eligible worker receiving premium
pay is not exempt from the FLSA
overtime provisions.267 This change will
expand the number of workers eligible
to receive premium pay 268 and does not
require recipients to provide written
justification to Treasury regarding the
workers who are not exempt from the
FLSA overtime provisions, making the
program easier to administer for
recipients. Incorporating this change
further simplifies application of the
267 Department of Labor, Overtime Pay, https://
www.dol.gov/agencies/whd/overtime; see also 29
U.S.C. 207.
268 Among workers that report working overtime,
roughly 41-44 percent of workers earn above
$50,000 per year, which is slightly less than the
national average annual wage for all employees
according to the Bureau of Labor Statistics'
Occupational Employment and Wage Statistics,
available at https://www.bls.gov/oes/ . See also U.S.

Census Bureau, Basic Monthly CPS, January 2019
through December 2019, available at https://
www.census.gov/data/datasets/time-series/demo/
cps/cps-basic.html. Notes: Annual earnings reflect
weekly wages multiplied by 52. Usual weekly
earnings are computed by BLS to include earnings
from work such as tips, overtime, regular wages,
etc., but not non -labor sources of income such as
government transfers and capital gains. Pre -
overtime earnings are computed by taking the
difference of usual weekly earnings and earnings
from overtime last week and multiplying by 52.

Note, some sources multiply weekly earnings by 50
instead of 52 to account for unpaid time off and
holidays, so these figures may be slightly larger
than those reported elsewhere. Either assumption
may overestimate earnings if workers do not work
year-round.
final rule for recipients because
Treasury understands that most
employers, public and private, are
familiar with and are routinely required
to apply the FLSA.

With this addition, the final rule
provides that premium pay is
responsive to eligible workers
performing essential work during the
public health emergency if each eligible
worker who receives premium pay falls
into one of three categories: (1) The
worker's pay is below the wage
threshold, (2) the worker is not exempt
from the FLSA overtime provisions, or
(3) the recipient has submitted a written
justification to Treasury.

The final rule makes it clear that
written justification to Treasury is not
necessary with respect to eligible
workers whose pay is less than the wage
threshold. Nor is written justification
necessary with respect to eligible
workers who are not exempt from the
FLSA overtime provisions. The written
justification is only necessary if the
worker's pay (with or without the
premium) exceeds the threshold, and
the worker is exempt from the FLSA
overtime provisions. The final rule also
clarifies that a worker's pay exceeds the
threshold if either the premium pay
increases the worker's total pay above
the wage threshold or the worker's total
pay was already above the threshold,
before receiving premium pay.

Treasury has also updated the final
rule to clarify that written justification
means a brief, written narrative
justification of how the premium pay or
grant is responsive to workers
performing essential work during the
public health emergency. This could
include a description of the essential
workers' duties, health or financial risks
faced due to COVID-19, and why the
recipient determined that the premium
pay was responsive despite the workers'
higher income.

Recipients should refer to SLFRF
program reporting guidance, user
guides, and other documentation for
further guidance on the form and
content of the written justification.

Treasury anticipates that recipients will
easily be able to satisfy the justification
requirement for front-line workers, like
nurses and hospital staff.

Definition of Premium Pay
The statute defines premium pay as
"an amount of up to $13 per hour . . . ,
in addition to wages or remuneration
the eligible worker otherwise receives,
for all work performed by the eligible
worker during the COVID-19 public
health emergency. Such amount may
not exceed $25,000 with respect to any
single eligible worker." The interim

4400 Federal Register / Vol. 87, No. 18 / Thursday, January 27, 2022 / Rules and Regulations final rule incorporated this definition
and emphasized that premium pay
should be in addition to compensation
typically received.

Public Comment: Several submitted
comments related to the definition of
"premium pay." Several commenters
asked Treasury to clarify certain aspects
of the interim final rule and statutory
definition of premium pay. For instance,
a few commenters asked whether the
$25,000 limit applies to the annual
amount of premium pay received or the
aggregate amount of premium pay
received over the period of performance.

A few commenters requested flexibility
as to how premium pay may be
awarded, including flexibility to make
monthly or quarterly payments or lump
sum payments. Finally, commenters
requested additional clarification as to
how premium pay should be calculated.

For instance, a commenter asked how to
calculate the amount of and account for
overtime pay and other incentive
pay,2e9
Treasury Response: Treasury has
clarified some of these issues in the
final rule. For example, Treasury has
clarified in the final rule that the
$25,000 per employee limit is for the
entire period of performance, not an
annual cap. Further, recipients have
discretion with respect to the way in
which premium pay is awarded to
eligible workers (e.g., monthly,
quarterly, lump sum), provided that the
total premium pay awarded to any
eligible worker does not exceed $13 per
hour or $25,000 over the period of
performance. Finally, a recipient may
award premium pay to an eligible
worker in addition to the overtime pay
already earned by the eligible worker
but in no instance may the portion of
the compensation funded with SLFRF
funds exceed $13 per hour, even if strict
time -and -a -half calculation requires
more.270 To the extent that an employer
is required under the FLSA to make
payments to an eligible worker in excess
of $13 per hour or $25,000 in the
aggregate over the period of
performance, the employer must use a
source of funding other than the SLFRF
funds to satisfy those obligations.

Program Structure
Public Comment: Several commenters
also requested elaboration on eligible
269 See 29 U.S.C. 207(a) ("[A]t a rate not less than
one and one-half times the regular rate at which he
is employed.").
279 All recipients are required to comply with
otherwise applicable laws, including any wage and
hour requirements in the Fair Labor Standards Act.

See generally, Department of Labor, Wages and the
Fair Labor Standards Act, https://www.dol.gov/
agencies/whd/flsa.
types of employees and permissible
structures for awarding premium pay. A
few commenters asked if premium pay
could be awarded to volunteers or those
in irregular and non -hourly or salaried
employment positions. Similarly,
various commenters asked if part-time
workers were eligible for premium pay.

Some commenters asked Treasury to
provide more detail on when premium
pay may be paid retroactively or if a
government could reimburse its general
fund for hazard pay already paid before
the start of the period of performance.

Treasury Response: Treasury has also
made clear in the final rule that a
recipient may award premium pay to
non -hourly or salaried workers as well
as part-time workers. Premium pay may
not, however, be awarded to volunteers.

If a recipient is interested in
compensating volunteers with SLFRF
funds, then it must do so consistent
with the requirements set forth in other
eligible use categories; for example, see
section Public Sector Capacity and
Workforce in Public Health and
Negative Economic Impacts.

Under the final rule, recipients may
award premium pay retroactively;
however, SLFRF funds may not be used
to reimburse a recipient or eligible
employer grantee for premium pay or
hazard pay already received by the
employee. To make retroactive premium
payments funded with SLFRF funds, a
recipient or eligible employer grantee
must make a new cash outlay for the
premium payments and the payments
must be in addition to any wages or
remuneration the eligible worker
already received, subject to the other
requirements and limitations set forth in
the ARPA and this final rule.

Finally, as part of accepting the
Award Terms and Conditions for
SLFRF, each recipient agreed to
maintain a conflict -of -interest policy
consistent with 2 CFR 200.318(c) that is
applicable to all activities funded with
the SLFRF award. This award term
requires recipients and subrecipients to
report to Treasury or the pass -through
agency, as appropriate, any potential
conflict of interest related to the award
funds per 2 CFR 200.112. Pursuant to
this policy, decisions concerning SLFRF
funds must be free of undisclosed
personal or organizational conflicts of
interest, both in fact and in appearance.

Consistent with this policy, elected
officials are prohibited from using their
official position and control over SLFRF
funds for their own private gain. This
policy also prohibits, among other
things, elected officials from steering
funds to projects in which they have a
financial interest or using funds to pay
themselves premium pay.

C. Revenue Loss
Background
Sections 602(c)(1)(C) and 603(c)(1)(C)
of the Social Security Act provide that
SLFRF funds may be used "for the
provision of government services to the
extent of the reduction in revenue of
such . . . government due to the
COVID-19 public health emergency
relative to revenues collected in the
most recent full fiscal year of the . . .
government prior to the emergency."
This provision allows recipients
experiencing budget shortfalls to use
payments from the SLFRF funds to
avoid cuts to government services and,
thus, enables state, local, and Tribal
governments to continue to provide
valuable services and ensures that fiscal
austerity measures do not hamper the
broader economic recovery.

State and local government budgets
experienced stress in fiscal year 2020 as
delayed tax filings and pandemic -
related business closures caused
revenues to decline sharply.271 Twenty-
two state governments took actions to
close budget gaps in fiscal year 2020 272
and nearly 80 percent of cities reported
being less able to meet the fiscal needs
of their communities relative to fiscal
year 2019.273 Surveys of Tribal
governments and Tribal enterprises
conducted in 2020 found majorities of
respondents reporting substantial cost
increases and revenue decreases, with
Tribal governments reporting reductions
in health care, housing, social services,
and economic development activities as
a result of reduced revenues.274
The economic recovery, aided by the
broad distribution of COVID-19
vaccines and the deployment of federal
stimulus, has led to a strong rebound in
total state and local government revenue
and is contributing to a brighter fiscal
221 In the second quarter of 2020, quarterly state
and local tax revenues as reported by the U.S.

Census Bureau fell 19 percent compared to the
second quarter of 2019; U.S. Census Bureau,
Quarterly Summary of State and Local Tax
Revenue, https://www.census.gov/programs-
surveys/gtax.html.
272 National Association of State Budget Officers,
Fiscal Survey of the States (Fall 2020), available at
https://higherlogicdownload.s3.amazonaws.com/
NASBO/9d2d2db1-c943-4f1 b-b750-Ofca152d64c2/
Uploadedlmages/Fiscal%20Survey/NASBO Fall_
2020_Fiscal_Survey_of States_S.pdf.
273 National League of Cities, City Fiscal
Conditions (2020), available at https://www.nlc.org/
wp-content/uploads/2020/08/City_Fiscal_
Conditions_2020_FINAL. pdf.
294 Surveys conducted by the Center for Indian
Country Development at the Federal Reserve Bank
of Minneapolis in March, April, and September
2020. Elijah Moreno & Heather Sobrepena, Tribal
entities remain resilient as COVID-19 batters their
finances, Federal Reserve Bank of Minneapolis
(Nov. 10, 2020), https://www.minneapolisfed.org/
article/2020/tribal-entities-remain-resilient-as-
covid-19-batters-their finances.

Federal Register / Vol. 87, No. 18 / Thursday, January 27, 2022 / Rules and Regulations 4401 outlook for most jurisdictions as
compared to the earlier months of the
public health emergency. For the fiscal
year ending June 30, 2021, total state
and local government tax revenues
increased 21 percent relative to the
same period in 2020, reflecting the
combined impact of the modified tax
filing deadline in 2020 and an
improving economy.275 However,
despite a stable budget situation overall,
many governments face uncertainty as
the COVID-19 pandemic continues to
impact commuting patterns, hospitality
and tourism, and other drivers of
jurisdictions' economies. Thirty-five
percent of cities still report being less
able to meet financial needs than in
fiscal year 2020,276 and over half of
surveyed Tribal governments and Tribal
enterprises reported losing at least 40
percent of their revenue since the start
of the pandemic.277 Budget challenges
persist as governments work to mitigate
and contain COVID-19 and help
citizens weather the economic
downturn.

State, local, and Tribal government
budgets affect the broader economic
recovery. During the period following
the 2007-2009 recession, state and local
government budget pressures led to
fiscal austerity that was a significant
drag on the overall economic
recovery.278 Inflation -adjusted state and
local government revenue did not return
to the previous peak until 2013,279
while employment in the sector
returned to the previous peak in August
2019, nearly a decade later.28° Just
months after recouping losses from the
previous downturn, the COVID-19
pandemic caused state and local
government employment to contract
again, but this time more sharply: By
May 2020, state and local government
payrolls fell 7.7 percent compared to
February 2020. Despite improvement,
non-federal public sector job growth
continues to lag behind the rest of the
U.S. labor market recovery.281
Summary of Interim Final Rule
As stated above, the Social Security
Act provides that SLFRF funds may be
used "for the provision of government
services to the extent of the reduction in
revenue of such . . . government due to
the COVID-19 public health emergency
relative to revenues collected in the
most recent full fiscal year of the . . .
government prior to the emergency."
The interim final rule provided a
formula for calculating revenue loss
through a four -step process:
• Step 1: Identify revenues collected
in the most recent full fiscal year prior
to the public health emergency (i.e., last
full fiscal year before January 27, 2020),
called the base year revenue.
• Step 2: Estimate counterfactual
revenue, which is the amount of
revenue the recipient would have
expected in the absence of the downturn
caused by the pandemic. The
counterfactual revenue is equal to base
year revenue * [(1 + growth adjustment)
n (n/12)], where n is the number of
months elapsed since the end of the
base year to the calculation date, and
growth adjustment is the greater of the
average annual growth rate across all
State and Local Government "General
Revenue from Own Sources" in the
most recent three years prior to the
emergency, 5.2 percent, or the
recipient's average annual revenue
growth in the three full fiscal years prior
to the COVID-19 public health
emergency.282 This approach to the
growth rate provides recipients with the
option to use a standardized growth
adjustment when calculating the
counterfactual revenue trend and thus
minimizes administrative burden, while
not disadvantaging recipients with
revenue growth that exceeded the
national average prior to the COVID-19
public health emergency by permitting
these recipients to use their own
revenue growth rate over the preceding
three years.
• Step 3: Identify actual revenue,283
which equals revenues collected over
the twelve months immediately
preceding the calculation date.
• Step 4: The extent of the reduction
in revenue is equal to counterfactual
revenue less actual revenue. If actual
revenue exceeds counterfactual revenue,
the extent of the reduction in revenue is
set to zero for that calculation date.

For illustration, consider a
hypothetical recipient with base year
revenue equal to 100 (Step 1) that ends
on June 30, 2019. In Step 2, the
hypothetical recipient finds that the
average annual growth across all state
and local government "General Revenue
from Own Sources" in the most recent
three years of available data, 5.2
percent, is greater than the recipient's
average annual revenue growth in the
three full fiscal years prior to the public
health emergency. In this illustration, n
(months elapsed) and counterfactual
revenue would be equal to:

As of:
12/31/2020
12/31/2021
12/31/2022
12/31/2023
n (months elapsed)
18 30
42 54
Counterfactual revenue:
107.9
113.5
119.4
125.6
275 Analysis of Quarterly Summary of State and
Local Tax Revenue, U.S. Census Bureau, supra note
271.
27s National League of Cities, City Fiscal
Conditions (2021), available at https://www.nlc.org/
wp-content/uploads/2021/10/2021-City-Fiscal-
Conditions-Report-2021. pd f.
277 Center for Indian Country Development and
Federal Reserve Bank of Minneapolis, One Year
Into COVID-19, Pandemic's Negative Effects Persist
in Indian Country (May 2021), available at https://
www.minneapolisfed . org/article/2021 /one -year -
in to-covi d -19-pandemics-negative-effects-persist-i n - indian-country.
278 See, e.g., Nora Fitzpatrick et al., Fiscal Drag
from the State and Local Sector?, Liberty Street
Economics Blog, Federal Reserve Bank of New York
(June 27, 2012), https://libertystreeteconomics .
newyorkfed.org/2012/06/fiscal-dragfrom-the-state-
and-local-sector.html; Jiri Jonas, Great Recession
and Fiscal Squeeze at U.S. Subnational Government
Level, IMF Working Paper 12/184, (July 2012),
available at https://www.imf.org/external/pubs/ft/
wp/2012/wp12184.pdf, Gordon, supra note 16.
279 State and local government general revenue
from own sources, adjusted for inflation using the
Bureau of Economic Analysis' implicit price
deflator for GDP. U.S. Census Bureau, Annual
Survey of State Government Finances and U.S.

Bureau of Economic Analysis, National Income and
Product Accounts, https://www.census.gov/
programs-surveys/gov-finances.html.
285 U.S. Bureau of Labor Statistics, All Employees,
State Government [CES9092000001] and All
Employees, Local Government [CES9093000001],
retrieved from FRED, Federal Reserve Bank of St.

Louis, https://fred.stlouisfed.org/series/
CES9092000001 and https://fred.stlouisfed.org/
series/CES9093000001.
281 Pew Research, State and Local Government
Job Growth Lags as Economy Recovers (September
2021), available at https://www.pewtrusts.org/en/
research-and-analysis/articles/2021 /09/14/state-
and-local-government-job-growth-lags-as-economy-
recovers.
282 At the time the interim final rule was
published, the average annual growth across all
state and local government "General Revenue from
Own Sources" in the most recent three years of
available data (2015-2018) was 4.1%, which was
presented as one option for the growth adjustment.

Since the interim final rule was published, 2019
data has been made available, which increases this
rate to 5.2%. The final rule updates the percentage
to 5.2%, as shown in Step 2.
283 As explained below, in the final rule,
recipients must adjust actual revenue amounts
based on certain tax policy changes.

4402 Federal Register / Vol. 87, No. 18 / Thursday, January 27, 2022 /Rules and Regulations The figure below illustrates the hypothetical recipient calculated in reduction in revenue for the
140
130
120
110
accordance with the methodology.

Actual Revenue
=Extent of reduction in revenue
inBase year revenue
Counterfactual revenue
Finally, as explained in greater detail
below, the clear meaning of the
statutory phrase "due to the COVID-19
public health emergency" is that it is
referring to revenue reductions caused
by the public health emergency. As
such, it does not include revenue
reduced for reasons other than the
public health emergency. Treasury in
the interim final rule presumed that any
reduction in revenue relative to the
counterfactual estimate would be
considered revenue lost due to the
pandemic and thereby relieved
recipients of the administrative burden
of determining the extent to which
reduction in revenue was due to the
public health emergency. The
calculation methodology in the interim
final rule implicitly assumed that
recipients did not suffer a loss in
revenue due to the public health
emergency if they did not experience a
reduction in aggregate revenue
compared to the counterfactual
estimate. The interim final rule invited
comments on whether Treasury should
revise its presumption to "take into
account other factors, including actions
taken by the recipient as well as the
expiration of the COVID-19 public
health emergency, in determining
whether to presume that revenue losses
Dec -20
Dec -21
are 'due to' the COVID-19 public health
emergency."
Treasury received a substantial
number of comments on the revenue
loss provisions set forth in the interim
final rule. These comments largely
pertained to the following topics: The
overall methodology for calculating
revenue loss; the definition of
"revenue"; whether revenue should be
aggregated or calculated on some
alternative basis (e.g., source -by -source
or fund -by -fund); the appropriate
calculation dates (i.e., fiscal year or
calendar year); the presumption that all
revenue loss is due to the pandemic; the
base year; and the definition of
"government services."
Overall Methodology for Calculating
Revenue Loss
As noted above, the interim final rule
provided a formula for recipients to
calculate revenue loss by comparing
actual revenues received during a given
time -period with a counterfactual
amount of revenue based on revenues in
the base year and an adjustment for
expected growth in revenue each year.

Public Comment: Treasury received
many public comments on the overall
methodology for calculating revenue
loss. Some recipients, including smaller
governments, have expressed concern
regarding the burden associated with
Dec -22
Dec -23
the calculation of revenue loss,
particularly the burden involved in
calculating the amount of general
revenue, given that the definition of
general revenue in the interim final rule
does not always align with the
definition of revenue already calculated
by recipients for other purposes, and
requested clarifications regarding a
number of components, including the
definition of revenue. Commenters also
asked for clarification on the
relationship between revenue loss
calculations across different calculation
dates. Other commenters argued that the
revenue loss formula does not precisely
capture the nuances of local revenues or
their particular situation. For example,
some commenters stated that requiring
that revenues be aggregated fails to
capture decreases in revenue sources
that cannot easily be made up for with
other revenue sources.

Treasury Response: In the final rule,
Treasury is largely maintaining the
revenue loss formula as set forth in the
interim final rule. To address comments
that the formula for calculating revenue
loss was difficult to apply, Treasury is
including an option for recipients to use
a standard allowance for revenue loss.

Specifically, in the final rule, recipients
will be permitted to elect a fixed
amount of loss that can then be used to
fund government services. This fixed

Federal Register / Vol. 87, No. 18 /Thursday, January 27, 2022 /Rules and Regulations 4403
amount, referred to as the "standard
allowance," is set at up to $10 million
total for the entire period of
performance not to exceed the
recipient's SLFRF award amount.

Although Treasury anticipates that this
standard allowance will be most helpful
to smaller local governments and Tribal
governments, any recipient can use this
standard allowance instead of
calculating revenue loss pursuant to the
formula above, so long as recipients
employ a consistent methodology across
the period of performance (i.e., choose
either the standard allowance or the
regular formula). Treasury intends to
amend its reporting forms to provide a
mechanism for recipients to make a one-
time, irrevocable election to utilize
either the revenue loss formula or the
standard allowance.

The $10 million level is based on
average revenue loss across state and
local governments, taking into
consideration potential variation in
revenue types and losses and continued
uncertainty faced by many recipients
regarding revenue shortfalls. To
calculate this estimate, Treasury applied
a variation of the final rule's revenue
loss calculation on available aggregate
state and local government tax revenue
data as reported by the Census Bureau
for the first calculation date of
December 31, 2020. This estimate
accounts for expected variation across
recipient experiences and reflects the
fact that the final rule revenue loss
calculation provides recipients several
options for specific aspects (e.g.,
calendar year or fiscal year basis; use of
average state and local revenue growth
rate or specific local rate). Treasury
compared actual calendar year 2020 tax
revenues, in aggregate for all state and
local governments, to several
counterfactual trends that vary based on
the end date of the fiscal base year.284
Treasury also assessed counterfactual
trends using different revenue growth
rates (e.g., the three-year average growth
rates of total state and local government
general revenue for both fiscal years
ending in 2016-2018 and fiscal years
ending in 2017-2019; the three-year
average growth rates of total state and
local government tax revenues for fiscal
years ending in 2017-2019; and the one-
year growth rate for total state and local
government tax revenue in the last full
fiscal year before the public health
emergency). To account for the fact that
the initial estimate, based on tax
284 Because the Census Bureau's state and local
government tax revenue data is reported on a
quarterly frequency, fiscal base year end dates of
March 31, June 30, September 30, and December 31
were used in this assessment.
revenue, only includes a subset of
recipient aggregate general revenue,
Treasury applied a scaling factor to
recognize that tax revenues generally
make up just over half of general
revenue collected by state and local
governments (i.e., Treasury scaled up its
estimate based on tax revenue to
produce an estimate for total general
revenue).285 The resulting calculation
was then extrapolated over the four-year
period of performance and divided by a
population of interest to arrive at an
average loss estimate.

As noted above, Treasury estimated a
range of scenarios to account for
different values of the variables that
would impact average losses. For
example, the end date of the fiscal base
year and growth rate of counterfactual
revenue impact the overall estimate of
revenue loss. In addition, this estimate
takes into consideration the limitations
in the available data. The governments
covered by the Census Bureau's survey
do not entirely align with SLFRF
recipients. The Census Bureau's figures
are based on 50 state governments, all
local government property tax collectors
and local government non -property tax
imposers, representing at a minimum
the more than 38,000 "General Purpose
Governments" defined by Census.

However, there are only roughly 32,000
recipients of SLFRF funds. Thus,
Treasury considered the difference
between the number and type of entities
in the Census Bureau data and the
SLFRF recipients.

Based on this methodology, Treasury
estimates that average revenue loss
(determined by comparing the
counterfactual revenue to actual
revenue) may range from $0 to $11.7
million per recipient over the period of
performance.286 Treasury settled on a
point estimate toward the upper end of
the range of potential averages, in part,
to account for significant variation in
the experiences of recipient
governments: Some recipients likely
experienced losses at the upper end of
this range of potential averages. A point
estimate toward the upper end of the
range errs toward ensuring more
recipients' experiences are covered and
increases the utility of the standard
allowance for SLFRF recipients.

Specifically, the program includes a
very large number of recipients with
relatively smaller awards; these
recipients have tended to describe
having greater difficulty completing the
285 Annual Survey of State and Local Government
Finances (2019).
286 This is the range of averages that Treasury
calculated by varying the aforementioned
assumptions.
regular revenue loss calculation. Thus,
selecting a point estimate toward the
higher end of the expected range not
only increases the likelihood that the
standard allowance will reflect the
experience of a larger number of SLFRF
recipients but is more responsive to the
comments of those with smaller awards.

In addition, using a point estimate
toward the upper end of the range
accounts for the difficulty and
uncertainty in predicting revenue losses
years into the future, throughout the
period of performance.287
Finally, Treasury selected a single
allowance level, as opposed to varying
levels, to further the goals of simplicity,
flexibility, and administrability.

Furthermore, data limitations make it
difficult to distinguish between types of
local governments.288
General Revenue
The interim final rule adopted a
definition of "general revenue" based
largely on the components reported
under "General Revenue from Own
Sources" in the Census Bureau's Annual
Survey of State and Local Government
Finances. Under the interim final rule,
general revenue included revenue
collected by a recipient and generated
from its underlying economy, and it
would capture a range of different types
of tax revenues, as well as other types
of revenue that are available to support
government services.289 Specifically,
revenue under the interim final rule
included money that is received from
tax revenue, current charges, and
miscellaneous general revenues and
excluded refunds and other correcting
transactions, proceeds from issuance of
debt or the sale of investments, agency
or private trust transactions, revenue
from utilities, social insurance trust
revenues, and intergovernmental
287 See, e.g., Government Accountability Office,
State and Local Governments: Fiscal Conditions
During the COVID-19 Pandemic in Selected States
(July 2021) (noting that "[sltate and local
government revenues partly depend on the overall
economy, and actions to stem the spread of the
virus drastically reduced economic activity.");
Board of Governors of the Federal Reserve System,
Monetary Policy Report (July 9, 2021) (noting that
the pandemic "pushed down state and local
government tax collections" and that while some of
the drag is "abating" state and local "government
payrolls .. . have only edged up from their lows
at the onset of the pandemic").
288 Local government tax revenue data in the
Census Bureau's Quarterly Summary of State and
Local Tax Revenue, supra note 271, is provided on
an aggregated basis.
289 The Department also released guidance
clarifying how a recipient may determine whether
a particular entity is "part of the recipient's
government." See FAQ 3.14. Coronavirus State and
Local Fiscal Recovery Funds, Frequently Asked
Questions, as of July 19, 2021; https://home .
treas ury.gov/system/files/136/SLFRPFAQ. pd f.

4404 Federal Register / Vol. 87, No. 18 /Thursday, January 27, 2022 /Rules and Regulations transfers from the federal government,
including transfers made pursuant to
section 9901 of the ARPA.290 In the case
of Tribal governments, it also included
revenue from Tribal business
enterprises.

Public Comment: Many commenters
asked Treasury to include certain items
in the definition of "general revenue."
For instance, several commenters that
operate their own utilities asked that
revenue from utilities be included,
arguing that declines in utility revenue
directly affect contributions to their
general funds. Many of these
commenters noted that moratoriums on
utility shutoffs and a decline in
collections have resulted in significant
budgetary pressures.

Some commenters also asked for the
exclusion of certain intergovernmental
transfers in the definition of general
revenue, including transfers of shared
revenue from the state.291 Other
commenters asked for the inclusion of
certain transfers from the federal
government, including fees paid for
services and grants that are, in effect,
paid for the provision of services.

Treasury also received multiple
requests to include revenue from Tribal
enterprises in the definition of "general
revenue" and that "Tribal enterprise" be
defined broadly. Others asked for the
ability to choose whether to include
revenue from Tribal enterprises.

Finally, some commenters requested
that the definition of general revenue
exclude certain sources of revenue, such
as revenue sources that do not support
a general fund (Le., revenue sources that
are restricted in use). Commenters also
asked that general revenue exclude
revenue from special assessments,
settlements that make the recipient
299 The interim final rule stated that "general
revenue" and "tax revenue" excludes refunds and
other correcting transactions. Instead of
"excluding" refunds and other correcting
transactions, the Census Bureau methodology upon
which those definitions are based provides that
general revenue and tax revenue are determined
"net of" refunds and other correcting transactions.

The use of "excluding" in the interim final rule is
substantively the same as the Census Bureau
methodology. However, to be consistent with the
terminology used by the Census Bureau, the final
rule uses "net of" instead of "excluding." Current
charges are defined as "charges imposed for
providing current services or for the sale of
products in connection with general government
activities." It includes revenues such as public
education institution, public hospital, and toll
revenues. Miscellaneous general revenue comprises
of all other general revenue of governments from
their own sources (i.e., other than utility and
insurance trust revenue), including rents, royalties,
lottery proceeds, and fines.
291 The interim final rule excluded governmental
transfers from the Federal Government, but it did
not exclude intergovernmental transfers from other
governmental units for purposes of the revenue loss
provisions.
whole for past expenditures, and one-
time revenues such as revenue from the
sale of property.

Treasury Response: In the final rule,
Treasury has maintained the definition
of "general revenue" from the interim
final rule with two exceptions.

Treasury has adjusted the definition
to allow recipients that operate utilities
that are part of their own government to
choose whether to include revenue from
these utilities in their revenue loss
calculation. This change responds to
comments from recipients indicating
that revenue from utilities is used to
fund other government services and that
utility revenues have declined on
aggregate.292 This approach is consistent
with other eligible uses, which
recognize decreased ability of many
households to make utility payments;
see section Assistance to Households,
which identifies utility assistance as an
enumerated eligible use of funds,
including through direct or bulk
payments to utilities for consumer
assistance. Furthermore, for utilities or
other entities (e.g., certain service
districts) that are not part of the
recipient government, a transfer from
the utility to the recipient constitutes an
intergovernmental transfer and therefore
is included in the definition of "general
revenue." 293
Treasury has also added liquor store
revenue to the definition of general
revenue. The Supplemental Information
to the interim final rule stated that the
definition of tax revenue would include
liquor store revenue, but the text of the
rule did not include it. Accordingly, in
the final rule, Treasury is clarifying that
revenue includes liquor store revenue.

However, Treasury believes revenue
from government -owned liquor stores is
better classified as general revenue than
it is as tax revenue, so the final rule
includes it as part of general revenue.

In response to requests that the
definition of general revenue exclude
revenue from special assessments,
settlements that make the recipient
whole for past expenditures, and one-
time revenues such as revenue from the
sale of property, Treasury is maintaining
its position in the final rule that such
revenue is included in general revenue.

While such revenues may be less
predictable than other sources of
292 U.S. Energy Information Administration,
Annual Electric Utility Data (October 2021),
available at https://www.eia.gov/electricity/sales_
revenue_price/.
293 FAQ 3.14 provides further guidance on how
to determine what entities constitute a government
for purposes of calculating revenue loss. See
Coronavirus State and Local Fiscal Recovery Funds,
Frequently Asked Questions, as of July 19, 2021;
https://home.treasuiy.gov/system/files/136/
SLFRPFAQ.pdf.
revenue (e.g., property taxes), these are
not uncommon sources of revenue for
recipients, and their inclusion provides
a more complete view of the financial
health of a recipient government and is
consistent with the Census Bureau
methodology. Treasury is also
maintaining the exclusion of all
payments from the federal government
(including payments for services) from
general revenue in order to avoid
substantial dilution of the definition of
revenue, particularly in light of
extraordinary fiscal support provided
during the pandemic. Treasury is
maintaining the inclusion of
intergovernmental transfers other than
from the federal government for the
reasons provided in the Supplemental
Information to the interim final rule; to
do otherwise would be to significantly
distort the revenue calculations for local
governments that regularly receive
revenue sharing payments, for example,
from their state governments. Treasury
is also maintaining the approach that
"general revenue" includes revenue
from Tribal enterprises. This approach
recognizes that these enterprises often
form the revenue base for Tribal
governments' budgets.

To ease the burden on recipients and
account for anomalous variations in
revenue, as mentioned above, Treasury
has incorporated a "standard
allowance" option into the final rule. A
recipient may choose to use the
standard allowance, which under the
final rule is set at up to $10 million, not
to exceed the recipient's SLFRF award
amount, as an alternative to calculating
revenue loss according to the formula
described above. This addition will
promote administrative efficiency and
simplify the revenue loss calculation for
the vast majority of recipients. Treasury
intends to amend its reporting forms to
provide a mechanism for recipients to
elect to utilize either the revenue loss
formula or the standard allowance, in
addition to other changes made as part
of the final rule.

Aggregate Revenue Loss Calculation
Under the interim final rule, revenue
loss was calculated based on aggregate
revenues and therefore loss in one type
of revenue could be offset by gains in
another. The amount of SLFRF funds
available to provide government
services was based on overall net
revenue loss. In the Supplementary
Information to the interim final rule,
Treasury asked commenters to discuss
the advantages and disadvantages of,
and any potential concerns with, this
approach, including circumstances in
which it could be necessary or

Federal Register / Vol. 87, No. 18 / Thursday, January 27, 2022 / Rules and Regulations 4405
appropriate to calculate the reduction in
revenue by source.

Public Comment: Treasury received
many comments stating that revenue
loss should be calculated on a source -
by -source basis. Some commenters
argued that a source -by -source approach
would be administratively simpler.

Other commenters argued that
calculating revenue loss source -by -
source would better reflect the impact of
the COVID-19 pandemic on their ability
to fund government services because
revenue gains in one source cannot
always be used to make up for losses in
another. For similar reasons, other
commenters asked that revenue loss be
calculated on a fund basis.

Treasury Response: Treasury
considered alternative methods (e.g.,
source -by -source, fund -by -fund) but
ultimately determined to maintain the
calculation of revenue loss in the
aggregate. The pandemic has had
different effects on recipients (and their
revenues), and Treasury recognized that
one particular type of revenue or one
particular source may have experienced
a greater amount of loss for some
recipients. However, the statute refers
only to "the reduction in revenue of
such State, local government, or Tribal
government." The statute is thus clear
that Treasury is to refer to the aggregate
revenue reduction of the recipient due
to the public health emergency. Further,
this provision is designed to address
declines in the recipients' overall ability
to pay for governmental services, and
calculating revenue loss on an aggregate
basis provides a more accurate
representation of the effect of the
pandemic on overall revenues and the
fiscal health of the recipient. In many
circumstances, recipient governments
have flexibility to use revenues from an
array of sources and offset declines in
some sources with gains in others.

While the details and configuration of
this flexibility vary widely across
recipient governments, calculating
revenue loss on a source -by -source or
fund -by -fund basis would not capture
how recipient governments balance
their budgets in the regular course of
business. Accordingly, the final rule
maintains the requirement that revenue
loss is to be calculated on an aggregate
basis.

Calculation Dates
Public Comment: Under the interim
final rule, recipients calculate revenue
loss as of the end of the calendar year.

Treasury received many comments
requesting that recipients be permitted
to calculate revenue loss as of the end
of their fiscal year. Commenters argued
that doing so would be simpler and less
burdensome on recipients and that
financial data as of the end of the fiscal
year is audited and therefore more
reliable. Commenters also argued that
recipients' fiscal years are structured
around the timing of major revenue
sources, and that the Census Bureau
uses fiscal years in its Annual Survey.

Treasury also received comments
about the use of multiple calculation
dates. Several Tribal governments stated
that they would not see ongoing revenue
losses due to the COVID-19 public
health emergency and asked to be able
to determine revenue loss as of the first
calculation date. Several commenters
asked whether revenue loss is
determined independently for each
year, so that a gain in one year does not
offset a loss in another, or whether
revenue loss is cumulative from the
beginning of the pandemic.

Treasury Response: In the final rule,
Treasury has made adjustments to give
recipients more flexibility with respect
to calculation dates and to clarify
certain elements. Specifically, the final
rule provides recipients the option to
choose whether to calculate revenue
loss on a fiscal year or calendar year
basis, though they must choose a
consistent basis for loss calculations
throughout the period of performance.

Treasury has also clarified in the final
rule that revenue loss is calculated
separately for each year such that the
calculation of revenue lost in one year
does not affect the calculation of
revenue lost in prior or future years.

Presumption That Revenue Loss Is Due
to the Pandemic
As stated above, sections 602(c)(1)(C)
and 603(c)(1)(C) of the Social Security
Act provide that SLFRF funds may be
used "for the provision of government
services to the extent of the reduction in
revenue of such . . . government due to
the COVID-19 public health emergency
relative to revenues collected in the
most recent full fiscal year of the . . .
government prior to the emergency." As
discussed in the interim final rule,
although revenue may decline for
reasons unrelated to COVID-19, in order
to minimize the administrative burden
on recipients in calculating revenue loss
and take into consideration the
devastating effects of the COVID-19
public health emergency, any reduction
in revenue relative to the counterfactual
estimate was presumed in the interim
final rule to be considered revenue lost
due to the pandemic.

Treasury stated in the Supplementary
Information to the interim final rule that
it was considering when, if ever, during
the period of performance it would be
appropriate to reevaluate the
presumption that all losses are
attributable to the public health
emergency. Treasury also sought
comment on whether to take into
account other factors, including actions
taken by the recipient as well as the
expiration of the COVID-19 public
health emergency, in determining
whether to presume that revenue losses
are "due to" the COVID-19 public
health emergency.

Public Comment: Treasury received
many comments in support of the
presumption, as well as some opposed.

Some commenters argued that the
presumption eases the administrative
burden on recipients because, without
it, it would be difficult to identify which
losses are attributable to the COVID-19
public health emergency. Many
commenters also argued that Treasury
should maintain the presumption
because recipients are likely to
experience losses due to the public
health emergency even after the end of
the public health emergency. Treasury
also received comments asking that it
adjust any revenue loss calculation to
account for tax changes enacted by the
recipient. In particular, some
commenters noted that some recipients
had increased taxes in order to meet
additional demands for government
services or to address declines in
revenue due to the pandemic. These tax
increases have in some cases offset some
or all of the actual revenue loss
attributable to the public health
emergency. Because the interim final
rule calculates revenue loss by reference
to actual revenue collected, commenters
argued that the calculation of revenue
loss "due to" the public health
emergency needs to take into
consideration the effects of tax increases
by deducting the effect of these tax
increases from actual revenue collected.

Treasury Response: In the final rule,
Treasury has maintained the
presumption that a reduction in a
recipient's revenue is due to the public
health emergency with certain
adjustments to respond to comments
and to better account for revenue loss
"due to the COVID-19 public health
emergency." The final rule makes
adjustments to the presumption to take
into account certain government actions
to change tax policy. In particular,
Treasury is adjusting the presumption to
account for changes to tax policy by
providing that changes in revenue that
are caused by tax increases or decreases
adopted after the issuance of the final
rule will not be treated as due to the
public health emergency.

4406 Federal Register / Vol. 87, No. 18 / Thursday, January 27, 2022 / Rules and Regulations Presumption of Revenue Loss "Due To"
the Pandemic
In enacting sections 602(c)(1)(C) and
603(c)(1)(C) of the Social Security Act,
Congress provided that a state, local
government, or Tribal government could
use funds to "cover costs . . . for the
provision of government services," but
only "to the extent of the reduction in
revenue . . . due to the COVID-19
public health emergency relative to
revenues collected in the most recent
full fiscal year . . . prior to the
emergency." In doing so, Congress
recognized that the pandemic was
causing significant disruption to
economic activity and sought to
minimize the impact of associated
revenue losses on the ability of the
recipient to provide government
services when such services were
needed most.294 The text of the statute
itself reinforces this important context:

The law specifically limits funds to
cover revenue losses that both are "due
to the COVID-19 public health
emergency" and could impact "the
provision of government services."
Courts have recognized that the
phrase "due to" can refer to various
causal standards.295 Here, in the context
of Congress's addressing economic
disruptions caused by the COVID-19
pandemic that could impact both
revenues and government services, the
key consideration is whether a revenue
loss experienced by the recipient
resulted from the exogenous impacts of
the public health emergency (and were
thus "due to" the pandemic) or instead
from the recipient's own discretionary
actions (and, in this context, were not
"due to" the pandemic). Reductions in
revenue due to the public health
emergency does not cover revenue
reductions that resulted from a
recipient's own discretionary actions.

In the interim final rule, Treasury
included a presumption that all revenue
loss is due to the pandemic in order to
minimize the administrative burden on
recipients discussed above and take into
consideration the devastating effects of
the COVID-19 public health emergency.

Based on comments, Treasury believes
that the reasons for the presumption
continue to be valid and has determined
to maintain the presumption in the final
rule with certain modifications. In
294 See also sections 602(a)(1) and 603(a) of the
Social Security Act (appropriating the funds for
payment to recipients in order to "mitigate the
fiscal effects stemming from the public health
emergency").
295 U.S. Postal Service v. Postal Regulatory
Comm'n, 640 F.3d 1263 (D.C. Cir. 2011); see Kimber
v. Thiokol Corp., 196 F.3d 1092, 1100 (10th Cir.
1999); Adams v. Director, OWCP, 886 F.2d 818, 821
(6th Cir. 1989).
particular, at this point in the course of
the pandemic, with the fiscal pressure
on state and local governments having
been significantly reduced, it is
appropriate for Treasury to reassess
aspects of this presumption. As
discussed below, the final rule requires
recipients to exclude the value of tax
policy changes adopted after January 6,
2022.

Recipients of the SLFRF range from
states to the smallest local governments.

At the time that the interim final rule
was adopted, it was important for
recipients to be able to calculate with
ease and certainty their amount of
revenue loss so that they could begin
deploying these funds to continue to
maintain essential government services.

To this end, the presumption in the
interim final rule provided a relatively
simple formula for all recipients to use,
but the exigent need for recipients to
immediately deploy funds for the
provision of government services has
decreased and the benefit of the
presumption in reducing administrative
burden is less relevant for those
governments that are not likely to avail
themselves of the standard allowance
described above.

Consistent with these considerations,
the final rule requires recipients to
exclude revenue loss due to tax changes
adopted after January 6, 2022.

Eliminating revenue loss due to tax
changes from the presumption is
appropriate given the significance of tax
revenue as a portion of all revenue for
state and local governments, the direct
impact of tax policy decisions on
revenue collected, and the relative ease
with which recipients can isolate the
estimated effect of a tax change on
revenue.296 Most state budgeting
processes require a "budget score,"
often developed through a consensus
process with executive and legislative
branch experts,297 and Treasury expects
that larger localities, those most likely to
utilize the revenue loss formula rather
than the standard allowance, also
regularly use revenue or budget
estimates when considering changes to
tax policies. As such, in many cases,
296 Treasury considered whether to also eliminate
the presumption with respect to losses resulting
from other changes in policy, such as decreases in
user fees or fines. However, the effects of these
changes are more minor overall and would be more
challenging to accurately identify and quantify, so
the administrability benefit of the presumption for
recipients outweighs whatever distortion there
might be as a result of not reflecting such changes.
297 See generally, National Association of State
Budget Officers, Budget Processes in the States,
(2021), available at https://higherlogicdownload .
s3. amazonaws.com/NASBO/9d2d2db1-c943-4 f1 b-
b750-0fca152d64c2/Uploadedlmages/Budget%20
Processess/NASBO_2021 _Bu dget_Processes_in_th e_
States_S.pdf.
recipients already prepare estimates of
the impact of tax changes on revenue,
and as discussed below, Treasury will
generally permit recipients to rely on
such estimates in adjusting their
revenue loss calculations.

Reductions in revenue that are not
attributable to tax changes would
continue to be subject to the
presumption. A requirement that
recipients evaluate the revenue effect of
changes in discretionary policy actions
other than tax changes would be more
difficult for recipients than evaluating
the changes attributable to tax changes
given that state and local governments
do not generally prepare estimates of the
revenue effects of other actions. Finally,
as noted above, taxes are the single
largest source of revenue for state and
local government recipients in the
aggregate.

Revisions to Presumption To Address
Tax Reductions
For these reasons, Treasury is
providing in the final rule that changes
in general revenue that are caused by
tax cuts adopted after the date of
adoption of the final rule (January 6,
2022) will not be treated as due to the
public health emergency, and the
estimated fiscal impact of such tax cuts
must be added to the calculation of
"actual revenue" for purposes of
calculation dates that occur on or after
April 1, 2022. Tax cuts include final
legislative or regulatory action or a new
or changed administrative interpretation
that reduces any tax (by providing for a
reduction in a rate, a rebate, a
deduction, a credit, or otherwise) or
delays the imposition of any tax or tax
increase and that the recipient assesses
has had the effect of reducing tax
revenue relative to current law. This
includes the phase -in or taking effect of
any statute or rule if the phase -in or
taking effect was not prescribed prior to
the issuance of the final rule.

In assessing whether a tax change has
had the effect of reducing tax revenue,
recipients may either calculate the
actual effect on revenue or rely on
estimates prepared at the time the tax
change was adopted. More specifically,
recipients may rely on information
typically prepared in the course of
developing the budget (e.g., expected
revenues) and/or considering tax
changes (e.g., budget scores, revenue
notes) to determine the amount of
revenue that would have been collected
in the absence of the tax cut, as long as
those estimates are based on reasonable
assumptions and do not use dynamic
methodologies that incorporate the
projected effects of macroeconomic
growth, given that macroeconomic

Federal Register / Vol. 87, No. 18 / Thursday, January 27, 2022 /Rules and Regulations 4407
growth is accounted for in the
counterfactual growth assumptions.

Recipients that choose to calculate the
actual effect of a tax change on revenue
must similarly base their calculations on
reasonable estimates that do not use
dynamic methodologies. Recipients
should apply this adjustment in
determining their actual revenue totals
at Step 3 in the revenue loss calculation
described above.

Revisions to Presumption To Address
Tax Increases
As noted above, the calculation
methodology in the interim final rule
implicitly assumed that recipients did
not experience a reduction in revenue
due to the public health emergency if
they did not experience a reduction in
aggregate revenue relative to the
counterfactual estimate. Treasury
recognizes that some recipients may
have experienced a reduction in
revenue due to the public health
emergency that was offset by other
revenue, particularly in the case of
increases to tax revenue resulting from
a tax increase. The final rule requires
recipients that increased taxes to deduct
the amount of increases to revenue
attributable to such tax increase. This
change is also consistent with the
incorporation in the interim final rule
and final rule of a counterfactual growth
rate, which effectively permits
recipients to count revenue losses due
to the public health emergency that are
offset by increased tax revenue resulting
from organic growth.

For these reasons, Treasury is
providing in the final rule that
recipients must subtract from their
calculation of actual revenue the effect
of tax increases adopted after the date of
adoption of this final rule (January 6,
2022) for purposes of calculation dates
that occur on or after April 1, 2022. This
change and the change to the final rule
described above treat tax changes in a
consistent manner: In the case of
reduction in revenue resulting from a
tax cut, a recipient must add the amount
of that reduction to its calculation of
actual revenue, and in the case of an
increase in revenue resulting from a tax
increase, a recipient must subtract the
amount of additional revenue collected
as a result of the tax increase from its
calculation of actual revenue.298
299 The final rule does not permit recipients to
reflect the effects of other changes in policy, such
as increases in fees adopted after adoption of the
final rule. Treasury understands that the main
beneficiaries of such a change would be those
recipients that will benefit from the standard
allowance provided for in the final rule and that for
other recipients the administrative burden on
recipients needed to calculate these adjustments
As is the case with tax cuts, discussed
above, tax increases that must be
reflected in the calculation of revenue
include final legislative or regulatory
action or a new or changed
administrative interpretation that
increases any tax and that the recipient
assesses has had the effect of increasing
tax revenue relative to current law. In
assessing whether a tax change has had
the effect of increasing tax revenue,
recipients may either calculate the
actual effect on revenue or rely on
estimates prepared at the time the tax
change was adopted. Recipients may
rely on information typically prepared
in the course of developing the budget
(e.g., expected revenues) and/or
considering tax changes (e.g., budget
scores, revenue notes) to determine the
amount of revenue that was collected as
a result of the tax increase as long as
those estimates are based on reasonable
assumptions and do not use dynamic
methodologies that incorporate the
projected effects of macroeconomic
growth, given that macroeconomic
growth is accounted for in the
counterfactual growth assumptions.

Recipients that choose to calculate the
actual effect of a tax change on revenue
must similarly base their calculations on
reasonable estimates that do not use
dynamic methodologies. Recipients
should apply this adjustment in
determining their actual revenue totals
at Step 3 in the revenue loss calculation
described above.

Previously Adopted Tax Changes
As discussed above, the final rule will
not require recipients to reflect the
revenue effects of tax increases or
decreases adopted prior to the adoption
of the final rule. Recipients that adopted
a tax change in a previous period will
not be required to recalculate the
amount of revenue loss as of prior
calculation dates or to reflect the fiscal
impacts of such tax changes in
calculation dates after the effective date
of the final rule. However, the final rule
will permit recipients to elect to reflect
the revenue effects of their tax changes
adopted between the beginning of the
public health emergency and the
adoption of the final rule.299 If a
recipient elects to do so, it must do so
with respect to all of its tax changes
would outweigh the benefit of having a somewhat
larger amount of funds available for government
services.
299 The final rule also addresses the possibility
that some recipients may have fiscal years ending
during the period between January 6, 2022 and
April 1, 2022; such recipients' election to reflect tax changes from prior periods would also apply to
changes during this period with respect to the
calculation date in this period.
adopted between the beginning of the
public health emergency and the
adoption of the final rule. Treasury
intends to revise its reporting
requirements to permit recipients to
amend their previously reported
calculation periods to reflect such
changes.

Determination of the Base Year
Under the ARPA and interim final
rule, SLFRF funds may be used "for the
provision of government services to the
extent of the reduction in revenue . . .
relative to revenues collected in the
most recent full fiscal year" of the
recipient. Therefore, the base year for
the revenue loss calculation is the most
recent full fiscal year prior to the
COVID-19 public health emergency.

Public Comment: Treasury received
multiple comments asking for flexibility
in determining base year revenues. For
instance, some commenters asked to use
a different base year than the "most
recent full fiscal year" prior to the
pandemic for calculating revenue loss;
others asked to be able to average prior
years. Commenters stated that, for
various reasons, revenue was artificially
low in the last full fiscal year prior to
the public health emergency, and,
therefore, using revenue in that year as
the base year did not accurately reflect
expected revenue in a normal year. For
example, several Tribes stated that
unforeseeable weather events resulted
in forced closure of casinos which, in
turn, artificially deflated revenues in the
base year. Other commenters indicated
that one-time anomalies in the timing of
tax collection in that year artificially
pushed revenue into the following fiscal
year. Similarly, a few commenters noted
that tax changes that took effect in the
middle of the base year may artificially
skew the size of the revenue loss
experienced by the recipient
government.

Treasury Response: Treasury
understands that recipients may have
experienced events in the base year that
led to lower or higher revenues than
what they otherwise would have
collected. The ARPA provides that
revenue loss is to be determined with
respect to revenue in the most recent
full fiscal year prior to the pandemic,
and therefore the final rule maintains its
incorporation of the statutory definition.

In calculating revenue loss, recipients
may use data on a cash, accrual, or
modified accrual basis, provided that
recipients are consistent in their choice
of methodology throughout the covered
period, which might help recipients
adjust to certain delays in revenue
receipt. Both the standard allowance
and elements of the formula (e.g.,

4408 Federal Register / Vol. 87, No. 18 / Thursday, January 27, 2022 / Rules and Regulations counterfactual growth rate) incorporate
generous assumptions to give recipients
flexibility and to account for variation
among recipients' experiences during
the pandemic.

Government Services
The SUPPLEMENTAL INFORMATION to the
interim final rule provided a non -
exhaustive list of examples of services
that are government services. The
interim final rule also discussed why
neither payment of debt service nor
replenishing financial reserves
constitutes government services, as
these expenditures do not provide
services but relate to the financing of
such services. Similarly, government
services under the interim final rule did
not include satisfaction of any
obligation arising under or pursuant to
a settlement agreement, judgment,
consent decree, or judicially confirmed
debt restructuring in a judicial,
administrative, or regulatory
proceeding, unless the judgment or
settlement required the provision of
government services.

Public Comment: Treasury received
several comments requesting further
clarification regarding the scope of
government services, including asking
for either a specific definition of
government services or that a specific
use be expressly deemed to be a
government service. Some commenters
disagreed with the exclusions from
government services in the interim final
rule. For instance, many of the
comments Treasury received suggested
that replenishing reserve funds and at
least certain types of debt service should
be treated as providing governmental
services. Some commenters also
suggested that a recipient should be able
to use funds for costs incurred before
March 3, 2021. Other commenters asked
Treasury to maintain the prohibition on
using the funds to pay debt service.

Treasury Response: Treasury
continues to believe that the lists of
activities that either are or are not
providing government services are
accurate but is clarifying here that,
generally speaking, services provided by
the recipient governments are
"government services" under the
interim final rule and final rule, unless
Treasury has stated otherwise.

Government services include, but are
not limited to, maintenance or pay -go
funded building 300 of infrastructure,
including roads; modernization of
cybersecurity, including hardware,
300 Pay -go infrastructure funding refers to the
practice of funding capital projects with cash -on -
hand from taxes, fees, grants, and other sources,
rather than with borrowed sums.
software, and protection of critical
infrastructure; health services;
environmental remediation; school or
educational services; and the provision
of police, fire, and other public safety
services.

The aforementioned list of
government services is not exclusive.

However, recipients should be mindful
that other restrictions may apply,
including those articulated in the
section Restrictions on Use. In the final
rule, Treasury is maintaining the
limitations on government services
included in the interim final rule and
has addressed and responded to public
commenters on these issues in the
section Restrictions on Use.

D. Investments in Water, Sewer, and
Broadband Infrastructure
Summary of Interim Final Rule
Under the ARPA, recipients may use
funds to make necessary investments in
water, sewer, and broadband
infrastructure. The interim final rule
provided recipients with the ability to
use funds for a broad array of uses
within these categories.

The interim final rule discussed two
general provisions that apply across all
water, sewer, and broadband
infrastructure investments. First, the
interim final rule addressed the
meaning of "necessary" investments as
meaning those designed to provide an
adequate minimum level of service and
unlikely to be made using private
sources of funds. Second, the interim
final rule encouraged recipients to use
strong labor standards in water, sewer,
and broadband projects, as discussed
below.

Necessary Investments
The statute limits investments to
those that are necessary. As discussed in
more detail below, Treasury determined
that the types of water and sewer
projects that were authorized under the
interim final rule by reference to
existing Environmental Protection
Agency (EPA) programs would in all
cases be necessary investments given
the conditions applicable to such EPA
programs. Similarly, the interim final
rule's definition of eligible broadband
projects as those designed to provide a
certain standard of service to those
households and businesses with limited
existing service was based on the
statutory requirement that investments
in water, sewer, and broadband must be
"necessary."
As discussed further below, Treasury
has expanded the scope of what is an
eligible water and sewer infrastructure
project to include additional uses. In
particular, the final rule permits use of
SLFRF funds for certain dam and
reservoir restoration projects and certain
drinking water projects to support
population growth. The nature of these
additional uses is such that additional
factors must be considered in
determining whether one of these
additional uses is a necessary project. In
addition, Treasury recognizes that there
may be a need for improvements to
broadband beyond those households
and businesses with limited existing
service as defined in the interim final
rule. Treasury has replaced this specific
requirement based on an understanding
that broadband investments may be
necessary for a broader set of reasons.

Given this expansion of what is
considered in scope as a water, sewer,
or broadband infrastructure project, the
final rule provides a further elaboration
of Treasury's understanding of the
conditions under which an
infrastructure project will be considered
to be a necessary investment. Treasury
considers a necessary investment in
infrastructure to be one that is (1)
responsive to an identified need to
achieve or maintain an adequate
minimum level of service, which may
include a reasonable projection of
increased need, whether due to
population growth or otherwise and (2)
a cost-effective means for meeting that
need, taking into account available
alternatives. In addition, given that
drinking water is a resource that is
subject to depletion, in the case of
investments in infrastructure that
supply drinking water in order to meet
projected population growth, the project
must be projected to be sustainable over
its estimated useful life.

Not included in the list of criteria
above is the requirement in the interim
final rule that the project be unlikely to
be made using private sources of funds.

Given that it may be difficult to assess
in a particular case what the probability
of private investment in a project would
be, Treasury has eliminated this
standard from the meaning of necessary
but still encourages recipients to
prioritize projects that would provide
the greatest public benefit in their
respective jurisdictions.

Strong Labor Standards in Water, Sewer,
and Broadband Construction
As stated in the Supplementary
Information to the interim final rule,
Treasury encourages recipients to carry
out investments in water, sewer, or
broadband infrastructure in ways that
produce high -quality infrastructure,
avert disruptive and costly delays, and

Federal Register / Vol. 87, No. 18 / Thursday, January 27, 2022 / Rules and Regulations 4409 promote efficiency.3o1 Treasury
encourages recipients to use strong labor
standards, including project labor
agreements (PLAs) and community
benefits agreements that offer wages at
or above the prevailing rate and include
local hire provisions. Treasury also
recommends that recipients prioritize in
their procurement decisions employers
who can demonstrate that their
workforce meets high safety and
training standards (e.g., professional
certification, licensure, and/or robust in-
house training), that hire local workers
and/or workers from historically
underserved communities, and who
directly employ their workforce or have
policies and practices in place to ensure
contractors and subcontractors meet
high labor standards. Treasury further
encourages recipients to prioritize
employers (including contractors and
subcontractors) without recent
violations of federal and state labor and
employment laws.

Treasury believes that such practices
will promote effective and efficient
delivery of high -quality infrastructure
projects and support the economic
recovery through strong employment
opportunities for workers. Such
practices will also reduce the likelihood
of potential project challenges like work
stoppages or safety accidents, while
ensuring a reliable supply of skilled
labor and minimizing disruptions, such
as those associated with labor disputes
or workplace injuries. That will, in turn,
promote on -time and on -budget
delivery.

Furthermore, among other
requirements contained in 2 CFR 200,
Appendix II, all contracts made by a
recipient or subrecipient in excess of
$100,000 with respect to water, sewer,
or broadband infrastructure project that
involve employment of mechanics or
laborers must include a provision for
compliance with certain provisions of
the Contract Work Hours and Safety
Standards Act, 40 U.S.C. 3702 and 3704,
301 Treasury received several comments related to
its encouragement of certain wage and labor
standards in the Supplementary Information to the
interim final rule. Some commenters opposed this
encouragement, arguing that even encouragement
and reference to PLAs and prevailing wage laws
could lead to confusion or make it more likely that
recipients would apply labor standards in ways that
would discourage competition and raise project
costs. Conversely, some commenters supported the
encouragement of the use of certain standards,
including giving preference to employers that meet
certain employment standards (e.g., those that
maintain high safety and training standards)
because it would support the goal of completing
water, sewer, and broadband projects efficiently
and safely. As in the interim final rule, this
encouragement does not impose a legally binding
restriction on recipients.
as supplemented by Department of
Labor regulations (29 CFR part 5).

Treasury will continue to seek
information from recipients on their
workforce plans and water, sewer, and
broadband projects undertaken with
SLFRF funds. This reporting will
support transparency and competition
by enhancing available information on
the services being provided. Since
publication of the interim final rule,
Treasury has provided recipients with
additional guidance and instructions on
the reporting requirements.302
Environmental and Other Generally
Applicable Requirements
Treasury cautions that, as is the case
with all projects engaged in using the
SLFRF funds, all projects must comply
with applicable federal, state, and local
law. In the case of infrastructure
projects in particular, this includes
environmental and permitting laws and
regulations. Likewise, as with all capital
expenditure projects using SLFRF
funds, projects must be undertaken and
completed in a manner that is
technically sound, meaning that they
must meet design and construction
methods and use materials that are
approved, codified, recognized, fall
under standard or acceptable levels of
practice, or otherwise are determined to
be generally acceptable by the design
and construction industry.

1. Water and Sewer Infrastructure
Sections 602(c)(1)(D) and Section
603(c)(1)(D) of the Social Security Act
provide that recipients may use the
SLFRF funds "to make necessary
investments in water [and] sewer . . .
infrastructure." The interim final rule
permitted a broad range of necessary
investments in projects that improve
access to clean drinking water and
improve wastewater and stormwater
infrastructure systems. As discussed
below, after review of comments
received on the interim final rule,
Treasury has made changes in the final
rule to expand the scope of eligible
water and sewer projects.

Summary of Interim Final Rule and
Final Rule Structure
Background: In the interim final rule,
Treasury aligned eligible uses of the
SLFRF with the wide range of types or
categories of projects that would be
eligible to receive financial assistance
through the Clean Water State Revolving
Fund (CWSRF) or Drinking Water State
Revolving Fund (DWSRF) administered
302 See U.S. Department of the Treasury,
Compliance and Reporting Guidance, 21 (June 24,
2021), https://home.treasury.gov/system/files/136/
SLFRF-Compliance-and-Reporting-Gui d an ce. pd f.
by the Environmental Protection Agency
(EPA). By referring to these existing
programs, with which many recipients
are already familiar, Treasury intended
to provide flexibility to recipients to
respond to the needs of their
communities while facilitating
recipients' identification of eligible
projects. Furthermore, by aligning
SLFRF eligible uses with these existing
programs, Treasury could ensure that
projects using the SLFRF are limited to
"necessary investments."
Public Comment: Treasury received
many comments responding to the
water and sewer infrastructure
provisions of the interim final rule from
state, local, and Tribal governments,
industry trade associations, public
interest groups, private individuals, and
other interested parties. Commenters
requested that Treasury provide a wider
set of eligible uses for water and sewer
infrastructure beyond those uses
articulated by the DWSRF and CWSRF,
suggesting that Treasury expand the
definition of necessary water and sewer
infrastructure.

Treasury Response: In response to
commenters, Treasury is expanding the
eligible use categories for water and
sewer infrastructure, discussed in
further detail below. Because the
interim final rule aligned the definition
of necessary water and sewer
infrastructure with the eligible uses
included in the DWSRF and CWSRF,
Treasury is reflecting in the final rule a
revised standard for determining a
necessary water and sewer
infrastructure investment for eligible
water and sewer uses beyond those uses
that are eligible under the DWSRF and
CWSRF.

Interpretation of Necessary Investments
and Water and Sewer Infrastructure
Necessary Investments: As discussed
above, Treasury considers an
investment in infrastructure to be
necessary if it is (1) responsive to an
identified need to achieve or maintain
an adequate minimum level of service,
which for some eligible project
categories may include a reasonable
projection of increased need, whether
due to population growth or otherwise
and (2) a cost-effective means for
meeting that need, taking into account
available alternatives. In addition, in the
case of investments in drinking water
service infrastructure to supply drinking
water to satisfy a projected increase in
population, the project must also be
projected to be sustainable over its
estimated useful life. As detailed further
below, DWSRF and CWSRF eligible
projects continue to be presumed to be
necessary investments under the final

4410 Federal Register / Vol. 87, No. 18 /Thursday, January 27, 2022 /Rules and Regulations rule, with the exception of projects for
the rehabilitation of dams and
reservoirs, which the EPA has permitted
in certain circumstances under the
DWSRF and, as discussed below, are
addressed separately in the final rule.

In evaluating whether a project would
respond to a need to achieve or
maintain an adequate minimum level of
service, a recipient should consider
whether it would meet the needs of the
population to be served and would
satisfy applicable standards. For
example, a drinking water project must
be sized such that it provides an
adequate volume of water to households
and other customers and must meet
applicable standards for drinking water
quality under the Safe Drinking Water
Act (SDWA). Similarly, a centralized
wastewater treatment project should be
designed to manage updated estimated
flow rates and comply with Clean Water
Act requirements. These requirements
are already reflected in the eligibility
criteria of the DWSRF and CWSRF,
respectively.

In evaluating whether a project is a
cost-effective means of providing the
water or sewer service, the recipient
should consider the need for the project,
the costs and benefits of the project
compared to alternatives, and the
effectiveness of the project in meeting
the identified need. Recipients are not
required to conduct a full cost -benefit
analysis; however, they should consider
and analyze relevant factors. For
example, a recipient may not use funds
to pursue a costly dam rehabilitation to
provide drinking water to a community
if it could provide the same service with
a significantly smaller investment by
drawing water from another available
reservoir, assuming that doing so would
meet the other requirements of the final
rule. As detailed further below,
recipients are only required to assess
cost-effectiveness of projects for the
creation of new drinking water systems,
dam and reservoir rehabilitation
projects, or projects for the extension of
drinking water service to meet
population growth needs.

Certain DWSRF eligibilities are
already subject to a cost-effectiveness
test. Specifically, projects that create
new drinking water systems must be a
cost-effective solution to addressing the
identified problem.3o3 The EPA also
imposes a cost-effectiveness condition
on dam and reservoir rehabilitation
projects undertaken pursuant to its class
deviation from the DWSRF rule. These
projects are particularly expensive and,
unlike in the case of other types of
eligible projects, there are often
303 See 40 CFR 35.3520(b)(2)(vi).
available alternatives to conducting
these projects. Projects for the extension
of drinking water service to meet
population growth needs are also often
particularly expensive, and there are
often different ways to meet the needs
of expanding populations. Treasury will
accordingly require that recipients
engage in a cost-effectiveness analysis
when engaging in projects for the
creation of new drinking water systems,
dam and reservoir rehabilitation
projects, or projects for the extension of
drinking water service to meet
population growth needs. Other types of
eligible water or sewer projects will not
be subject to this cost-effectiveness test,
including lead line replacement and
lead remediation.3o4
In the case of projects that expand
drinking water service infrastructure to
satisfy a projected increase in
population, the project must also be
sustainable, meaning that the project
can continue providing the adequate
minimum level of service for its
estimated useful life, taking into
account projected impacts of changes to
the climate and other expected demands
on the source of water. For example, a
reservoir rehabilitation project may not
be pursued if the reservoir will no
longer be able to provide an adequate
source of drinking water before the end
of the estimated useful life of the
improvements to the reservoir. In areas
currently impacted by drought or where
drought conditions are expected to be
more frequent or more severe in the
future, sources of drinking water may be
diminished more quickly than in prior
periods. In considering how much of a
source of water will be available in the
future for the drinking water project, a
recipient must consider that a source of
water may be drawn upon or otherwise
used for other current and expected
uses, including use by fish and other
wildlife.

The final rule applies this
sustainability condition to projects that
expand drinking water service
infrastructure to satisfy a projected
increase in population but not to other
drinking water projects. When a new
source of water is required to remedy an
existing threat to public health, as in the
case of source projects eligible under the
DWSRF, sustainability should be a
consideration, but in some cases, the
need to replace a contaminated source
may mean that a less sustainable choice
304 In such cases, either the projects are
presumptively cost-effective (e.g., lead projects
would always be considered cost-effective given the
costs imposed by lead poisoning) or a cost-
effectiveness test is less relevant given the lack of
available alternatives or the relatively low cost of
the project.
may be made. When faced with such an
issue, such as in the case of a
contaminated well system, a project to
replace the contaminated source can be
said to be "necessary" even if the
replaced source is not sustainable over
the long term. Expediency may dictate
that a shorter -term solution is pursued
if it is cost-effective and will prevent
health issues while a longer -term
solution can be found. In contrast, an
expansion to accommodate population
growth cannot be said to be necessary if
it is not sustainable over its estimated
useful life.

Not included in the list of criteria
above is the requirement in the interim
final rule that the project be unlikely to
be made using private sources of funds.

Given that it may be difficult to assess
in a particular case what the probability
of private investment in a project would
be, Treasury has eliminated this
standard from the meaning of necessary
but nevertheless encourages recipients
to apply funds to projects that would
provide the greatest public benefit.

Water and Sewer Infrastructure: As
stated above, Congress provided that
SLFRF funds are available for
"necessary water, sewer, and broadband
infrastructure." Treasury interprets the
reference to water and sewer uses
consistent with the inclusion of
broadband uses. Water, sewer, and
broadband infrastructure all involve the
provision of essential services to
residents, businesses, and other
consumers. As the pandemic has made
clear, access to broadband has itself
become essential for individuals and
businesses to participate in education,
commerce, work, and civic matters and
to receive health care and social
services.

Water and sewer services provided
broadly to the public as essential
services include the provision of
drinking water and the removal,
management, and treatment of
wastewater and stormwater.305
Although governments are engaged in
other infrastructure related to water,
including irrigation projects,
transportation projects, and recreation
projects, such projects go beyond the
scope of what is provided to all
residents as an essential service.

Provision of drinking water and
removal, management, and treatment of
305 In many jurisdictions, stormwater flows into
the sewer system rather than into a separate
stormwater system. The separate inclusion of
"water" and "sewer" infrastructure also makes
clear that "water" in this context cannot refer to all
uses relevant to water. Given that sewer systems
carry wastewater (and often stormwater), if water
infrastructure were to refer to all water -related
infrastructure in this context, it would make the
inclusion of sewer infrastructure redundant.

Federal Register / Vol. 87, No. 18 /Thursday, January 27, 2022 /Rules and Regulations 4411 wastewater and stormwater are the
typical responsibilities of "water and
sewer" authorities throughout the
country, and there is a tremendous need
for improvements to the ability of state,
local, and Tribal governments to
provide such services, including to
address the consequences of deferred
maintenance and additional resiliency
needed to adapt to changes to the
climate.306
Although the meaning of water and
sewer infrastructure for purposes of
sections 602(c)(1)(D) and 603(c)(1)(D) of
the Social Security Act does not include
all water -related uses, Treasury has
made clear in this final rule that
investments to infrastructure include a
wide variety of projects. Treasury
interprets the word "infrastructure" in
this context broadly to mean the
underlying framework or system for
achieving the given public purpose,
whether it be provision of drinking
water or management of wastewater or
stormwater.307 As discussed below, this
can include not just storm drains and
culverts for the management of
stormwater, for example, but also
bioretention basins and rain barrels
implemented across a watershed,
including on both public and private
property, that together reduce the
amount of runoff that needs to be
managed by traditional infrastructure.

Further, Treasury understands that
investments in infrastructure include
3051n addition, Treasury interprets the eligible
uses of SLFRF funds against the background of the
Coronavirus Relief Fund (CRF), for which the
SLFRF funds are, in part, a successor. CRF
recipients expressed great interest in using the CRF
to pursue water infrastructure projects, including
provision of drinking water and internal plumbing
on Tribal lands and in Alaskan villages, and
broadband projects throughout the country;
Treasury permitted these projects given the
connection to the public health emergency (see
Coronavirus Relief Fund for States, Tribal
Governments, and Certain Eligible Local
Governments, 86 FR 4182, 4190, 4192 (Jan. 15,
2021), but the short deadline for use of funds made
it difficult to use CRF funds in this way. Congress'
inclusion of the water, sewer, and broadband clause
in the ARPA, along with the SLFRF funds' longer
eligible use date, is responsive to this unmet need.

As discussed below, Congress in the Infrastructure
Investment and Jobs Act amended sections 602(c)
and 603(c) of the Social Security Act to add a new
paragraph as sections 602(c)(4) and 603(c)(5),
respectively, providing that SLFRF funds may be
used to meet non-federal matching requirements of
any authorized Bureau of Reclamation project. This
authority was added as a separately enumerated
eligible use regardless of whether the underlying
project would be an eligible use of SLFRF funds
under the water and sewer infrastructure eligible
use category.
307 See, e.g., section 502 of the Federal Water
Pollution Control Act (33 U.S.C. 1362), defining
"green infrastructure" as "the range of measures
that use plant or soil systems, permeable pavement
or other permeable surfaces or substrates,
stormwater harvest and reuse, or landscaping to
store, infiltrate, or evapotranspirate stormwater and
reduce flows to sewer systems or to surface waters."
improvements that increase the capacity
of existing infrastructure and extend the
useful life of existing infrastructure.

Accordingly, water and sewer
infrastructure investment projects
include those that conserve water,
thereby reducing pressure on
infrastructure for the provision of
drinking water, and that recycle
wastewater and stormwater, thereby
reducing pressure on the infrastructure
for treating and managing wastewater
and stormwater.

As with other infrastructure projects
and capital expenditure projects that are
permitted as responses to the public
health emergency and its negative
economic impacts, costs for planning
and design and associated pre -project
costs are eligible uses of SLFRF funds.

Costs for the acquisition of land are also
eligible, but only if needed for the
purposes of locating eligible project
components. Recipients should ensure
that they have the technical, financial,
and managerial capability to ensure
compliance with the requirements of the
SDWA, or that the assistance will
ensure compliance and the owners or
operators of the systems will undertake
feasible and appropriate changes in
operations to ensure compliance over
the long-term.

Drinking Water State Revolving Fund
and Clean Water State Revolving Fund
Background: As stated above, in the
interim final rule, Treasury included
eligible uses of the DWSRF and the
CWSRF as eligible uses of the SLFRF in
the water and sewer infrastructure
category. By providing that projects
eligible under the DWSRF and the
CWSRF are also eligible uses of SLFRF
funds, the interim final rule permitted a
broad range of projects that improve
drinking water infrastructure, such as
building or upgrading facilities and
transmission, distribution, and storage
systems, including replacement of lead
service lines. With respect to clean
water and wastewater infrastructure, the
interim final rule provided that
recipients may use SLFRF funds to
construct publicly owned treatment
infrastructure, manage and treat
stormwater or subsurface drainage
water, and facilitate water reuse, among
other uses. Consistent with the DWSRF
and the CWSRF, the interim final rule
provided that SLFRF funds may be used
for cybersecurity needs to protect water
or sewer infrastructure, such as
developing effective cybersecurity
practices and measures at drinking
water systems and publicly owned
treatment works.

Use of DWSRF and CWSRF to Support
Climate Change Adaptations. Many of
the types of projects eligible under
either the DWSRF or CWSRF also
support efforts to address climate
change. For example, by taking steps to
manage potential sources of pollution
and preventing these sources from
reaching sources of drinking water,
projects eligible under the DWSRF and
CWSRF may reduce energy required to
treat drinking water. Similarly, projects
eligible under the DWSRF and CWSRF
include measures to conserve and reuse
water, for example through projects to
reuse or recycle wastewater, stormwater,
or subsurface drainage water. Treasury
encourages recipients to consider green
infrastructure investments and projects
to improve resilience to the effects of
climate change. For example, more
frequent and extreme precipitation
events combined with construction and
development trends have led to
increased instances of stormwater
runoff, water pollution, and flooding.

Green infrastructure projects that
support stormwater system resiliency
could include bioretention basins that
provide water storage and filtration
benefits, and green streets, where
vegetation, soil, and engineered systems
are combined to direct and filter
rainwater from impervious surfaces. In
cases of a natural disaster, recipients
may also use SLFRF funds for water
infrastructure to provide relief, such as
interconnecting water systems or
rehabilitating existing wells during an
extended drought.

Public Comment: Many commenters
expressed support for the interim final
rule's alignment of the use of funds for
water and sewer infrastructure under
the SLFRF with the project categories
provided through the EPA's DWSRF and
CWSRF programs.

Many commenters also provided
recommendations about the specific
types of water infrastructure projects
that should be eligible under the final
rule. In many of these cases,
commenters recommended that
Treasury include project types that are
already eligible under the DWSRF and
CWSRF and thus eligible under the
interim final rule and final rule. For
example, several commenters requested
that aquifer recharge projects, or other
groundwater protection and restoration
projects, be included as eligible uses of
SLFRF when certain aquifer recharge
projects that (1) implement a nonpoint
source pollution management
program 308 or (2) constitute reuse of
308 Specifically, this would include desalination
projects that decrease the burden on aquifers where
there is causal relationship between aquifer
withdrawals and saltwater intrusion if the projects
implement a nonpoint source pollution
Continued

4412 Federal Register / Vol. 87, No. 18 / Thursday, January 27, 2022 / Rules and Regulations wastewater, stormwater, or subsurface
drainage water are in fact eligible uses
under the CWSRF. Furthermore, under
the DWSRF, eligible projects include
certain aquifer storage and recovery
systems for water storage.

Treasury Response: Eligible projects
articulated in the DWSRF and CWSRF
continue to be eligible uses of SLFRF
funds under the final rule. Recognizing
that recipients have faced challenges
interpreting eligible use categories
under the interim final rule or cross-
referencing EPA program materials to
interpret eligible project types, Treasury
is including in this Supplementary
Information additional information on
the types of projects eligible under the
DWSRF and CWSRF. Treasury
emphasizes that this further clarification
does not represent a change in
eligibility. Treasury encourages
recipients to reference EPA handbooks
for the DWSRF and CWSRF, which
provide further information and detail
about the types of projects eligible
under those programs and thus under
the final rule.

Eligible projects under the DWSRF.

Eligibilities under the DWSRF, the
interim final rule, and the final rule
include projects that address present or
prevent future violations of health -based
drinking water standards. These include
projects needed to maintain compliance
with existing national primary drinking
water regulations for contaminants with
acute and chronic health effects.

Projects to replace aging infrastructure
are also eligible uses if they are needed
to maintain compliance or further the
public health protection objectives of
section 1452 of the SDWA.309 The
following project categories are eligible
under the DWSRF, were eligible under
the interim final rule, and continue to
be eligible under the final rule:
(i) Treatment projects, including
installation or upgrade of facilities to
management program under section 319 of the
Clean Water Act. This could include projects in
which desalinated seawater is injected into the
aquifer to mitigate or prevent salt water intrusion,
as well as projects in which brackish water is
removed from an aquifer, desalinated, and returned
to the aquifer.
309 See 42 U.S.C. 300j-12(a)(2)(B) (limiting
financial assistance used by a public water system
to expenditures (including expenditures for
planning, design, siting, and associated
preconstruction activities, or for replacing or
rehabilitating aging treatment, storage, or
distribution facilities of public water systems, but
not including monitoring, operation, and
maintenance expenditures of a type or category
which the Administrator of the EPA has
determined, through guidance, will facilitate
compliance with national primary drinking water
regulations applicable to the system under 42
U.S.C. 300g-1 or otherwise significantly further the
health protection objectives of the SWDA); See also
40 CFR 35.3520(b).
improve the quality of drinking water to
comply with primary or secondary
standards and point of entry or central
treatment under section 1401(4)(B)(i)(III)
of the SDWA.
(ii) Transmission and distribution
projects, including installation or
replacement of transmission and
distribution pipes to improve water
pressure to safe levels or to prevent
contamination caused by leaks or breaks
in the pipes.
(iii) Source projects, including
rehabilitation of wells or development
of eligible sources to replace
contaminated sources.
(iv) Storage projects, including
installation or upgrade of eligible
storage facilities, including finished
water reservoirs, to prevent
microbiological contaminants from
entering a public water system.
(v) Consolidation projects, including
projects needed to consolidate water
supplies where, for example, a supply
has become contaminated or a system is
unable to maintain compliance for
technical, financial, or managerial
reasons.
(vi) Creation of new systems,
including those that, upon completion,
will create a community water system to
address existing public health problems
with serious risks caused by unsafe
drinking water provided by individual
wells or surface water sources. Eligible
projects are also those that create a new
regional community water system by
consolidating existing systems that have
technical, financial, or managerial
difficulties. Projects to address existing
public health problems associated with
individual wells or surface water
sources must be limited in scope to the
specific geographic area affected by
contamination. Projects that create new
regional community water systems by
consolidating existing systems must be
limited in scope to the service area of
the systems being consolidated.

Ineligible projects under the DWSRF.

Federally -owned public water systems
and for-profit noncommunity water
systems are not eligible to receive
DWSRF funds and therefore SLFRF
funds.310 The acquisition of water
rights, laboratory fees for routine
compliance monitoring, and operation
and maintenance expenses are not costs
associated with investments in
infrastructure and thus would not be
eligible under the final rule. 311 Projects
needed primarily to serve future
population growth are also ineligible
under the DWSRF; the treatment of such
projects under the final rule is discussed
310 See 40 CFR 35.3520(d)(1).
311 See id at § 35.3520(e)(2)—(4).
separately below under "Expansion of
Drinking Water Service." Projects
eligible under the DWSRF must be sized
only to accommodate a reasonable
amount of population growth expected
to occur over the useful life of the
project.

Eligible projects under the CWSRF.

The final rule continues to allow the use
of SLFRF funds for projects eligible
under the CWSRF, consistent with the
interim final rule. Under the CWSRF, a
project must meet the criteria of one of
the following CWSRF eligibilities to be
eligible for assistance. Section 603(c) of
the Clean Water Act (CWA) 312 provides
that the CWSRF can provide assistance:
(i) to any municipality, intermunicipal,
interstate, or state agency for construction of
publicly owned treatment works (as defined
in section 212 of the CWA); 313
(ii) for the implementation of a
management program established under
section 319 of the CWA; 314
(iii) for the development and
implementation of a conservation and
management plan under section 320 of the
CWA; 315
(iv) for the construction, repair, or
replacement of decentralized wastewater
treatment systems that treat municipal
wastewater or domestic sewage. Eligible
projects include, but are not limited to, the
construction of new decentralized systems
(e.g., individual onsite systems and cluster
systems), as well as the upgrade, repair, or
replacement of existing systems.
(v) for measures to manage, reduce,
treat, or recapture stormwater or
subsurface drainage water. Publicly and
privately owned, permitted and
unpermitted projects that manage,
reduce, treat, or recapture stormwater or
subsurface drainage water are eligible.

For example, projects that are
specifically required by a Municipal
Separate Storm Sewer System (MS4)
permit are eligible, regardless of
ownership. Projects may include, but
are not limited to green roofs,
bioretention basins, roadside plantings,
porous pavement, and rainwater
harvesting.
(vi) to any municipality,
intermunicipal, interstate, or state
agency for measures to reduce the
demand for publicly owned treatment
works capacity through water
conservation, efficiency, or reuse.

Eligible projects include, but are not
limited to, the installation, replacement,
or upgrade of water meters; plumbing
fixture retrofits or replacement; and gray
water recycling. Water audits and water
conservation plans are also eligible.
312 33 U.S.C. 1383(c).
313 33 U.S.C. 1292.
314 33 U.S.C. 1329.
315 33 U.S.C. 1330.

Federal Register / Vol. 87, No. 18 /Thursday, January 27, 2022 /Rules and Regulations 4413
Equipment to reuse effluent (e.g., gray
water, condensate, and wastewater
effluent reuse systems) is eligible.
(vii) for the development and
implementation of watershed projects
meeting the criteria set forth in section
122 of the CWA.316 Projects that
develop or implement a watershed pilot
project related to at least one of the six
areas identified in section 122 of the
CWA are eligible: Watershed
management of wet weather discharges,
stormwater best management practices,
watershed partnerships, integrated
water resource planning, municipality -
wide stormwater management planning,
or increased resilience of treatment
works.
(viii) to any municipality,
intermunicipal, interstate, or state
agency for measures to reduce the
energy consumption needs for publicly
owned treatment works. Projects may
include, but are not limited to, the
installation of energy efficient lighting,
HVAC, process equipment, and
electronic equipment and systems at
publicly owned treatment works.

Planning activities, such as energy
audits and optimization studies are also
eligible.
(ix) for reusing or recycling
wastewater, stormwater, or subsurface
drainage water. Projects involving the
reuse or recycling of wastewater,
stormwater, or subsurface drainage
water are eligible. This includes, as part
of a reuse project, the purchase and
installation of treatment equipment
sufficient to meet reuse standards. Other
eligible projects include, but are not
limited to, distribution systems to
support effluent reuse, including piping
the effluent on the property of a private
consumer, recharge transmission lines,
injection wells, and equipment to reuse
effluent (e.g., gray water, condensate,
and wastewater effluent reuse systems).
(x) for measures to increase the
security of publicly owned treatment
works. Security measures for publicly
owned treatment works might include,
but are not limited to, vulnerability
assessments, contingency/emergency
response plans, fencing, security
cameras/lighting, motion detectors,
redundancy (systems and power),
secure chemical and fuel storage,
laboratory equipment, securing large
sanitary sewers, and tamper -proof
manholes. The CWSRF cannot fund
operations and maintenance activities.

Therefore, maintaining a human
presence (i.e., security guards) and
monitoring activities are not eligible.
316 33 U.S.C. 1274.

Other Clarifications of DSWRF and
CWSRF Eligible Project Categories
Public Comment: Several commenters
requested that Treasury provide
clarification of the requirements
associated with use of SLFRF funds for
necessary investments in water and
sewer infrastructure.

Treasury Response: After release of
the interim final rule, Treasury clarified
in further guidance that, while
recipients must ensure that water and
sewer infrastructure projects pursued
are eligible under the final rule,
recipients are not required to obtain
project pre -approval from Treasury or
any other federal agency when using
SLFRF funds for necessary water and
sewer infrastructure projects unless
otherwise required by federal law. For
projects that are being pursued under
the eligibility categories provided
through the DWSRF or CWSRF
programs, project eligibilities are based
on federal project categories and
definitions for the programs and not on
each state's eligibility or definitions.

While reference in the final rule to the
DWSRF, CWSRF, or other federal water
programs is provided to assist recipients
in understanding the types of water and
sewer infrastructure projects eligible to
be funded with SLFRF, recipients do
not need to apply for funding from the
applicable state programs or through
any federal water program. Similarly,
besides eligible project categories, the
final rule does not incorporate other
program requirements or guidance that
attach to the DWSRF, CWSRF, or other
federal water programs. However, as
noted above, recipients should be aware
of other federal or state laws or
regulations that may apply to
construction projects or water and sewer
projects, independent of SLFRF funding
conditions, and that may require pre -
approval from another federal or state
agency.

Expanded Eligible Uses for Water and
Sewer Infrastructure
Summary
Public Comment: Many commenters
requested broader flexibility in the use
of SLFRF funds for water and sewer
infrastructure projects that are not
eligible under the DWSRF and CWSRF.

These commenters argued that localities
are best situated to identify the highest -
need water and sewer projects in their
communities. Several Tribal
government commenters noted that
Tribes have different water and sewer
infrastructure needs than states and
localities and that additional flexibility
in the use of funds would lift current
barriers to improving infrastructure on
Tribal lands.

To achieve additional flexibility,
commenters suggested a range of
options for broadening the eligible use
of SLFRF funds for necessary water and
sewer infrastructure. For example,
several commenters suggested Treasury
broaden the eligibilities provided under
the interim final rule to include project
types eligible under other federal water
and sewer programs.

Treasury Response: Treasury agrees
that additional flexibility for use of
SLFRF funds is warranted and is
providing expanded eligibilities as
described below, several of which
address specific areas of need outlined
by Tribal and rural communities.

As discussed below, Treasury has
incorporated into the final rule projects
that are eligible under certain programs
established by the EPA under the Water
Infrastructure Improvements for the
Nation Act (WIIN Act). Other water -
related grant programs cited by
commenters include projects that are
otherwise already covered by the final
rule, for example because they are
covered as eligible under the DWSRF or
the CWSRF, or projects that are
ineligible under the final rule because
they are beyond the scope of the
meaning of water and sewer projects for
purposes of ARPA. To minimize the
need for recipients of SLFRF funds to
cross reference eligibilities across
multiple federal programs, which may
exacerbate current challenges to
understanding eligibility under SLFRF,
Treasury is providing detailed
information related to expanded
eligibilities within the text of this
SUPPLEMENTARY INFORMATION for the
final rule.

Stormwater Infrastructure
Public Comment: Several commenters
requested that additional stormwater
infrastructure projects be included as
eligible uses of SLFRF funds under the
final rule. Commenters suggested that
culvert repair and resizing and
replacement of storm sewers is
necessary to address increased rainfall
brought about by a changing climate.

Other commenters noted that rural
communities that do not manage their
own sewer systems may rely on this
type of water infrastructure.

Treasury Response: The CWSRF
includes a broad range of stormwater
infrastructure projects, and as such
these projects were eligible under the
interim final rule and continue to be
eligible under the final rule. These
projects include gray infrastructure
projects, such as traditional pipe,
storage, and treatment systems. Projects

4414 Federal Register / Vol. 87, No. 18 /Thursday, January 27, 2022 /Rules and Regulations that manage, reduce, treat, or recapture
stormwater or subsurface drainage water
are also eligible, including real-time
control systems for combined sewer
overflow management, and sediment
control. Culvert infrastructure projects
are eligible under the CWSRF if they (1)
implement a nonpoint source
management plan, (2) implement
National Estuary Program
Comprehensive Conservation and
Management Plan, or (3) implement a
stormwater management plan with the
goal of providing a water quality benefit.

Stormwater projects under the CWSRF
also encompass a number of eligible
green infrastructure categories, such as
green roofs, green streets, and green
walls, rainwater harvesting collection,
storage, management, and distribution
systems, real-time control systems for
harvested rainwater, infiltration basins,
constructed wetlands, including surface
flow and subsurface flow (e.g., gravel)
wetlands, bioretention/bioswales (e.g.,
bioretention basins, tree boxes),
permeable pavement, wetland, riparian,
or shoreline creation, protection, and
restoration, establishment or restoration
of urban tree canopy, and replacement
of gray infrastructure with green
infrastructure including purchase and
demolition costs.

In addition to the eligible uses under
the CWSRF, Treasury is expanding the
eligible uses under the final rule to
include stormwater system
infrastructure projects regardless of
whether there is an expected water
quality benefit from the project.

Treasury anticipates that this eligible
use will allow recipients to manage
increased volumes of stormwater as a
result of changes to the climate. For
example, the final rule now permits the
use of SLFRF funds for the repair,
replacement, or removal of culverts or
other road -stream crossing
infrastructure to the extent the purpose
of the project is to manage stormwater.

In addition, Treasury understands that
the repair, replacement, or removal of
culverts may necessitate the repair or
upgrade of roads. As noted in guidance
issued after the interim final rule,
recipients may use SLFRF funds for
road repairs and upgrades that interact
directly with an eligible stormwater
infrastructure project. All stormwater
infrastructure projects undertaken
should incorporate updated design
features and current best practices.

Private Wells and Septic Systems
Public Comment: Several commenters
requested that the scope of eligible
projects be expanded to allow for the
expenditure of SLFRF funds on private
wells or septic systems. Commenters
noted that wells may be contaminated
with dangerous substances, including
arsenic, lead, radon, and PFAS (per- and
polyfluoroalkyl). Commenters also
suggested that, because rural and
underserved communities are often
reliant on these infrastructure types for
their drinking water or wastewater
needs, lack of appropriate funding to
maintain these systems could present
health and safety issues that
disproportionately affect certain
communities.

Treasury Response: Consistent with
the CWSRF, the installation, repair, or
replacement of private septic units
continues to be an eligible use of SLFRF
funds under the final rule. For example,
eligible projects include those that
address groundwater contamination
resulting from faulty septic units and
those that would connect failing septic
systems to centralized wastewater
treatment. Consistent with the DWSRF,
connecting homes served by a private
well to a public water system is an
eligible use of SLFRF funds.

In addition, Treasury has provided in
the final rule that recipients may use
SLFRF funds for an expanded set of
infrastructure projects that improve
access to and provision of safe drinking
water for individuals served by
residential wells. Eligible projects under
this category include rehabilitation of
private wells, testing initiatives to
identify contaminants in wells, and
treatment activities and remediation
strategies that address contamination.

Remediating Lead in Water
Public Comment: Several commenters
emphasized the need to fully remediate
lead contamination, especially in
structures that serve the public or
populations like children that are
particularly vulnerable to the effects of
lead exposure, such as schools and
daycares. Many American households
and an estimated 400,000 schools and
childcare centers currently lack safe
drinking water.317
Treasury Response: The replacement
of lead service lines, up to premise
plumbing, is an eligible use under the
DWSRF and continues to be an eligible
use of SLFRF funds. Such projects are
eligible regardless of the pipe material
of the replacement lines and ownership
of the property on which the service
line is located. Lead service line
replacement projects can serve
households, schools, or any other
317 The White House, Updated Fact Sheet:

Bipartisan Infrastructure Investment and Jobs Act
(August 2, 2021), https://www.whitehouse.gov/
briefing-room/statements-releases/2021/08/02/
updated fact -sheet -bipartisan -infrastructure -
in vestm en t -an d -jobs -act/.
entities. Given the lifelong impacts of
lead exposure for children and the
widespread prevalence of lead service
lines, Treasury encourages recipients to
consider projects to replace lead service
lines.

In addition, Treasury is providing in
the final rule that for lead service line
replacement projects, recipients must
replace the full length of the service
line, and not just a partial portion of the
service line. Some water utilities, when
replacing service lines, will only replace
the "public portion" of the service line
and physically slice through the lead
service line at the public/private line.

This action can result in elevated
drinking water lead levels for some
period of time after replacement,
suggesting the potential for harm, rather
than benefit during that time period.318
Requiring replacement of the full length
of the service line is also consistent with
the requirements of the EPA's Lead and
Copper Rule Revisions for water
systems that have an action level
exceedance for lead 319 and certain other
water systems.32°
Treasury is expanding eligible uses of
SLFRF funds to include infrastructure
projects eligible under EPA grant
programs authorized by the WIIN
Act.321 Eligible projects under these
programs include the installation or re -
optimization of corrosion control
treatment, replacing lead service lines,
replacing galvanized pipes downstream
of a lead service line (other than lead
pipes within a home as discussed
below), and maintaining an inventory of
the drinking water system's service
lines. Water quality testing, compliance
monitoring, and remediation activities
in schools and other childcare facilities,
as well as activities necessary to
respond to a contaminant, are eligible
uses of SLFRF funds.322 Remediation
318 See EPA Science Advisory Board, Evaluation
of the Effectiveness of Partial Lead Service Line
Replacements, (September 2011), https://
www. epa.gov/sdwa/science-advisory-board-
evaluation-effectiveness-partial-lead-service-line-
replacements (advising against partial lead service
line replacement).
319 Environmental Protection Agency, supra note
188.
328 Environmental Protection Agency, National
Primary Drinking Water Regulations: Lead and
Copper Rule Revisions, 86 FR 4198. 40 CFR 141.84,
and preamble at 4215, January 15, 2021, https://
www.federalregister.gov/d/2020-28691; scheduled
to become effective December 16, 2021,
Environmental Protection Agency, 86 FR 31939,
https://www.federalregister.gov/d/2021-12600 .
321 Eligible uses of funds include those eligible
under the Small, Underserved, and Disadvantaged
Communities Grant (Section 2104), Reduction in
Lead Exposure via Drinking Water Grant Program
(Section 2105) and Lead Testing in School and
Child Care Program Drinking Water Grant Program
(Section 2107).
322 Such testing and remediation programs would
be an eligible use of SLFRF funds given that they

Federal Register / Vol. 87, No. 18 / Thursday, January 27, 2022 / Rules and Regulations 4415
activities such as replacement of
faucets, internal plumbing, and fixtures
in schools and childcare facilities are
also an eligible use of SLFRF funds.

Consistent with the EPA programs,
replacement of lead pipes within a
home is not eligible under the final rule
because the vast majority of lead
contamination cases can be solved by
replacing lead service lines (including
on public and private property) and
faucets and fixtures themselves. As
such, replacement of lead pipes within
a home would not be considered a cost-
effective means for achieving the
desired level of service and thus would
not be a "necessary" investment. The
provision of bottled water is also not an
eligible use of SLFRF funds under this
eligible use category, as it is not an
investment in infrastructure. However,
bottled water in areas with an action
level exceedance for lead in water may
be an eligible use of SLFRF funds under
a separate eligible use category for
"remediation of lead paint and other
lead hazards;" see Assistance to
Households in Public Health and
Negative Economic Impacts.

Water filtration systems are eligible
under the EPA grant programs and the
final rule as long as they are installed as
a permanent part of a facility's system
and not intended for temporary use.

Conducting remediation, follow-up
monitoring, and conducting public
education and outreach about the
availability of infrastructure programs,
such as water testing and fixture
replacement programs funded with
SLFRF funds or otherwise, are also
eligible projects. Finally, recipients
should note that "remediation of lead
paint and other lead hazards" is a
separate eligible use category and a
broader range of programs and services
may be eligible under that section,
including investments that are not
infrastructure; see the eligible use for
"remediation of lead paint and other
lead hazards" in section Assistance to
Households in Public Health and
Negative Economic Impacts.

Dams and Reservoirs
Public Comment: Many commenters
requested that Treasury broaden
eligibilities to include dams and
reservoirs, infrastructure that
commenters noted may in its current
state be unsafe and could put
surrounding communities at risk. Some
would help a recipient determine whether an
infrastructure project, such as a lead line
replacement, is necessary. In contrast, as mentioned
above, the costs of continual testing that is part of
a drinking water or wastewater facilities' operating
costs would not be considered part of an
infrastructure project.
commenters argued that dams and
reservoirs play an important role in
providing municipal water supply and
water to irrigate farmland, including in
areas impacted by recent droughts.

Other commenters noted that a large
number of dams are currently classified
as high -hazard structures, the failure of
which would have severe consequences
for public safety and the local
environment. With respect to reservoirs,
commenters articulated that changing
climate conditions have necessitated
upgrades to reservoir infrastructure to
ensure existing facilities can meet the
local water needs of a community.

Commenters noted that communities
facing drought may also need to adjust
or enhance reservoirs to maintain
adequate water supply.

In contrast, several commenters
suggested that infrastructure projects
related to dams and reservoirs should
not be considered eligible uses of SLFRF
funds. These commenters noted that
alternate sources of funding exist for
dam and reservoir projects and that
dams and reservoir infrastructure could
result in negative impacts to Tribal
communities and negative
environmental impacts, including harm
to wildlife habitats.

Treasury Response: Treasury
understands that many dams and
reservoirs in need of rehabilitation are
dams and reservoirs whose primary
purpose is to provide drinking water. As
discussed above, SLFRF funds are
available for projects related to the
provision of drinking water. Moreover,
since issuance of the interim final rule,
the EPA has adopted a class deviation
from the DWSRF regulations that
permits such dam and reservoir
rehabilitation projects in certain
circumstances.323 In approving this
class deviation, the EPA recognized that
many dams used for drinking water are
aging and deteriorating and pose a
public health risk to communities; that
current dam conditions do not meet
state safety standards; and that reservoir
capacity has diminished and requires
dredging to meet drinking water needs
of the existing population.

Treasury's final rule provides that
funds may be used for rehabilitation of
dams and reservoirs if the primary
purpose of the dam or reservoir is for
drinking water supply and the
rehabilitation project is necessary for
continued provision of drinking water
323 See EPA, Approval of Class Exception from
the Regulatory Prohibitions on the Use of Drinking
Water State Revolving Fund for Rehabilitation of
Dams and Reservoirs (July 14, 2021), available at
https://www.epa.gov/system/files/documents/2021-
07/d wsrf-class-deviation-dam-reservoir-rehab-2021_
O.pdf.
supply. In considering whether a dam or
reservoir project is necessary for the
provision of drinking water supply, a
recipient may take into consideration
future population growth in certain
circumstances, as discussed under
"Expansion of Drinking Water Service
Infrastructure" below, but the project
must in any case be designed to support
no more than a reasonable level of
projected increased need. The recipient
must also determine that the project is
cost-effective, i.e., that there are not
significantly superior alternatives that
are available, taking into consideration
the relative costs and benefits of the
project as compared to those
alternatives.

This change to the final rule would
permit a wide variety of projects.324 The
limitation in the final rule to
rehabilitation of existing dams and
reservoirs reflects the scope of the EPA
class deviation referenced above and
Treasury's understanding of the
significant need for investments in
rehabilitation to address deterioration of
dams and the diminished capacity of
reservoirs. Further, Treasury expects
that in many cases it would be
considerably more difficult to
demonstrate that construction of a new
dam or reservoir would be necessary for
the purpose of the provision of drinking
water than is the case for rehabilitation
of dams and reservoirs already serving
that purpose for a particular population,
particularly given opportunities to meet
drinking water needs through water
reuse and conversation efforts. For these
reasons, and given that the relatively
short period of availability of the funds
makes new dam and reservoir
construction with these funds less
likely, Treasury has limited the scope of
the final rule to dam and reservoir
rehabilitation projects.

As discussed above, Treasury has
determined that ARPA does not
authorize the use of SLFRF funds for
uses other than the provision of
drinking water and the management of
wastewater and storm water. As such,
the final rule does not include
infrastructure projects related to dams
and reservoirs as eligible uses of SLFRF
funds unless they meet the conditions
discussed above.
324 As noted in the EPA's class deviation,
examples of dam rehabilitation projects include
spillway reconstruction or repair; dam resurfacing,
patching, or other structural repairs, including
minimal height increases if needed to maintain the
structural integrity of the dam; grouting for seepage
control or liquefaction remediation (e.g., epoxy
resin, asphalt, or rock); repair or replacement of
drainage systems; and seismic stability efforts (e.g.,
anchors). Examples of reservoir rehabilitation
projects include sedimentation dredging and
reservoir lining.

4416 Federal Register / Vol. 87, No. 18 /Thursday, January 27, 2022 /Rules and Regulations Public Comment: Several commenters
requested that the removal of dams and
associated habitat restoration should be
eligible uses of SLFRF funds, noting that
in some cases, dam removal will
improve water quality while removing
long-term operational expenses for the
recipient.

Treasury Response: Dam removal
projects and associated stream and
habitat restoration projects are eligible
uses of the CWSRF and continue to be
eligible under the final rule when the
removal implements either a nonpoint
source management program plan or a
National Estuary Program
Comprehensive Conservation and
Management Plan or when the removal
will provide a water quality benefit.

Habitat restoration projects more
generally may also be eligible under the
CWSRF and the final rule if they
constitute a form of stormwater
infrastructure.

Expansion of Drinking Water Service
Infrastructure
Public Comment: Commenters asked
for the ability to use funds for drinking
water projects for the purpose of
meeting needs arising from future
growth, which, given the restrictions
applicable to the DWSRF, was not
permitted under the interim final rule.

Treasury Response: As provided for in
the SDWA, the DWSRF is meant to
serve the public health needs of the
existing population. The EPA regulation
implementing the DWSRF program
provides that projects needed primarily
to serve future population growth are
not eligible uses of the DWSRF. A
project that is intended primarily to
address public health or regulatory
compliance issues for the existing
service population may be sized for a
"reasonable" amount of population
growth over the useful life of the
project.325
ARPA does not include the same
limitation as the SDWA. Accordingly,
the final rule provides that recipients
may use SLFRF funds for projects that
are needed to support increased
population in certain cases. ARPA
limits projects to those investments that
are "necessary." As discussed above,
Treasury interprets this to mean that the
investments must be (1) responsive to
an identified need to achieve or
maintain an adequate minimum level of
service, which for some eligible project
categories may include a reasonable
projection of increased need, whether
due to population growth or otherwise
and (2) a cost-effective means for
meeting that need, taking into account
325 See 40 CFR 35.3520(e)(5).
available alternatives. For this eligible
use category, expansion of drinking
water service infrastructure, the project
must also be projected to be sustainable
over its estimated useful life.

Investments must be determined to be
necessary when they are initiated.

Accordingly, Treasury is clarifying in
the final rule that the need identified for
a water or sewer project may include a
need arising from reasonable
expectations of future population
growth, provided that it is necessary at
the time the investment is initiated for
the recipient to make the investment to
meet this growth. For example, a
recipient expecting increased
population during the period of
performance may install a drinking
water treatment plant to meet that
growth. In addition, a recipient
expecting increased population growth
outside the period of performance may
install the treatment plant if the
planning and construction timeline for
the project would require work to begin
during the performance period in order
to meet the expected population growth.

A recipient may install transmission
lines as part of the development of new
housing occurring during the period of
performance. In this case, the housing
development must be in progress; a
recipient may not use the SLFRF funds
to install a water main, for example, to
an undeveloped tract in the expectation
that in the future that tract will be
developed with housing, because there
would be no need for that investment to
be made at the time it is initiated.

For the reasons discussed above, if a
project is undertaken to address
expected growth in population, the
project must also be sustainable,
meaning that the project can continue
providing the adequate minimum level
of service for its estimated useful life,
taking into account projected impacts of
changes to the climate and other
expected demands on the source of
water. In considering how much of a
source of water will be available in the
future for the drinking water project, a
recipient must consider that a source of
water may be drawn upon or otherwise
used for other current and expected
uses, including use by fish and other
wildlife. A drinking water project that is
designed to address a growing
population cannot be considered a
necessary investment if the source of
drinking water will cease to be available
to meet the population's needs before
the end of the estimated useful life of
the project. In such a case, a recipient
should consider alternative sources for
drinking water. See "Interpretation of
Necessary Investments and Water and
Sewer Infrastructure" above for more
information.

Non -Federal Matching Requirements for
Authorized Bureau of Reclamation
Projects
The Infrastructure Investment and
Jobs Act amends sections 602(c) and
603(c) of the Social Security Act to add
an additional eligible use of SLFRF
funds, providing that SLFRF funds
"may be used for purposes of satisfying
any non -Federal matching requirement
required for [an authorized Bureau of
Reclamation project]." 326
This amendment permits the use of
SLFRF funds to meet non-federal
matching requirements of any
authorized Bureau of Reclamation
project, regardless of whether the
underlying project would be an eligible
use of SLFRF funds under the water and
sewer infrastructure eligible use
category. These amendments are
effective as of March 11, 2021, as if
included in the ARPA at the time of its
enactment.327 Treasury will provide
further guidance to recipients on the
scope of Bureau of Reclamation water
projects and expenses covered by this
provision.

Floodplain Management and Flood
Mitigation Projects
Public Comment: Several commenters
requested that projects to address
floodwater, including floodplain
management and flood mitigation
projects, be included as an eligible use
of SLFRF funds. Within this category of
floodplain management and flood
mitigation infrastructure, several
commenters requested that the
installation of levees, flood walls, sea
walls, elevation projects, dredging, or
nature -based flood mitigation projects
be included as eligible projects.

Treasury Response: Treasury notes
that some floodplain management and
flood mitigation infrastructure projects,
including green infrastructure designed
to protect treatment works from flood
waters and flood impact are currently
eligible under the CWSRF and therefore
continue to be eligible under the final
rule.

Treasury has not included floodplain
management and flood mitigation
projects more generally as eligible under
the final rule. Although floodplain
management and flood mitigation are
functions of many state and local
governments, they are not the sort of
generally -provided essential services
included within the meaning of water
326 See Public Law 117-58, 40909(a) —(b) (Nov. 15,
2021).
327 See Public Law 117-58 § 40909(c).

Federal Register / Vol. 87, No. 18 / Thursday, January 27, 2022 / Rules and Regulations 4417
and sewer projects under the ARPA, as
discussed above.

Irrigation
Public Comment: Some commenters
requested that irrigation projects be an
eligible use because they consider such
projects to be critical infrastructure.

Several commenters supported this
request by noting that irrigation systems
may be used to replenish aquifers and
recharge wells, in addition to delivering
water for irrigation. One commenter also
noted that the national irrigation system
is antiquated and in need of repair.

Treasury Response: Some irrigation
projects were eligible under the interim
final rule and continue to be eligible
under the final rule as a result of their
inclusion as eligible projects under the
CWSRF. For example, water efficient
irrigation equipment that reduces the
runoff of nutrients and implements a
management program established under
section 319 of the CWA and/or a
conservation and management plan
under section 320 of the CWA are
eligible uses under the CWSRF and
therefore continue to be an eligible use
of SLFRF funds under the final rule.

Likewise, projects to receive and
distribute reclaimed water for irrigation
systems or other agricultural use are
eligible under the CWSRF and therefore
continue to be an eligible use under the
final rule. Unlike projects for the
improvement of irrigation systems
generally, these reclaimed water
projects are related to wastewater
treatment and stormwater management,
which are within the scope of the
meaning of water and sewer
infrastructure for purposes of ARPA.

Treasury considered commenter
requests for inclusion of additional
irrigation infrastructure and determined
that irrigation projects more generally
are not permitted under the final rule.

Although these types of projects may be
water -related infrastructure, they are not
the sort of generally -provided essential
services included within the meaning of
water and sewer projects under ARPA,
as discussed above.

Consumer Incentive Programs
Public Comment: One commenter
requested that consumer incentive
programs in the areas of water use
efficiency, conservation, green
infrastructure, reuse, and other
distributed solutions be an allowable
use of SLFRF.

Treasury Response: The DWSRF and
CWSRF eligibilities include the
development and implementation of
incentive and educational programs that
address and promote water
conservation, source water protection,
and efficiency related to infrastructure
improvements, e.g., incentives such as
rebates to install green infrastructure
such as rain barrels or promote other
water conservation activities. Treasury
clarifies that such project types were
eligible under the interim final rule and
continue to be eligible under the final
rule.

2. Broadband Infrastructure
Under the ARPA, recipient
governments may use SLFRF funds to
make "necessary investments in . . .
broadband infrastructure." In the
Supplementary Information to the
interim final rule, Treasury interpreted
necessary investments in infrastructure
as investments "designed to provide an
adequate minimum level of service and
[that] are unlikely to be made using
private sources of funds." Treasury
explained that, with respect to
broadband specifically, such necessary
investments include projects that
"establish [] or improve [] broadband
service to underserved populations to
reach an adequate level to permit a
household to work or attend school, and
that are unlikely to be met with private
sources of funds."
Summary of Interim Final Rule, Public
Comments, and Treasury Response
Summary of Interim Final Rule: In
implementing the ARPA, the interim
final rule provided that eligible
broadband infrastructure investments
are limited to those that are designed to
provide service to unserved or
underserved households or businesses,
defined as those that lack access to a
wireline connection capable of reliably
delivering at least minimum speeds of
25 Mbps download and 3 Mbps upload.

The interim final rule also provided that
eligible projects under the SLFRF are
limited to those that are designed to
deliver, upon project completion,
service that reliably meets or exceeds
symmetrical upload and download
speeds of 100 Mbps. In instances where
it would not be practicable for a project
to deliver such service speeds because
of the geography, topography, or
excessive costs associated with such a
project, the interim final rule provided
that the project would be required to be
designed to deliver, upon project
completion, service that reliably meets
or exceeds 100 Mbps download speed
and between at least 20 Mbps and 100
Mbps upload speeds and be scalable to
a minimum of 100 Mbps symmetrical
for download and upload speeds.

In addition, Treasury, in the
Supplementary Information to the
interim final rule, encouraged recipients
to pursue a number of other objectives.

First, Treasury encouraged recipients to
prioritize investments in fiber-optic
infrastructure wherever feasible and
focus on projects that deliver a physical
broadband connection by prioritizing
projects that achieve last -mile
connections. Second, Treasury
encouraged recipients to integrate
affordability options into their program
design. Third, Treasury encouraged
recipients to prioritize support for local
networks owned, operated, or affiliated
with local governments, nonprofits, and
cooperatives. Fourth, Treasury
encouraged recipients to avoid investing
in locations with existing agreements to
build reliable wireline service with
minimum speeds of 100 Mbps
download and 20 Mbps upload by
December 31, 2024, in order to avoid
duplication of efforts and resources.

Finally, following release of the interim
final rule, Treasury provided further
guidance clarifying some aspects of
broadband infrastructure eligibility,
specifically on flexibility for recipients
to determine eligible areas to be
served,328 middle -mile projects,329 pre -
project development costs,33°
broadband connections to schools or
libraries,331 and the applicability of the
National Environmental Policy Act
(NEPA) and the Davis -Bacon Act.332
Summary of Public Comments:

Treasury received several comments on
the interim final rule's requirements
regarding eligible areas for investment
and build -to speed standards, as well as
Treasury's encouragements in the
Supplementary Information of the
interim final rule. Many commenters
found the interim final rule's
requirement to limit projects to those
designed to provide service to unserved
or underserved households or
businesses to be appropriately focused
on hard -to -reach areas. In contrast, other
commenters argued that this
requirement was too restrictive and that
it would limit the ability for some
recipients, particularly local
governments, to invest in broadband
infrastructure.

Separately, some commenters
supported the interim final rule's
requirement that eligible projects be
built to reliable speeds of 100 Mbps
symmetrical, with an exception for areas
where it was impracticable, and
encouragement that projects be built
with fiber-optic infrastructure, while a
328 See FAQ 6.8, 6.9, 6.11. Coronavirus State and
Local Fiscal Recovery Funds, Frequently Asked
Questions, as of July 19, 2021; https://
home. treasury.gov/system/files/136/SLFRPFAQ. pd f.
329 See FAQ 6.10. Id.
339 See FAQ 6.12. Id.
331 See FAQ 6.16. Id.
332 See FAQ 6.4, 6.17. Id.

4418 Federal Register / Vol. 87, No. 18 / Thursday, January 27, 2022 / Rules and Regulations few others argued that the interim final
rule should remain technology -neutral
and that lower speed standards would
be more appropriate for today's usage
needs.

Summary of Treasury Response: In
response to the comments, the final rule
expands eligible areas for investment by
requiring recipients to invest in projects
designed to provide service to
households and businesses with an
identified need for additional
broadband infrastructure investment,
which would include but not be limited
to a lack of broadband service reliably
delivering certain speeds. In addition, as
discussed further below, the final rule
further supports the expansion of
affordable access to broadband service
for households by requiring that
recipients use a provider that
participates in a qualifying affordability
plan. Treasury encourages recipients to
prioritize projects that are designed to
provide service to locations not
currently served by a wireline
connection that reliably delivers at least
100 Mbps of download speed and 20
Mbps of upload speed.

The final rule maintains the interim
final rule's requirement that eligible
projects be designed to, upon
completion, reliably meet or exceed
symmetrical 100 Mbps download and
upload speeds. As was the case under
the interim final rule, in cases where it
is not practicable, because of the
excessive cost of the project or
geography or topography of the area to
be served by the project, eligible
projects may be designed to reliably
meet or exceed 100 Mbps download
speed and between at least 20 Mbps and
100 Mbps upload speed and be scalable
to a minimum of 100 Mbps download
speed and 100 Mbps upload speed.

Treasury continues to encourage
recipients to prioritize investments in
fiber-optic infrastructure wherever
feasible and to focus on projects that
will achieve last -mile connections,
whether by focusing directly on funding
last -mile projects or by ensuring that
funded middle -mile projects have
commitments in place to support new
and/or improved last -mile service.

The final rule requires recipients to
address the affordability needs of low-
income consumers in accessing
broadband networks funded by SLFRF,
given that such a project cannot be
considered a necessary investment in
broadband infrastructure if it is not
affordable to the population the project
would serve. Recipients must require
the service provider for a completed
broadband infrastructure investment
project that provides service to
households to either participate in the
Federal Communications Commission's
(FCC) Affordable Connectivity Program
(ACP), or otherwise provide access to a
broad -based affordability program to
low-income consumers in the proposed
service area of the broadband
infrastructure that provides benefits to
households commensurate with those
provided under the ACP.

Treasury also recognizes the
importance of affordable broadband
access for all consumers beyond those
that are low-income. As part of their
project selection process, recipients are
encouraged to consult with the
community on the general affordability
needs of the target markets in the
proposed service area. Additionally,
recipients are encouraged to require that
services provided by a broadband
infrastructure project include at least
one low-cost option offered without
data usage caps and at speeds that are
sufficient for a household with multiple
users to simultaneously telework and
engage in remote learning. Recipients
will be required to report speed, pricing,
and any data allowance information as
part of mandatory reporting to Treasury.

The final rule also clarifies that
subsidies to households and
communities impacted by the pandemic
to access the internet, broadband
adoption programs, digital literacy
programs, and device programs are
eligible programs to respond to the
public health and negative economic
impacts of the pandemic under sections
602(c)(1)(A) and 603(c)(1)(A). See
section Assistance to Households in
Negative Economic Impacts.

Treasury continues to encourage
recipients to prioritize support for
broadband networks owned, operated
by, or affiliated with local governments,
nonprofits, and cooperatives. In
addition, to the extent recipients are
considering deploying broadband to
locations where there are existing
enforceable federal or state funding
commitments for reliable service at
speeds of at least 100 Mbps download
speed and 20 Mbps upload speed,
recipients must ensure that SLFRF
funds are designed to address an
identified need for additional
broadband investment that is not met by
existing federal or state funding
commitments. Recipients must also
ensure that SLFRF funds will not be
used for costs that will be reimbursed by
the other federal or state funding
streams. Further, Treasury highlights
that recipients are subject to the
prohibition on use of grant funds to
procure or obtain certain
telecommunications and video
surveillance services or equipment as
outlined in 2 CFR 200.216 and 2 CFR
200.471 and clarifies that modernization
of cybersecurity for existing and new
broadband networks are eligible uses of
funds under sections 602(c)(1)(D) and
603(c)(1)(D).

Finally, this Supplementary
Information to the final rule
incorporates and confirms guidance
issued by Treasury following the
interim final rule regarding middle -mile
projects,333 pre -project development
costs,334 broadband connections to
schools or libraries,335 and applicability
of the National Environmental Policy
Act (NEPA) and Davis -Bacon Act.336
The remainder of this section
provides additional details on the final
rule. Specifically, these sections
address: (1) Eligible areas for
investment; (2) build -to speed
standards; (3) affordability; (4) public
networks; (5) duplication of efforts and
resources; (6) cybersecurity; and (7) use
of funds to meet non-federal match
under the Infrastructure Investment and
Jobs Act.

Eligible Areas for Investment
The interim final rule limited eligible
broadband investments to projects
focused on delivering service to
unserved or underserved locations,
defined as households or businesses
that lack access to a wireline connection
capable of reliably delivering at least
minimum speeds of 25 Mbps download
and 3 Mbps upload. This targeted
approach was generally consistent with
certain speed thresholds used in other
federal programs to identify eligible
areas for federal investment in
broadband infrastructure, such as the
FCC's Rural Digital Opportunity Fund
(RDOF) program and the National
Telecommunication and Information
Administration's (NTIA's) Broadband
Infrastructure Program, and generally
aligns with the FCC's benchmark for an
"advanced telecommunications
capability" for wireline broadband
services.

Public Comment: Many commenters
discussed the disadvantages of such an
approach. Some commenters, including
several local government recipients,
argued that limiting investments to
locations without access to reliable
wireline 25/3 Mbps 337 was too
333 See FAQ 6.10. Coronavirus State and Local
Fiscal Recovery Funds, Frequently Asked
Questions, as of July 19, 2021; https://
home. treasury.gov/system/files/136/SLFRPFAQ. pd f.
334 See FAQ 6.12. Id.
335 See FAQ 6.16. Id.
336 See FAQ 6.4, 6.17. Id.
337 In the remainder of this Supplementary
Information, "25/3 Mbps" refers to broadband
infrastructure that is designed to reliably meet or
exceed at least 25 Mbps download speeds and 3

Federal Register / Vol. 87, No. 18 / Thursday, January 27, 2022 / Rules and Regulations 4419
restrictive because some urban
jurisdictions are already mostly or
entirely covered by a network with at
least 25/3 Mbps speeds yet lack
widespread broadband adoption for
various reasons. Commenters suggested
that recipients would benefit from
greater flexibility to provide necessary
investments in broadband access in
areas that are nominally covered by
speeds of at least 25/3 Mbps, such as to
provide affordable broadband access in
low-income areas or to address service
quality and reliability issues. Further,
commenters argued that Treasury's
requirement that new projects meet
minimum reliable speeds of 100 Mbps
symmetrical was inconsistent with the
requirement that broadband
infrastructure projects focus on those
with access to significantly lower
speeds, and further noted that several
states have already expanded the focus
of their broadband programs beyond
those without reliable access to speeds
of 25/3 Mbps. Commenters argued that
if the limitation to unserved and
underserved households and businesses
were maintained, the definition of
unserved and underserved households
and businesses should be revised to
include households and businesses
currently served by higher standards.

Commenters proposed a number of
alternative cutoff speeds, including 25/
25 Mbps, 50/10 Mbps, and 100 Mbps
symmetrical. Others expressed support
for providing flexibility for recipients to
make their own determination on
eligible areas for investment. These
commenters referenced studies
indicating that 25/3 Mbps is inadequate
for today's modern household or
business needs.

Some commenters advocated for
unserved and underserved areas to be
prioritized while providing flexibility
for recipients to serve areas beyond
those designated as unserved or
underserved. Reflecting the perceived
restrictiveness of the interim final rule
approach, some commenters asked for
assurance that projects conducted under
other categories of SLFRF eligible uses,
specifically to respond to the public
health and negative economic impacts
of the pandemic under sections
602(c)(1)(A)—(C) and 603(c)(1)(A)—(C),
were not barred by the presence of 25/
3 Mbps service, including "gap
networks," which are networks
designed to offer low-cost or no -cost
internet access for lower -income
Mbps upload speeds. "100 Mbps" symmetrical
refers to broadband infrastructure that is designed
to reliably meet or exceed at least 100 Mbps
download speeds and 100 Mbps upload speeds.
households with low broadband
adoption rates.

Commenters suggested additional
factors to be incorporated in the
consideration of locations that are
eligible to be served. Many commenters
suggested that affordability should be
considered a key factor when
determining whether a community has
access to broadband, as the presence of
25/3 Mbps service does not necessarily
mean the service is financially
accessible to the area's residents.

Commenters noted that surveys indicate
that affordability, not lack of coverage,
is the most significant barrier for most
Americans who do not have robust
broadband service in their households.

Some advocated that the final rule allow
for investments in areas with existing
reliable wireline access at or above
25/3 Mbps as long as existing broadband
service has been unaffordable for a
certain segment of the population;
others advocated that Treasury presume
eligibility when investments are made
in certain areas, such as Qualified
Census Tracts or neighborhoods with
persistent poverty, or are made by Tribal
governments. Separately, some
commenters noted that Treasury should
provide more clarification on what
constitutes a "reliabl[e]" connection,
including providing details as to
latency, jitter, and other technical
specifications that would meet that
standard, and what it means for certain
technologies, such as copper and other
outdated technologies, to be deemed
presumptively unreliable.

Other commenters supported the
interim final rule's approach on eligible
areas for investment or suggested
tightening eligibility even further. They
argued that higher speed thresholds
beyond 25/3 Mbps would likely lead to
investments in or building of new
broadband infrastructure in areas
already served by broadband at speeds
these commenters considered sufficient;
these areas, commenters suggested, are
less in need of federal assistance and
permitting investments here could
divert funding away from rural areas to
more densely populated areas.

Treasury Response: The final rule
expands eligible areas for investment by
requiring recipients to invest in projects
designed to provide service to
households and businesses with an
identified need for additional
broadband infrastructure investment.

Recipients have flexibility to identify a
need for additional broadband
infrastructure investment: Examples of
need include lack of access to a
connection that reliably meets or
exceeds symmetrical 100 Mbps
download and upload speeds, lack of
affordable access to broadband service,
or lack of reliable broadband service.

Recipients are encouraged to prioritize
projects that are designed to provide
service to locations not currently served
by a wireline connection that reliably
delivers at least 100 Mbps of download
speed and 20 Mbps of upload speed, as
many commenters indicated that those
without such service constitute hard -to -
reach areas in need of subsidized
broadband deployment.

Households and businesses with an
identified need for additional
broadband infrastructure investment do
not have to be the only ones in the
service area served by an eligible
broadband infrastructure project.

Indeed, serving these households and
businesses may require a holistic
approach that provides service to a
wider area, for example, in order to
make ongoing service of certain
households or businesses within the
service area economical.

Consistent with further guidance
issued by Treasury,338 in determining
areas for investment, recipients may
choose to consider any available data,
including but not limited to
documentation of existing broadband
internet service performance, federal
and/or state collected broadband data,
user speed test results, interviews with
community members and business
owners, reports from community
organizations, and any other
information they deem relevant.

In evaluating such data, recipients
may take into account a variety of
factors, including whether users
actually receive internet service at or
above the speed thresholds at all hours
of the day, whether factors other than
speed such as latency, jitter, or
deterioration of the existing connections
make their user experience unreliable,
and whether the existing service is
being delivered by legacy technologies,
such as copper telephone lines
(typically using Digital Subscriber Line
technology) or early versions of cable
system technology (DOCSIS 2.0 or
earlier),339 and other factors related to
338 See FAQ 6.11. Coronavirus State and Local
Fiscal Recovery Funds, Frequently Asked
Questions, as of July 19, 2021; https://
home. treasury.gov/system/files/136/SLFRPFAQ. pd f.
ass Legacy technologies such as copper telephone
lines (typically using Digital Subscriber Line
technology) and early versions of cable system
technology (DOCSIS 2.0 or earlier) typically lag on
speeds, latency, and other factors, as compared to
more modern technologies like fiber-optic. See, e.g.,
https://www.fcc.gov/sites/default/files/tech_
transitions_network_upgrades_that_may_a ffect_
your_service.pdf (comparing copper to fiber and
noting that copper wire networks have "limited
speeds," are "susceptible to signal interference/
loss," and have a "relatively short life"); https://
Continued

4420 Federal Register / Vol. 87, No. 18 / Thursday, January 27, 2022 / Rules and Regulations the services to be provided by the
project. In addition, recipients may
consider the actual experience of
current broadband customers when
making their determinations; whether
there is a provider serving the area that
advertises or otherwise claims to offer
broadband at a given speed is not
dispositive.

Build -To Speed Standards
The interim final rule provided that a
recipient may use funds to make
investments in broadband infrastructure
that is designed to, upon completion,
reliably meet or exceed symmetrical 100
Mbps download and upload speeds. In
cases where it is not practicable,
because of the excessive cost of the
project or the geography or topography
of the area to be served by the project,
eligible projects may be designed to
reliably meet or exceed 100 Mbps
download speed and between at least 20
Mbps and 100 Mbps upload speed, so
long as it is scalable to a minimum of
100 Mbps download speed and 100
Mbps upload speed. Relatedly, Treasury
in the SUPPLEMENTARY INFORMATION to
the interim final rule encouraged
recipients to prioritize investments in
fiber-optic infrastructure wherever
feasible and to prioritize projects that
achieve last -mile connections.

Public Comment: Many commenters
discussed the advantages of setting
minimum symmetrical download and
upload speeds of reliable 100 Mbps as
the speed threshold for new projects.

Some commenters indicated support for
the interim final rule's standard as it
takes into account growing demands on
internet use resulting from pandemic
broadband usage and suggested that
such a standard will help to ensure that
networks built with SLFRF funds
remain valuable for years to come, even
as demands continue to accelerate,
particularly on upload speeds. Some
also indicated that the interim final rule
standard has the effect of prioritizing
the use of fiber-optic infrastructure to
deliver such speeds, which some noted
was a "gold standard" future -proof
technology, although some commenters
noted that other technologies like fixed
wireless have been shown to deliver
such speeds in certain circumstances.

Other commenters suggested that 100
Mbps symmetrical speeds were
unnecessary given current broadband
data. fcc.gov/download/measuring-broadband-
america/2020/2020-Fixed-Measuring-Broadban d-
America-Report.pdf (comparing fiber with DSL and
cable technologies on a number of dimensions);
https://www.eff.org/wp/casefiber-home-today-why-
fiber-su perior-medium-21 st-century-broadband
(providing a technical background comparing fiber
technology to other legacy technologies).
usage needs and that such high
standards may have the potential to
slow down expansion to unserved or
underserved rural areas. Some argued
that setting this symmetrical threshold
may limit the type of technologies that
can be used, thereby decreasing
competition and limiting flexibility to
recipients whose communities might be
better served by technologies such as
wireless solutions or inexpensive gap
networks. Commenters suggested
alternate minimum speeds, ranging from
25/3 Mbps (which some argued best
balances reaching all communities and
maximizing the impact of federal funds)
to 100/20 Mbps (which some argued
best serves the typical broadband usage
patterns of households and businesses,
including new pandemic -driven needs).

A few commenters suggested a higher
minimum speed, such as gigabit speeds,
advocating that such speeds were
necessary for a network to last at least
a decade.

Many commenters supported the
interim final rule's lower speed
standards for projects where it is
impracticable to meet minimum reliable
speeds of 100 Mbps symmetrical, as it
provides flexibility for recipients to
invest in hard -to -reach areas, such as
those in mountainous regions. A few
commenters indicated that Treasury
should more clearly define the
characteristics of a location eligible for
this exception. Some indicated that the
minimum standard for all new projects
should be 100 Mbps symmetrical. In
contrast, others argued that scalability to
100 Mbps symmetrical should not be a
requirement to meet today's demands,
particularly in hard -to -reach areas.

Some commenters requested that
Treasury clarify eligibility for middle -
mile projects as these projects
potentially provide connectivity to far-
reaching areas, while other commenters
suggested that last -mile projects
generally require more capital
investment and are therefore most in
need of government support.

Treasury Response: The final rule
maintains the interim final rule's
requirement that eligible projects be
designed to, upon completion, reliably
meet or exceed symmetrical 100 Mbps
download and upload speeds, with the
interim final rule's exception for
projects where it is impracticable to
build to such speeds due to excessive
cost, geography, or topography of the
area to be served by the project. Given
the build time associated with
broadband infrastructure projects, these
standards will enable SLFRF funds to
fund lasting infrastructure that will be
able to accommodate increased network
demand once the network is
complete,34o while providing flexibility
for certain locations to meet lower speed
standards where 100 Mbps symmetrical
speeds are impracticable.

To illustrate the accelerating need for
higher upload speeds, by one measure,
mean upload speeds as of October 2021
increased to 75.21 Mbps as compared to

62.11 Mbps a year earlier.341
Jurisdictions are increasingly
responding to the growing demands of
their communities for high speeds; for
example, Illinois requires 100 Mbps
symmetrical service as the construction
standard for their state broadband grant
programs. The 100 Mbps symmetrical
standard accounts for increased
pandemic internet usage and provides
adequate upload speeds for individuals
and businesses to accommodate
interactive applications such as virtual
learning and videoconferencing, while
also helping ensure that funding is
responsibly used to provide a true and
lasting benefit for years to come.

Treasury continues to encourage
recipients to prioritize investments in
fiber-optic infrastructure wherever
feasible, as such advanced technology
enables the next generation of
application solutions for all
communities and is capable of
delivering superior, reliable
performance and is generally most
efficiently scalable to meet future
needs.342 In designing these projects,
recipients should ensure that the
broadband infrastructure provides
"reliable" service at required speeds
and are not required to rely on
providers' advertised speeds in their
assessments.

Consistent with further guidance
issued by Treasury,343 while recipients
are permitted to make investments in
"middle -mile" connections that
otherwise satisfy the requirements of the
final rule, Treasury continues to
encourage recipients to focus on
34° Using the Federal Communications
Commission (FCC) Broadband Speed Guide, a
household with two telecommuters and two to
three remote learners today is estimated to need 100
Mbps download to work simultaneously. See
Federal Communications Commission, Broadband
Speed Guide, available at https://www.fcc.gov/
consumers/guides/broadband-speed-guide (last
visited October 28, 2021).
341 United States' Mobile and Broadband Internet
Speeds—Speedtest Global Index, available at
https://www.speedtest.net/global-index/united-
states#fixed.
342 Bennett Cyphers, The Case for Fiber to the
Home, Today: Why Fiber is a Superior Medium for
21st Century Broadband, Electronic Frontier
Foundation (October 16, 2019), https://www.eff.org/
wp/case fiber-home-today-why-fiber-superior-
medi um -21 st-century-broadband.
343 See FAQ 6.10, Coronavirus State and Local
Fiscal Recovery Funds, Frequently Asked
Questions, as of July 19, 2021; https://
home. treasury.gov/system/files/136/SLFRPFAQ. pd f.

Federal Register / Vol. 87, No. 18 / Thursday, January 27, 2022 / Rules and Regulations 4421
projects that will achieve last -mile
connections —whether by focusing
directly on funding last -mile projects or
by ensuring that funded middle -mile
projects have commitments in place to
support new and/or improved last -mile
service.

Affordability
The interim final rule encouraged
recipients to consider ways to integrate
affordability options into their program
design but did not require recipients to
take particular actions. The interim final
rule also provided that assisting
households with internet access and
digital literacy is an eligible use of
SLFRF funds under sections
602(c)(1)(A) and 603(c)(1)(A) to respond
to the negative economic impacts of
COVID-19.

Public Comment: Many commenters
suggested that Treasury provide
recipients with a broader set of tools to
tackle what the commenters
characterized as an affordability crisis in
the broadband sector. As noted above,
some commenters proposed that
Treasury consider affordability when
determining whether an area is
unserved or underserved by broadband.

Some commenters indicated that the
final rule should allow for the
construction of broadband networks in
low-income neighborhoods including
low-cost or no -cost gap networks, even
in areas with existing service at the
speeds required under the interim final
rule. Other commenters voiced support
for direct subsidies to low-income
communities to afford broadband
service, which would provide
additional incentives for providers to
serve these communities.

Treasury Response: In response to
many commenters that highlighted the
importance of affordability in providing
meaningful access to necessary
broadband infrastructure, the final rule
provides additional requirements to
address the affordability needs of low-
income consumers in accessing
broadband networks funded by SLFRF.

Recipients must require the service
provider for a completed broadband
infrastructure investment project that
provides service to households to:
• Participate in the Federal
Communications Commission's (FCC)
Affordable Connectivity Program (ACP);
or
• Otherwise provide access to a
broad -based affordability program to
low-income consumers in the proposed
service area of the broadband
infrastructure that provides benefits to
households commensurate with those
provided under the ACP.

Recipients must require providers to
participate in or provide access to these
programs through the life of the ACP.

This requirement will no longer apply
once the SLFRF-funded broadband
infrastructure is no longer in use.

Furthermore, Treasury also recognizes
the importance of affordable broadband
access for all consumers beyond those
that are low income. As part of their
project selection process, recipients are
encouraged to consult with the
community on the general affordability
needs of the target markets in the
proposed service area. Additionally,
recipients are encouraged to require that
services provided by a broadband
infrastructure project include at least
one low-cost option offered without
data usage caps at speeds that are
sufficient for a household with multiple
users to simultaneously telework and
engage in remote learning. Treasury will
require recipients to report speed,
pricing, and any data allowance
information as part of their mandatory
reporting to Treasury.

Further, Treasury is clarifying that, as
a response to the public health and
negative economic impacts of the
pandemic, recipients may provide
households and communities impacted
by the pandemic with subsidies to help
pay for internet service, digital literacy
programs, broadband adoption
programs, and device programs that
provide discounted or no -cost devices
for low-income households to access the
internet. For further discussion of this
eligible use category, see the section
internet Assistance in Assistance to
Households in Public Health and
Negative Economic Impacts.

Public Networks
The interim final rule encouraged
recipients to prioritize support for local
networks owned, operated, or affiliated
with local governments, nonprofits, and
cooperatives.

Public Comment: Many commenters
voiced their support for Treasury's
encouragement that recipients work
with governmental or community
entities to establish local networks,
arguing that they have been shown to
effectively provide broadband access to
areas that would otherwise be left with
unaffordable or insufficient service.

These commenters suggested that, since
these entities are less driven by
financial returns to investment than
private providers, in some
circumstances they may be able to
provide robust service at a lower price
as compared to private providers, along
with potentially increasing local
competition in a service area.

Other commenters argued against
Treasury's encouragement, remarking
that private businesses have a robust
track record of serving hard -to -reach
customers. These commenters argued
that commercial providers have greater
technical and operational expertise in
deploying and operating broadband
networks and may be able to construct
broadband networks with greater
efficiency. Additionally, some
commenters argued that providing what
they considered an unfair competitive
advantage for government- or
community -owned or operated
networks may hurt consumers over
time.

Treasury Response: The final rule
maintains the interim final rule's
encouragement for recipients to
prioritize support for broadband
networks owned, operated by, or
affiliated with local governments,
nonprofits, and cooperatives, given that
these networks have less pressure to
generate profits and a commitment to
serve entire communities.344 This
encouragement provides flexibility for
recipients to select providers that best
fit their needs, while noting the critical
role that networks owned, operated, or
affiliated with local governments and
community organizations can play in
providing sufficient coverage, affordable
access, or increased competition in the
broadband sector.

Duplication of Efforts and Resources
Public Comment: Some commenters
raised concerns that Treasury's
encouragement in the interim final rule
that recipients avoid funding projects in
locations with an existing agreement to
provide service that reliably delivers
100/20 Mbps by December 31, 2024 was
too restrictive. Commenters noted that
many plans do not always lead to a
successful and complete deployment, as
issues may arise that prevent such
infrastructure from deploying on time or
at all, and that several existing federal
grants were designed and awarded
before the onset of the COVID-19
pandemic and do not meet the critical
broadband needs highlighted by the
pandemic. Other commenters argued
that Treasury's encouragement to avoid
duplication of resources should be
strengthened, as investing in areas with
existing agreements would be an
inefficient duplication of efforts.

Treasury Response: Given the final
rule's revised requirements on eligible
areas for investment, this
344 The Executive Office of the President,
Community -Based Broadband Solutions (January
2015), https://obamawhitehouse.archives.gov/sites/
default/files/docs/community-based_broadband_
report_by_executive_office_of_the_president.pdf.

4422 Federal Register / Vol. 87, No. 18 /Thursday, January 27, 2022 /Rules and Regulations Supplementary Information to the final
rule also modifies the interim final
rule's requirements around duplication
of resources. Since recipients must
ensure that the objective of the
broadband projects is to serve locations
with an identified need for additional
broadband investment, the final rule
provides that, to the extent recipients
are considering deploying broadband to
locations where there are existing
enforceable federal or state funding
commitments for reliable service at
speeds of at least 100 Mbps download
speed and 20 Mbps upload speed,
recipients must ensure that SLFRF
funds are designed to address an
identified need for additional
broadband investment that is not met by
existing federal or state funding
commitments. Recipients must also
ensure that SLFRF funds will not be
used for costs that will be reimbursed by
the other federal or state funding
streams.

Cybersecurity
Public Comment: Several commenters
expressed concern about the
cybersecurity of new broadband projects
funded with SLFRF funds and urged
Treasury to prohibit recipients from
utilizing SLFRF funds to procure
equipment from certain providers from
the People's Republic of China that may
pose a national security risk. These
commenters pointed out that the 2019
National Defense Authorization Act
(NDAA) and the FCC's Universal
Service Fund have similar prohibitions.

Further, several commenters requested
that Treasury explicitly include
cybersecurity costs as an eligible use for
broadband infrastructure investment
given the growing threat of cyber-attacks
and cyber-intrusions into the nation's
infrastructure.

Treasury Response: Treasury
highlights that investments in
broadband infrastructure must be
carried out in ways that comply with
applicable federal laws, including the
2019 NDAA. Among other requirements
contained in 2 CFR part 200, 2 CFR
200.216 implements certain provisions
of the NDAA and contains prohibitions
on the use of federal financial assistance
to procure or obtain certain
telecommunications and video
surveillance services or equipment
provided or produced by designated
entities, including certain entities
owned or controlled by the People's
Republic of China. In addition, 2 CFR
200.471 provides that certain
telecommunications and video
surveillance costs associated with 2 CFR
200.216 are unallowable.

Further, the final rule allows for
modernization of cybersecurity for
existing and new broadband
infrastructure as an eligible use under
sections 602(c)(1)(D) and 603(c)(1)(D) as
such investments are necessary for the
reliability and resiliency of broadband
infrastructure.345 Recipients may
provide necessary investments in
cybersecurity, including modernization
of hardware and software, for existing
and new broadband infrastructure
regardless of their speed delivery
standards. The final rule maintains the
interim final rule's provision that allows
for broader modernization of
cybersecurity, including hardware,
software, and protection of critical
infrastructure as an eligible provision of
government services, to the extent of
revenue loss due to the pandemic,
under sections 602(c)(1)(C) and
603(c)(1)(C).

Use of Funds To Meet Non -Federal
Match Under the Infrastructure
Investment and Jobs Act
The Infrastructure Investment and
Jobs Act specifies that, except as
otherwise provided, an entity using
funding under section 60102 of the law
for broadband deployment "shall
provide, or require a subgrantee to
provide, a contribution, derived from
non -Federal funds (or funds from a
Federal regional commission or
authority) . . . of not less than 25
percent of project costs." 346 It further
states that the matching contribution
may include funds provided to an
eligible entity or subgrantee under the
American Rescue Plan Act for the
purpose of deployment of broadband
service, which includes funds provided
under the SLFRF program.

SLFRF and the program established
under section 60102 of the
Infrastructure Investment and Jobs Act
are separate programs with separate
requirements. While section 60102
allows states and other eligible entities
to use SLFRF funds as the source of
matching funds for broadband
deployment, the requirements of the
SLFRF program still apply. As such,
recipients that use SLFRF funds to meet
the section 60102 matching requirement
will continue to be subject to the
requirements of the SLFRF program.
345 For more on the importance of cybersecurity
to the reliability and resiliency of broadband
networks, see: Federal Communications
Commission, https://docs.fcc.gov/public/
attachments/FCC-10-63A1.doc; Brookings Institute,
Protecting the Cybersecurity of America's Networks
(February 11, 2021), https://www.brookings.edu/
bl og/tech tank/2021 /02/11 /pro to cting-th e-
cybersecurity-of-americas-networks/.
346 See Infrastructure Investment and Jobs Act,
Public Law 117-58 (2021).

III. Restrictions on Use
While recipients have considerable
flexibility to use funds to address the
diverse needs of their communities,
some restrictions on use of funds apply.

The ARPA includes two statutory
provisions that further define the
boundaries of the statute's eligible uses.

First, section 602(c)(2)(A) of the Social
Security Act provides that states and
territories may not "use the funds . . .
to either directly or indirectly offset a
reduction in . . . net tax revenue . . .
resulting from a change in law,
regulation, or administrative
interpretation during the covered period
that reduces any tax . . . or delays the
imposition of any tax or tax increase."
Second, sections 602(c)(2)(B) and
603(c)(2) prohibit all recipients, except
Tribal governments, from using funds
for deposit into any pension fund. These
restrictions support use of funds only
for the congressionally permitted
purposes described in the Eligible Uses
section by providing a backstop against
the use of funds for purposes outside of
the eligible use categories provided for
in the statute.

In addition to the restrictions on use
of funds provided for in the ARPA
statute, the interim final rule noted that
several uses of funds would be
ineligible under any eligible use
category, including as a response to the
public health and negative economic
impacts of the pandemic or as a
"government service" under the
revenue loss eligible use category.

Specifically, use of funds for debt
service, to replenish financial reserves,
or to satisfy an obligation arising from
a judicial settlement or judgment were
ineligible uses of funds under the
eligible use categories for public health
and negative economic impacts and
revenue loss. These restrictions apply to
all recipients.

Recipients should note that
restrictions on use of funds for debt
service, to replenish financial reserves,
or to satisfy an obligation arising from
a judicial settlement or judgment apply
to all eligible use categories, not just the
eligible use categories in which they
were discussed in the interim final rule.

Recipients are also subject to other
restrictions on use of funds in the
ARPA, the Award Terms and
Conditions, and other federal laws. As
discussed further below, uses of funds
may not conflict with the overall
statutory purpose of the ARPA to reduce
the spread of COVID-19. Per the Award
Terms and Conditions, recipients must
adopt and abide by policies to prevent
conflicts of interest. Finally, recipients
are reminded that other federal laws

Federal Register / Vol. 87, No. 18 /Thursday, January 27, 2022 /Rules and Regulations 4423 also apply to uses of funds, including
environmental and civil rights laws.

To enhance clarity, this
SUPPLEMENTARY INFORMATION for the
final rule consolidates these restrictions
on use of funds into one section and
makes clear that they apply to all
eligible use categories and any use of
funds under the program by recipients
to whom each specific restriction
applies.

This section discusses the
aforementioned restrictions, public
comments received, and Treasury's
response to these comments. For clarity,
Treasury has divided the following
discussion into (A) statutory restrictions
under the ARPA, which include (1)
offsetting a reduction in net tax revenue,
and (2) deposits into pension funds, and
(B) other restrictions on use, which
include (1) debt service and
replenishing reserves, (2) settlements
and judgments, and (3) general
restrictions.

A. Ineligible Uses of Funds Under the
ARPA Statute

1. Offset a Reduction in Net Tax
Revenue
For states and territories (recipient
governments 347), section 602(c)(2)(A)—
the offset provision —prohibits the use
of SLFRF funds to directly or indirectly
offset a reduction in net tax revenue
resulting from a change in law,
regulation, or administrative
interpretation 348 during the covered
period. If a state or territory uses SLFRF
funds to offset a reduction in net tax
revenue resulting from a change in law,
regulation, or interpretation, the ARPA
provides that the state or territory must
repay to Treasury an amount equal to
the lesser of (i) the amount of the
applicable reduction attributable to the
impermissible offset and (ii) the amount
of SLFRF funds received by the state or
territory. A state or territory that uses
SLFRF funds to offset a reduction in net
tax revenue does not forfeit its entire
allocation of SLFRF funds (unless it
misused the full allocation to offset a
reduction in net tax revenue) or any
non-SLFRF funding.

The interim final rule implements
these conditions by establishing a
framework for states and territories to
determine the cost of changes in law,
regulation, or interpretation that reduce
tax revenue and to identify and value
347In this sub -section, "recipient governments"
refers only to states and territories. In other
sections, "recipient governments" refers more
broadly to eligible governments receiving funding
from the SLFRF.
348 For brevity, this phrase is referred to as
"changes in law, regulation, or interpretation" for
the remainder of this SUPPLEMENTARY INFORMATION.
the sources of funds that will offset—
i.e., cover the cost of —any reduction in
net tax revenue resulting from such
changes. The interim final rule
recognizes three sources of funds that
may offset a reduction in net tax
revenue other than SLFRF funds:

Organic revenue growth, increases in
revenue due to policy changes (e.g., an
increase in a tax rate), and certain cuts
in spending.

Specifically, the interim final rule
establishes a step-by-step process for
determining whether, and the extent to
which, SLFRF funds have been used to
offset a reduction in net tax revenue,
based on information reported by the
recipient government:
• First, each year, each recipient
government will identify and value the
changes in law, regulation, or
interpretation that would result in a
reduction in net tax revenue, as it would
in the ordinary course of its budgeting
process. The sum of these values in the
year for which the government is
reporting is the amount it needs to "pay
for" with sources other than SLFRF
funds (total value of revenue reducing
changes).
• Second, the interim final rule
recognizes that it may be difficult to
predict how a change would affect net
tax revenue in future years and,
accordingly, provides that if the total
value of the changes in the year for
which the recipient government is
reporting is below a de minimis level,
as discussed below, the recipient
government need not identify any
sources of funding to pay for revenue
reducing changes and will not be
subject to recoupment.
• Third, a recipient government will
consider the amount of actual tax
revenue recorded in the year for which
it is reporting. If the recipient
government's actual tax revenue is
greater than the amount of tax revenue
received by the recipient for the fiscal
year ending 2019, adjusted annually for
inflation, the recipient government will
not be considered to have violated the
offset provision because there will not
have been a reduction in net tax
revenue.
• Fourth, if the recipient
government's actual tax revenue is less
than the amount of tax revenue received
by the recipient government for the
fiscal year ending 2019, adjusted
annually for inflation, in the reporting
year the recipient government will
identify any sources of funds that have
been used to permissibly offset the total
value of covered tax changes other than
SLFRF funds. These are:
o State or territory tax changes that
would increase any source of general
fund revenue, such as a change that
would increase a tax rate; and
o Spending cuts in areas not being
replaced by SLFRF funds.

The recipient government will
calculate the value of revenue reduction
remaining after applying these sources
of offsetting funding to the total value of
revenue reducing changes —that is, how
much of the tax change has not been
paid for. The recipient government will
then compare that value to the
difference between the baseline and
actual tax revenue. A recipient
government will not be required to
repay to Treasury an amount that is
greater than the recipient government's
actual tax revenue shortfall relative to
the baseline (i.e., fiscal year 2019 tax
revenue adjusted for inflation). This
"revenue reduction cap," together with
Step 3, ensures that recipient
governments can use organic revenue
growth to offset the cost of revenue
reductions.
• Finally, if there are any amounts
that could be subject to recoupment,
Treasury will provide notice to the
recipient government of such amounts
along with an explanation of such
amounts. This process is discussed in
greater detail in section Remediation
and Recoupment of this Supplementary
Information.

Together, these steps allow Treasury
to identify the amount of reduction in
net tax revenue that both is attributable
to covered changes and has been
directly or indirectly offset with SLFRF
funds.

Overview of Comments: Many
commenters supported the framework
established under the interim final rule.

These commenters argued that the offset
provision, and the interim final rule's
implementation of the offset provision,
was essential to ensuring SLFRF funds
are used in a manner consistent with the
statute's defined eligible uses and, in
particular, to support the use of SLFRF
funds to build public sector capacity.

Several commenters argued that the
framework should be made more
restrictive; for example, some comments
advocated that the offset provision be
applied to local governments.

Other commenters argued that the
offset provision and the interim final
rule's implementation of the offset
provision is too restrictive, with some
asserting that the offset provision
prohibits states from making changes to
reduce taxes. Many of these commenters
argued that the offset provision presents
constitutional concerns. These
commenters asserted that the offset
provision is ambiguous and the
restriction is unrelated to the purpose of
the ARPA. These commenters also

4424 Federal Register / Vol. 87, No. 18 /Thursday, January 27, 2022 /Rules and Regulations argued that the generous amount of
SLFRF funds provided to those
governments gave recipient
governments little choice as to whether
to accept the SLFRF funds and, as a
result, the offset provision is coercive.

In describing these concerns and
arguments, several of these commenters
referenced litigation regarding the offset
provision.349 Many of these commenters
also expressed concern regarding the
interim final rule's implementation of
the offset provision. Some of these
commenters argued that Treasury lacked
the authority to implement the
provision, asserting that the significance
of the provision required Congress to
make an explicit delegation of
rulemaking authority and provide
clearer principles by which Treasury
should implement the provision.

Finally, one commenter argued that the
offset provision should only apply if the
recipient expressly and intentionally
uses SLFRF funds to offset a reduction
in revenue, arguing that the term
"offset" implies a deliberate use SLFRF
funds to "pay for" a tax cut.

As discussed in the interim final rule,
the offset provision does not prevent a
recipient government from enacting a
broad variety of tax changes. Rather, the
offset provision prevents a recipient
government from using SLFRF funds to
offset a revenue reduction resulting
from a tax cut. A recipient government
would only be considered to have used
SLFRF funds to offset a reduction in net
tax revenue resulting from changes in
law, regulation, or interpretation if, and
to the extent that, the recipient
government could not identify sufficient
funds from sources other than SLFRF
funds to offset the reduction in net tax
revenue. Only if sufficient funds from
other sources cannot be identified to
cover the full cost of the reduction in
net tax revenue resulting from changes
in law, regulation, or interpretation, will
the remaining amount not covered by
these sources be considered to have
been offset by SLFRF funds, in
contravention of the offset provision.

Consistent with the statutory text, the
approach taken in the interim final rule
recognizes that, because money is
fungible, even if SLFRF funds are not
explicitly or directly used to cover the
costs of changes that reduce net tax
revenue, those funds may be used in a
manner inconsistent with the statute by
indirectly being used to substitute for
the state's or territory's funds that
349 See, e.g., State of West Virginia v. U.S.

Department of the Treasury, No. 7:21—cv-00465—
LSC, 2021 WL 2952863 (N.D. Ala. Jul. 14, 2021);
State of Ohio v. Yellen, No. 1:21—cv-181, 2021 WL
2712220 (S.D. Ohio Jul. 1, 2021).
would otherwise have been needed to
cover the costs of the reduction. As
discussed below, the scope of changes
in law, regulation, or interpretation is
further limited to those that the
recipient government voluntarily
enacted during the covered period.

Congress has the authority under the
Spending Clause in Article I, section 8
of the Constitution to specify the
permissible and impermissible uses of
federal grants. The Supreme Court has
repeatedly "upheld Congress's authority
to condition the receipt of funds on the
States' complying with restrictions on
the use of those funds, because that is
the means by which Congress ensures
that the funds are spent according to its
view of the `general Welfare.' " 350 "The
power to keep a watchful eye on
expenditures . . . is bound up with
congressional authority to spend in the
first place." 351 Assertions that the
amount of SLFRF funds are sufficiently
large to be coercive are inconsistent
with the Supreme Court's reasoning in
NFIB, which distinguished between
conditions placed on new federal funds
and conditions placed on existing
federal funds and not based on the size
of funds.352 Further, the conditions
placed on the use of SLFRF funds under
the ARPA—both the eligible uses and
additional limitations on deposits into
pension funds and the offset
provision —were well known to
recipient governments prior to recipient
governments requesting to receive
SLFRF funds. Finally, the ARPA
provides Treasury with the express
authority "to issue such regulations as
may be necessary or appropriate to carry
out" section 602, which includes the
offset provision.

A number of commenters expressed
concern regarding the burden associated
with complying with the offset
provision and the interim final rule.

Similarly, other commenters argued that
the framework provided in the interim
final rule complicated implementation
39° National Fed'n of Indep. Bus. v. Sebelius
(NFIB), 567 U.S. 519, 580 (2012) (plurality opinion);
see, e.g., South Dakota v. Dole, 483 U.S. 203, 206-
208 (1987); Gruver v. Louisiana Bd. of Supervisors
for Louisiana State Univ. Agric. & Mech. Coll., 959
F.3d 178, 183 (5th Cir.), cert. denied, 141 S. Ct. 901
(2020). For additional discussion of these issues,
see, e.g., Brief Reply for Appellants, Ohio v. Yellen,
No. 21-3787 (6th Cir. Oct. 26, 2021).
331 Sabri v. United States, 541 U.S. 600, 608
(2004).
332 The new federal funds offered by the
Affordable Care Act totaled $100 billion per year.

Even the dissenting Justices agreed that "Congress
could have made just the new funding provided
under the ACA contingent on acceptance of the
terms of the Medicaid Expansion," although they
disagreed with the majority about whether that
funding condition was severable. NFIB at 687-688
(joint dissent).
of the offset provision. Treasury took
several steps to minimize burden for
recipient governments in the interim
final rule. For example, the interim final
rule incorporates the types of
information and modeling already used
by states and territories in their own
fiscal and budgeting processes. By
incorporating existing budgeting
processes and capabilities, states and
territories will be able to assess and
evaluate the relationship of tax and
budget decisions to uses of SLFRF funds
based on information they likely have or
can readily obtain. This approach
ensures that recipient governments have
the information they need to understand
the implications of their decisions
regarding the use of SLFRF funds —and,
in particular, whether they are using the
funds to directly or indirectly offset a
reduction in net tax revenue resulting
from a change in law, regulation, or
interpretation, making the funds
potentially subject to recoupment. To
further reduce burden, Treasury is
considering whether the scope of
reporting requirements can be further
tailored.

As described in greater detail below,
Treasury is finalizing its
implementation of the offset provision
largely without change. This approach
is consistent with the text of the ARPA.

The remainder of this section discusses
and responds to comments on specific
aspects of the framework.

1. Definitions
Covered change. The offset provision
is triggered by a reduction in net tax
revenue resulting from "a change in
law, regulation, or administrative
interpretation." Consistent with this
language, the interim final rule defines
a "covered change" to include any final
legislative or regulatory action, a new or
changed administrative interpretation,
and the phase -in or taking effect of any
statute or rule where the phase -in or
taking effect was not prescribed prior to
the start of the covered period. Thus, the
offset provision applies only to actions
for which the change in policy occurs
during the covered period; it excludes
regulations or other actions that
implement a change or law
substantively enacted prior to March 3,
2021. For example, covered changes do
not include a change in rate that is
triggered automatically and based on
statutory or regulatory criteria in effect
prior to the covered period.353 Changed
333 For example, a state law that sets its earned
income tax credit (EITC) at a fixed percentage of the
federal EITC will see its EITC payments
automatically increase —and thus its tax revenue
reduced —because of the federal government's
expansion of the EITC in the ARPA See, e.g., Tax

Federal Register / Vol. 87, No. 18 /Thursday, January 27, 2022 /Rules and Regulations 4425 administrative interpretations would
not include corrections to replace prior
inaccurate interpretations; such
corrections would instead be treated as
changes implementing legislation
enacted or regulations issued prior to
the covered period. The operative
change in those circumstances is the
underlying legislation or regulation that
occurred prior to the covered period.

Moreover, only changes within the
control of the state or territory are
considered covered changes. Finally,
covered changes do not include changes
that simply conform with recent
changes in federal law (including those
to conform to recent changes in federal
taxation of unemployment insurance
benefits and taxation of loan forgiveness
under the Paycheck Protection
Program).

Scope of Covered Changes
Public Comment: Several commenters
argued that the definition of covered
change, and thus the limitations of the
offset provision, should apply to
subsidies for businesses. Similarly,
other commenters requested that
Treasury clarify that the offset provision
applies to tax abatements and
reductions in corporate taxes, even if
administered by a sub -unit of the
recipient government. Citing to
empirical research and other evidence,
these commenters argued that these
types of economic development policies
were poorly administered, reduced
public sector capacity, and were
ineffective at achieving stated objectives
of creating jobs, increasing income, and
increasing economic growth. On the
other hand, some commenters argued
that, because subsidies were
economically similar to some tax cuts,
neither action should be considered a
covered change and subject to the offset
provision. Finally, other commenters
requested that Treasury clarify whether
covered changes must be broad -based
policies or whether administrative
decisions applicable to individuals
would be considered covered changes.

Treasury Response: Section
602(c)(2)(A) applies to any change that
"reduces any tax (by providing for a
reduction in a rate, a rebate, a
deduction, a credit, or otherwise or
delays the imposition of any tax or tax
increase." Accordingly, and consistent
with this statutory text, the final rule
applies to covered changes that reduce
any tax, which can include tax
abatements, but does not apply to loans,
Policy Center, How do state earned income tax
credits work?, https://www.taxpolicycenter.org/
briefing-book/how-do-state-earned-income-tax-
credits-work/ (last visited May 9, 2021).
grants, or other types of interventions
that do not reduce tax revenue.354 In
addition, by including changes in
regulation or administrative
interpretation, in addition to changes in
law, within the scope of the offset
provision, the ARPA recognizes that a
recipient government may make a
covered change through its legislature or
may delegate the authority to make a
covered change including, but not
limited to, to a sub -unit of government.

Treasury has revised the definition of
"covered change" in the final rule using
the statutory language above to make
clear that the offset provision only
applies to such changes in law,
regulation, or administrative
interpretation. With respect to the
question of whether covered changes
could include administrative decisions
applicable to individuals, as discussed
above, a covered change includes a
change in law, regulation, or
administrative interpretation that
reduces any tax. Such changes may
apply to one or more individuals or
entities, provided that —consistent with
the statutory text —they result from a
change in law, regulation, or
administrative interpretation.

Prior Enactment and Phase -In
Public Comment: A number of
commenters expressed concern, or
requested clarification, regarding
changes that were enacted prior to the
covered period but take effect or phase -
in during the covered period. Several
commenters argued that the definition
of covered change should include
changes that were made prior to the
covered period but that phase -in during
the covered period.

Treasury Response: As discussed
above, the offset provision is triggered
by a reduction in net tax revenue
resulting from "a change in law,
regulation, or administrative
interpretation" made during the covered
period. Consistent with the statutory
text, "covered change" is defined to
include any final legislative or
regulatory action, a new or changed
administrative interpretation, and the
phase -in or taking effect of any statute
or rule where the phase -in or taking
effect was not prescribed prior to the
start of the covered period.

Conformity
Public Comment: A number of
commenters requested clarification on
the scope of covered changes.

Specifically, several commenters
354 Assistance must be consistent with eligible
uses of SLFRF funds. See section Eligible Uses of
this SUPPLEMENTARY INFORMATION.
requested clarification on the scope of
changes that would be considered as
conforming to recent changes in federal
law. These commenters requested that
Treasury clarify whether actions to
selectively conform with federal law
would be considered covered changes
and requested clarification regarding the
extent to which changes would be
considered "recent." For example, these
commenters requested clarification
regarding conformance with the Global
Intangible Low -Taxed Income provision
of the 2017 Tax Cuts and Jobs Act. Some
commenters further argued that changes
that selectively conform or decouple
from the Internal Revenue Code should
be included within scope of covered
changes and thus subject to the offset
provision.

Treasury Response: The final rule
maintains the treatment of changes that
simply conform with recent changes in
federal law, such as those to conform to
recent changes in federal taxation of
unemployment insurance benefits and
taxation of loan forgiveness under the
Paycheck Protection Program ass and
including other changes over the past
several years. Regardless of the
particular method of conformity and the
effect on net tax revenue, Treasury
views such changes as permissible
under the offset provision.

Accordingly, and for the reasons
discussed above, Treasury is
maintaining the definition of covered
change without change.

Tax revenue. The interim final rule's
definition of "tax revenue" is based on
the Census Bureau's definition of taxes,
used for its Annual Survey of State
Government Finances.356 It provides a
consistent, well -established definition
with which states and territories will be
familiar and is consistent with the
approach taken in section Revenue Loss
of this SUPPLEMENTARY INFORMATION
describing the implementation of
sections 602(c)(1)(C) and 603(c)(1)(C) of
the Social Security Act regarding
revenue loss. A number of commenters
expressed concern and requested
clarification regarding the definition of
"tax revenue." These comments and
responses are discussed in section
Revenue Loss of this Supplemental
Information and, for the reasons
discussed above, Treasury is finalizing
the definition of tax revenue without
ass See Statement on State Fiscal Recovery Funds
and Tax Conformity, April 7, 2021, available at
https://home.treaszny.gov/news/press-releases/
jy0113.
356 U.S. Census Bureau, Annual Survey of State
and Local Government Finances Glossary, https://
www.census.gov/programs-surveys/state/about/
glossary.html (last visited Apr. 30, 2021).

4426 Federal Register / Vol. 87, No. 18 / Thursday, January 27, 2022 /Rules and Regulations change and maintaining a consistent
definition of "tax revenue." 357
Baseline. For purposes of measuring a
reduction in net tax revenue, the interim
final rule measures actual changes in tax
revenue relative to a revenue baseline
(baseline). The baseline is calculated as
fiscal year 2019 (FY 2019) tax revenue
indexed for inflation in each year of the
covered period, with inflation
calculated using the Bureau of
Economic Analysis's Implicit Price
Deflator.358
Public Comment: Some commenters
expressed concern regarding the choice
of FY 2019 as the baseline, arguing that
the choice lacked justification and
would make the offset provision more
restrictive as applied to recipient
governments that experienced a decline
in revenue independent of making any
covered changes.

Treasury Response: Measuring a
"reduction" in net tax revenue requires
identification of a baseline. In other
words, a "reduction" can be assessed
only by comparing two amounts. The
Act defines "covered period" to begin
on March 3, 2021, and thus the baseline
year must end prior to March 3, 2021.

As discussed in the interim final rule,
FY 2019 is the last full fiscal year prior
to the COVID-19 public health
emergency, and thus is consistent with
the statutory definition and does not
include the extraordinary effects of the
pandemic that began in 2020. Further,
as discussed above, the interim final
rule recognizes three potential ways that
a recipient government may offset or
"pay for" a reduction in net tax revenue
due to a covered change: Increases in
taxes, decreases in spending, and
organic revenue growth. U.S. gross
domestic product rebounded to exceed
its pre -pandemic level in 2021,359
suggesting that an FY 2019 pre -
357 As discussed in section Revenue Loss of this
Supplementary Information, for purposes of
measuring revenue lost due to the pandemic under
sections 602(c)(1)(C) and 603(c)(1)(C), recipients
must adjust the amount of revenue lost to reflect
changes that resulted from a tax increase or
decrease. These adjustments do not apply to or
affect the definition of tax revenue.
359 U.S. Department of Commerce, Bureau of
Economic Analysis, GDP Price Deflator, https://
www.bea.gov/data/prices-inflation/gdp-price-
deflator (last visited Apr. 30, 2021). The FY 2019
baseline revenue is adjusted annually for inflation
to allow for direct comparison of actual tax revenue
in each year (reported in nominal terms) to baseline
revenue in common units of measurement; without
inflation adjustment, each dollar of reported actual
tax revenue would be worth less than each dollar
of baseline revenue expressed in 2019 terms.
359Economy Statement by Catherine Wolfram,
Acting Assistant Secretary for Economy Policy, for
the Treasury Borrowing Advisory Committee
November 1, 2021 (Nov. 1, 2021), available at
https://home.treasuiy.gov/news/press-releases/
jy0453.
pandemic baseline is a reasonable
comparator for future revenue levels
and provides recipients with flexibility
to identify organic growth as a
permissible offset. Finally, this baseline
year is consistent with the approach
directed by sections 602(c)(1)(C) and
603(c)(1)(C), which identify the "most
recent full fiscal year of the [state,
territory, or Tribal government] prior to
the emergency" as the comparator for
measuring revenue loss. For these
reasons, Treasury is finalizing the
definition of "baseline" without change.

The interim final rule includes several
other definitions that are applicable to
the implementation of the offset
provision, such as the term "reporting
year." 360 Commenters did not express
concern regarding other definitions in
the interim final rule.

2. Framework
The interim final rule provides a step-
by-step framework, to be used in each
reporting year, to determine whether a
state or territory used SLFRF funds to
offset a reduction in net tax revenue.

Consistent with section 602(c)(2) and
the interim final rule, the final rule
applies to states and territories:
(1) Covered changes that reduce tax
revenue. Under the interim final rule, a
recipient government identifies and
values covered changes that the
recipient government predicts will have
the effect of reducing tax revenue in a
given reporting year, similar to the way
it would in the ordinary course of its
budgeting process. The interim final
rule states that the value of these
covered changes may be reported based
on estimated values produced by a
budget model, incorporating reasonable
assumptions, that aligns with the
recipient government's existing
approach for measuring the effects of
fiscal policies, and that measures these
effects relative to a current law baseline.

If the recipient would prefer, the
covered changes may also be reported
based on actual values using a statistical
methodology to isolate the change in
year -over -year revenue attributable to
the covered change(s), relative to the
current law baseline prior to the
change(s).361 Further, estimation
approaches may not use dynamic
methodologies that incorporate the
365 One commenter requested clarification that
references to fiscal year refer to the fiscal year of
the recipient. "Reporting year" is defined in the
interim final rule and final rule to mean "a single
year or partial year within the covered period,
aligned to the current fiscal year of the State or
Territory during the covered period."
361 By permitting recipient governments to use
actual or estimated values, the interim final rule
and final rule provide flexibility to recipients and
thus minimizes burden.
projected effects of macroeconomic
growth because macroeconomic growth
is accounted for separately in the
framework.

Estimation
Public Comment: A number of
commenters expressed concern that
estimating the value of covered changes
required a number of assumptions and
that the actual effects of covered
changes on tax revenue would be
difficult to predict. Several commenters
expressed support for the interim final
rule's approach to dynamic scoring
methodologies, and one commenter
argued that the final rule should
prohibit the use of prior cash balances
in calculations of permissible tax cuts.

Treasury Response: Treasury
recognizes that estimating the effects of
covered changes requires assumptions
and that many other factors influence
the amount of tax revenue received. The
interim final rule addresses these
concerns in several ways. First, in
general and where possible, reporting
should be produced by the agency of the
recipient government responsible for
estimating the costs and effects of fiscal
policy changes. This approach offers
recipient governments the flexibility to
determine their reporting methodology
based on their existing budget scoring
practices and capabilities. In addition,
by relying on scoring methodologies
that do not incorporate projected effects
of macroeconomic growth, the
estimation of the value of covered
changes relies on fewer assumptions
and thus provide greater consistency
among states and territories. Finally, as
discussed below, the interim final rule
includes a de minimis threshold, below
which the sum of covered changes will
be deemed not to have any revenue -
reducing effects.

Timing of the Impact of Covered
Changes
Public Comment: Several commenters
expressed concern that recipient
governments, to evade the offset
provision, may backload the costs of
certain covered changes outside of the
covered period, and advocated that
covered changes be instead evaluated as
the net present value in the year that the
covered change is enacted. These
commenters argued that some tax cuts
could have effects on tax revenue for
many decades or could be structured to
take effect after the end of the covered
period.

Treasury Response: As discussed in
section Timeline for Use of SLFRF
Funds, SLFRF funds must be used to
cover costs incurred prior to December
31, 2024. Accordingly, SLFRF funds