State Budget Creates Uncertainty in Local ARPA Funds Project Commitments
In recent Michigan legislation, municipalities that do not obligate their ARPA Funds could miss out on a critical increase in their statutory revenue sharing.
Statutory Revenue Sharing
In late June, Michigan passed a bipartisan $81.7 billion budget for Fiscal Year 2024. Which included $26.7 million to provide a 5% increase in statutory revenue sharing to local municipalities. This is great news for local governments which have often felt slighted by Michigan’s fractured municipal finance system.
However, the press release proclaiming budget victory contained only a single sentence on the revenue sharing increase (Governor Whitmer Press Release). As always, the devil is in the details. In this case, some communities could be scrambling to obligate millions of dollars in federal funding before years end.
American Rescue Plan (ARPA)
As a reminder, in 2021, the federal government passed the American Rescue Plan (ARPA), which created the Coronavirus State and Local Fiscal Recovery Fund. Around $4.4 billion of federal funding was allocated directly to Michigan communities under this program. The so-called ARPA funds had to be “obligated” by recipient communities no later than December 31, 2023, then spent by December 31, 2026. 31 CFR 35.5(c)
According to Michigan’s budget legislation, of the 5% increase in revenue sharing, 1% is conditioned on each municipality fully obligating ARPA funds by Dec. 31, 2023 – a full year ahead of the federal schedule (See Enrolled House Bill No. 4437). Because the budget came out in late June, recipient communities had only six months to obligate any/all remaining funds to qualify for the increase.
Definition of “Obligation” in ARPA Funding
That’s not a lot of time, especially for those communities that might have millions of obligated dollars. The definition of “obligation” is, therefore, of critical importance. Although the state budget legislation does not appear to define the term, federal ARPA regulations do.
“Obligation means an order placed for property and services and entering into contracts, subawards, and similar transactions that require payment.”
– 31 CFR 35.3
For communities with unobligated funds, they might have just six months to enter into contracts, purchase orders or other transactions requiring payment to “obligate” their funds. This could present serious challenges for any community seeking equipment, services, or construction with a long procurement timeline.
Challenges to Obligate ARPA Funds in Time
As of April 2022, nearly $3.6 billion of ARPA funds remained unobligated by Michigan communities. This accounts for about 80% of ARPA’s total funds. There could still be millions of unobligated funds with only months remaining in the calendar year.
The most recent data available from the Local Government ARPA Investment Tracker (a partnership with the National League of Cities, Brookings Metro, and the National Association of Counties) indicates that 75% of total ARPA funding is “budgeted” for large cities and counties nationally with populations over 250,000. It isn’t clear if the Investment Tracker uses “budgeted” synonymously with “obligated.” Regardless, a search of select Michigan cities and counties with populations over 250,000 tells a different story. Below is an average of available ARPA funds as of December 2022:
- Detroit = 60%
- Wayne County = 30.2%
- Genesee County = 44.3%
- Oakland County = 50%
- Kent County = 8.3%
State and Local Laws in Interpreting Obligations
ARPA guidance from the U.S. Treasury appears to offer some flexibility in interpreting what constitutes an obligation of funds.
“Recipients must follow state or local law and their own established practices and policies regarding when they are considered to have incurred an obligation and how those obligations are documented.”
– Coronavirus State and Local Fiscal Recovery Fund Final Rule
The guidance from the U.S. Treasury opens the door for state and local laws and practices to come into play. Many local governments may have declared intended projects and even appropriated funds and budgeted for those projects. The Michigan Uniform Budgeting and Accounting Act, or UBAA, defines appropriation as “authorization […] to incur obligations and to expend public funds.” MCL 141.422a(3)
At first blush, it may seem that a mere authorization to incur an obligation is not itself an obligation. However, this provision must be read in conjunction with Section 17 of the UBAA, which requires all deviations from an original appropriation to be made pursuant to an amended appropriation. MCL 141.437(1)
Michigan case law supports a reading that appropriations themselves do carry at least some level of spending obligation. Michigan courts recognize that “an appropriation is not a mandate to spend.” Yet those same courts have also held that the executive branch of local government may not unilaterally and unequivocally “impound” (i.e., withhold or refuse to spend) funds. Such impoundments are “limited to situations in which doing so would achieve economic efficiencies.” ID. at 314. It canbe argued that an appropriation of funds for a project IS an “obligation.”
Workable Standard for Obligating ARPA Funds
But where does this uncertainty leave the number of Michigan communities that only have several months left to “obligate” their funds? The most conservative approach is, of course, to obligate ARPA funds with a contract, purchase order, or similar binding instrument. In larger projects with multiple contracts and long procurement leads, it’s tempting to rush the process.
At a minimum, communities should plan to appropriate and budget their ARPA funds toward a specific project before the end of the year. It is unclear whether the Michigan Treasury will view an appropriation as an “obligation,” but there’s still time for the Michigan Treasury to step in and clean this up.
Communities with unobligated ARPA funds should reach out to the Treasury and their state legislators and advocate for a workable standard that communities can reasonably implement by year’s end. Otherwise, communities with unobligated ARPA funds are at risk of missing out on a 1% increase in statutory revenue sharing.
Michigan Lawyers Weekly
Brandon Grysko is a partner with Fausone & Grysko, PLC in Northville, Michigan. He has assisted municipalities in a variety of transactions including the use of federal ARPA funding for transformational local projects.