The simmering debate over the definition of “obligation” that’s key for cities and states managing $350 billion of pandemic funds has boiled over again after Treasury released a revised definition that Republicans slam as “mind-bending” and “confounding,” and that even has issuer groups concerned about confusion and the need to backtrack to re-do previous reporting.

The Treasury Department on Nov. 20 released an interim final rule — effective immediately — to amend the definition of obligation for the use of the State and Local Fiscal Recovery Fund created by the 2021 American Rescue Plan Act.

The latest definition allows cities, states and other local governments to use pandemic funds to cover personnel costs associated with administrative requirements such as compliance and reporting, and extends the deadline for the obligation of those funds past the current obligation deadline of Dec. 31, 2024. The expenditure deadline for all funds remains Dec. 31, 2026.

Utah Sen. Mike Lee is among four Republican senators and dozens of House Republicans who are protesting Treasury’s new rules for pandemic fund spending by cities and states.

Bloomberg News

The rule also says that subrecipients of the funds are not subject to the Dec. 31, 2024 obligation deadline. It also restricts recipients’ ability to re-obligate funds beyond the December 31, 2024 deadline excluding certain exceptions, according to the National Association of Counties, which joined with the Government Finance Officers Association and the National League of Cities to urge Treasury to make changes to the rule.

“There’s a real twist on what does ‘obligated’ mean,” said Emily Brock, federal liaison for the GFOA. “The market implication is: how long do people have to spend this money? We saw displacement of all the federal funds and now at the last minute we’re talking about what obligation is. Are the [pandemic funds] spent? Are they ready to start borrowing now or not?”

Treasury took comments on the proposed rule through Dec. 20 – eliciting more than 100 letters, including from Congressional lawmakers – and may release a final rule by the end of the month.  

For issuers, the revised definition fails to address a chief concern, which is the timing problem between obligation and expenditure, said the GFOA, NACo and NLC in their joint letter.

The final expenditure deadline for the spending of ARPA funds “two years after the ‘obligation’ deadline presents a unique challenge for prime recipients,” the letter said. “Local governments’ policy objectives of spending in an operating budget window of one year cannot be reconciled with a two-year spend window. Offering prime recipients workable flexibility would allow them to spend accordingly and with an impact on their communities.”

The late introduction of a revised rule will likely frustrate cities that have started to prepare to close out their ARPA processes, the letter added. And it could force some governments to backtrack because they are no longer in compliance “despite their true intent of complying with Treasury’s original guidance,” the groups said. “Now, to comply with the proposed IFR, local governments will be forced to backtrack their original processes and follow Treasury’s more limiting definition.”

A new deadline of April 30, 2024 to report some of the administrative expenses is “insufficient time for fund recipients to calculate accurate estimates,” the issuer advocates said.

Meanwhile, the new rule sparked outrage among Capital Hill Republicans, who fired off letters threatening to try to overturn the rule through the Congressional Review Act.

A group of four GOP senators in a comment called the rule “mind-bending,” “confounding,” and “an insult to our basic rules of statutory construction and interpretation.”

Chief among the Republicans’ complaints is that the rule generally oversteps Treasury’s authority.

“ARPA was clear that SLFRF recipients have until December 31, 2024 to obligate their funding, and until December 31, 2026 to liquidate those obligations,” the senators said. “If Treasury continues with this tortured definition of obligation, Congress will have no choice but to introduce a resolution of disapproval under the Congressional Review Act.”

The letter signed by 32 House Republicans estimated that $13 billion “could be swept up in the ‘administrative’ use obligation carveout.”

It is “abundantly clear” that Treasury is attempting with the new rule “to wall off money from Congress as we seek offsets to new federal expenditures,” the letter said.