Navigating Targeted Populations in New Markets Tax Credit Deals

CHRISTIAN FELRA: Welcome and thanks for listening to Cherry Bekaert's Government and Public Sector podcast series. In each episode, we hear from the best in the business on the latest challenges, trends, and opportunities affecting the government and public sector.

CHRISTIAN FELRA: I'm Christian Felra, leader of Cherry Bekaert's Government & Public Sector industry team.

KIMBERLY KAC: Welcome everyone to "The American Rescue Plan Act: The Last-Minute Effort," episode 8 of our Grants Management podcast series. I'm Kimberly Kac, a grants management enthusiast and proud member of a brilliant team of professionals providing end-to-end solutions and support for the grant life cycle.

CAT KISER: Thank you. My name is Cat Kiser. I am the Grants Management Solutions Lead and Advisory Manager over the grants management section at Cherry Bekaert.

PAULA HELER: I am Paula Heler, a senior associate on the grants management team.

CAT KISER: You don't get to be introduced as the new person anymore; you're seasoned now. We're just going to roll forward.

KIMBERLY KAC: This podcast is for any entity that has received American Rescue Plan Act funding (ARPA), and specifically for state and local fiscal recovery funds (SLFRF). The acronym SLFRF doesn't exactly roll off the tongue, but we're going to stick with SLFRF.

KIMBERLY KAC: Let's start with discussing the deadlines. There are two major deadlines that organizations that have received SLFRF funding need to be aware of. The first is the obligations deadline, which is December 31, 2024.

KIMBERLY KAC: That is why we called this podcast "The Last-Minute Effort." We are coming down to the last minute to obligate those ARPA funds. In this case, we're talking about non-revenue replacement funds, and our focus is on recipients who have received more than $10 million in ARPA funding.

KIMBERLY KAC: Why is this obligations deadline so important? I know recipients have some time left to spend the funds, but what does "obligate" mean in this context?

PAULA HELER: This deadline is really important because it's the last day to obligate these funds. Whatever isn't obligated must be returned to the federal government. Before we dive into the deadline, we should step back and discuss the meaning of the word "obligation."

PAULA HELER: The federal government has been very specific about the definition of obligation for ARPA funding. They published an obligation interim final rule with unique obligation categories that are allowable as reported estimates. Normally, you cannot report an estimate as an obligation, but in this case, because there are a few more years to spend the money, recipients can estimate their legal and administrative costs, rehire public sector staff costs, and indirect costs.

PAULA HELER: The reporting for rehire public sector staff costs is due in January for quarterly reporters; we'll talk about reporting later. Outside of these estimate categories, funds must be obligated as they traditionally are in your financial management system. Typically, that's a purchase order, a signed agreement or contract, or an accepted quote—some sort of legally binding document.

PAULA HELER: A legally binding document is something that's signed, sealed, and delivered. We've heard many ways that governments or organizations plan to obligate funds that are not compliant with ARPA obligations guidance. Knowing the definition is very important.

PAULA HELER: For example, you cannot put your ARPA funds in a savings account and call them obligated. You cannot charge them to a special code on your ledger and name it "ARPA something" and consider it obligated. That is not a legal obligation; it's just setting the money aside.

CAT KISER: Let's talk about purchase orders (POs) for a minute. Generally, a PO is an appropriate way to obligate funds. But if you have a blanket PO or standing PO, is that actually obligated to the contractor for a certain amount? Be careful with POs and make sure you're specific about the dollar amount and the vendor.

CAT KISER: Know what "obligation" means in this situation because you don't want to return money to the federal government. You want to avoid returning that money at the end of the ARPA performance period.

KIMBERLY KAC: Now that we've cleared that up, how do recipients calculate their unobligated balances to know what they must plan to obligate now?

PAULA HELER: It's about doing the math to determine how much funding has not been obligated. Let's use a simple scenario. Suppose a recipient received $65 million in non-revenue replacement funds.

PAULA HELER: At this point, the recipient should know how much they've spent—for example, $10 million—and what is obligated in their financial management system, another $10 million. That totals $20 million.

PAULA HELER: Then add estimates like legal and administrative, indirect, and rehire public sector staff costs. Suppose those estimates total $30 million. Add that to the $20 million spent or obligated, and you have $50 million either spent, obligated, or estimated as an obligation.

PAULA HELER: If you received $65 million, subtract $50 million and you have an unobligated balance of $15 million. That is the amount that must be obligated by December 31, 2024.

KIMBERLY KAC: Obligating $15 million at this late point will be very tricky.

CAT KISER: There are feasible ways to obligate, but a full federal procurement will likely take too much time. The procurement process can take at least 30 days, and more realistically 60 to 90 days to be fully federally compliant.

CAT KISER: With about a month left to obligate funding, full procurement is usually not feasible. There are a few alternatives to obligate leftover unobligated funding now.

CAT KISER: One way is to use the funding for personnel expenses, but there are conditions. Paula knows this obligation method well, so I'll turn it over to her.

PAULA HELER: This is the rehire public sector staff cost estimate. For quarterly reporters, it's due in January, and for annual filers, it's due in April of next year. There are two approaches to calculating this, but you must choose one and not switch intermittently.

PAULA HELER: The first approach is simple and straightforward; refer to the final rule for details. It's the straightest path and the easiest one.

PAULA HELER: The second method can provide more benefit but requires more leg work. You need to gather budgets and position data, and once you have those financial reports, the final rule outlines the calculations in four steps.

PAULA HELER: Step one: calculate the full-time equivalent (FTE) you had budgeted on January 27, 2022.

PAULA HELER: Step two: multiply that amount by 1.75. This is an adjustment to account for a pre-pandemic baseline.

PAULA HELER: Step three: calculate the actual full-time equivalence as of March 3, 2021.

PAULA HELER: Step four: subtract the actual amount from the adjusted budgeted amount. The result is the expansion FTE available that you can use SLFRF funds to pay payroll and cover benefits.

PAULA HELER: This allows you to obligate these positions in your estimate and can give you more leverage. I recommend using this method if you haven't done the calculations, and if you have, go back and read the final rule closely because there are unique conditions for personnel that can be removed from the math.

KIMBERLY KAC: That sounds like a viable way to obligate ARPA funding. I want to add something about indirect costs, which is my area of expertise.

KIMBERLY KAC: If you have an indirect cost rate and haven't claimed any indirect costs on your ARPA funding thus far, you can apply your rate to your expenditures and claim reimbursement. That is another way to reserve funding and pull it into your general fund because you've already incurred those costs.

KIMBERLY KAC: If you claim indirect costs against your ARPA expenditures, it goes into your general fund as unrestricted revenue, and you can use it for those programs or reimburse your general fund for costs already incurred.

CAT KISER: We've given you quick formulas and an overview of how to use these methods. There's plenty of information on the web if you want to learn more.

CAT KISER: If you want more help, contact us. You'll have our emails at the end of the podcast. We can send information to help with calculations or anything with indirect costs that we can assist with.

CAT KISER: We do not recommend using POs at this point if you don't have time to make them clear and compliant.

CAT KISER: Another option is to enter into an interagency agreement. This type of agreement generally meets the same requirements as a contract or a subaward and is considered an obligation.

CAT KISER: You could also procure goods or services off a state term contract where costs are already set and prices were bid based on federal regulation. State term contracts for local government have gone through procurement and are typically federally compliant, which shortens the time needed to get a PO or contract in place.

KIMBERLY KAC: Those are two viable options besides the rehire personnel method.

PAULA HELER: It's good to know there are still options with this looming deadline. We started by saying there were two deadlines. We talked about December 31, 2024. What is the second important deadline?

CAT KISER: The other important deadline is the expense closeout deadline, which is December 31, 2026, when all expenses must be incurred.

PAULA HELER: We are hoping the Treasury will provide guidance on reporting windows after that date, whether 90 or 120 days, but at this point we do not know.

PAULA HELER: In the grants world, deadlines sometimes change, but do not expect the obligations or expense closeout deadlines to be extended. There has been a push from some legislators due to recent natural disaster response backlogs, but at this point do not count on a deadline extension.

PAULA HELER: Protect your funding and keep obligating to meet the December 31, 2024 obligations deadline.

KIMBERLY KAC: This is a lot to digest. Where can listeners find more information on ARPA obligations, the final rule, and related guidance?

CAT KISER: The U.S. Treasury has developed an ARPA website that includes final rules, interim rules, FAQs, general reference guides, and more technical materials. There's a wealth of information on the U.S. Treasury website.

CAT KISER: Also check with your state for state term contracts and specific guidance, because states may have added conditions on top of federal requirements.

CAT KISER: I want to give a nod to the North Carolina Association of County Commissioners; they have an excellent website with many resources and links that are helpful regardless of state.

KIMBERLY KAC: Thank you, Cat and Paula, for joining today's podcast. You can reach us at kimberly.conac@cb.com, cat.kiser@cb.com, or paula@cb.com.

KIMBERLY KAC: We are taking the month of December off to spend time with family and friends during the holiday season. Our next podcast will be in January 2025.

KIMBERLY KAC: Our next episode will be "Understanding Subrecipients: The What, the Why, and the How," an in-depth discussion on grant subrecipients from definition and determination to compliance.

KIMBERLY KAC: Subscribe to the series at www.cbcommunitybank.com.

CHRISTIAN FELRA: This is Christian again. I hope you enjoyed this episode and look forward to our next one. Don't forget to subscribe.

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