Background
The SLFRF was established under the ARPA to support state and local governments in responding to the economic and public health impacts of COVID-19. A significant challenge for recipients has been understanding how to properly "obligate" the funds
by the deadline set for December 31, 2024, with all expenditures completed by December 31, 2026. Prior to this rule, ambiguity around the definition of "obligation" led to confusion and inconsistent application across jurisdictions.
The original definition of an “obligation” under the previously adopted at 31 CFR 35.3 is an order placed for property and services and entering into contracts, subawards, and similar transactions that require payment. An obligation also means a requirement
under federal law or regulation or provision of the award terms and conditions to which a recipient becomes subject as a result of receiving or expending funds.
Revised Definition of an Obligation
The updated definition still maintains the traditional views of obligation (e.g., contracts and orders placed) as defined in 31 CFR 35.3 but now explicitly includes costs related to requirements that recipients automatically assume upon accepting
SLFRF funds. The primary focus of the revised definition is to allow agencies to capture the payroll and benefit related costs of personnel responsible for compliance and reporting and expenses of maintaining records which are likely to be incurred
after between January 1, 2025, and December 31, 2026, but still related to the management of the overall SLFRF program.
These include:
- Reporting and Compliance Requirements: Costs associated with time spent adhering to SLFRF reporting standards, such as the preparation and submission of required reports, subrecipient monitoring,
maintaining data and reporting tools, and handling invoices.
- Single Audit Costs: Costs related to the Recipient’s Single Audit, including time spent on audit preparations, the audit itself, and resolving audit findings, including funds spent by pass-through
entities to carry out their responsibilities related to audit resolution of subawards.
- Record Retention and Internal Controls: Costs to meet records retention mandates and to support internal controls that ensure program integrity up to the award's closeout.
- Property Standards Compliance: Costs related to insurance, inventory, recordkeeping, and maintenance of equipment to adhere to the property standards outlined in the Uniform Guidance (2 CFR 200.310
- 200.316).
- Environmental Compliance: Costs incurred to meet environmental obligations, such as renewing environmental permits necessary due to SLFRF-funded initiatives.
- Civil Rights and Nondiscrimination: Costs linked to ensuring civil rights and nondiscrimination requirements are met for projects financed by SLFRF, including costs to investigate any complaints
received.
In order to claim these costs as “obligations”, the costs would need to be calculated in compliance with the rules for compensation charged to federal awards. To take advantage of this additional flexibility and to ensure compliance with these new
rules, we recommend the following:
- Estimate the amount of costs that will be incurred to meet the requirements listed above.
- Personnel related costs should be calculated by estimating the number of hours for each activity above and multiplying that by the total cost for the employee.
- Non-personnel related costs should be calculated based on historical information. For instance, if you are calculating the cost to store hard copies for the required number of years, estimate the number of boxes it will require and multiply that by the cost per year and number of years to derive total estimated cost.
- Document a reasonable justification for this estimate.
- Consider drafting a memo for each item above documenting the reason these costs will be necessary and include your estimate calculations so they can be tested during the Single Audit.
- Report that amount to Treasury by April 30, 2024, with an explanation of how the amount was determined
- Report at award closeout the final amount expended for these costs
- Reconcile the amounts estimated in (1) above to the actual costs incurred for these activities and note any variances above or below estimates.
Treasury will update the SLFRF Compliance and Reporting Guidance to reflect recipients’ additional reporting regarding these estimated amounts.
It is important to note that these estimates may not include any costs that are expected to be made after December 31, 2026, other than administrative expenditures necessary to close out the SLFRF award in accordance with the Uniform Guidance.
If the reconciliation in (4a) above shows that the estimates exceeded the actual costs incurred, the excess SLFRF funds are required to be returned to Treasury.
Application of “Obligation” to the Negotiated Indirect Cost Rate Agreement
Treasury also clarified that recipients are allowed to continue charging their current negotiated indirect costs rate agreement established with their federal cognizant agency or the de minimis rate of 10 percent of modified total direct costs pursuant
to 2 CFR 200.414(f), after December 31, 2024 through December 31, 2026.
Application of “Obligation” Definition to Subawards
It was unclear if subrecipients had the same “obligation” deadline as recipients. If recipients had to obligate the funds by December 31, 2024, did subrecipients have to do the same with the funds they received? Treasury defined obligation to include
entry into a subaward agreement. This means that when a recipient obligates the funds to a subrecipient, the deadline is met and the subrecipient does not have to obligate the subaward funds by December 31, 2024. This clarification applies to contractors
as well. However, it should be noted that both subrecipients and contractors are required to expend all SLFRF funds by December 31, 2026, except for Title I projects and Surface Transportation projects which must be expended by September 30, 2026.
This requirement remains unchanged. Replacement or Amendment of Contracts and Subawards The Treasury was asked to consider the allowability of replacing contracts or subawards after December 31, 2024, so long as the original agreement was entered
into prior to the December 31, 2024 obligation deadline. Treasury is clarifying that after December 31, 2024, recipients are permitted to replace a contract or subaward entered into prior to December 31, 2024, if:
- The recipient terminates the contract or subaward because of the contractor or subawardee’s default, because the contractor or subawardee goes out of business, or because the recipient otherwise determines that the contractor or subawardee will not
be able to perform under the contract or carry out the subaward; or
- The recipient and contractor or subrecipient mutually agree to terminate the contract or subaward for convenience
- The recipient terminates the contract or subaward for convenience if the contract or subaward was not properly awarded (such as if the contractor was not eligible to receive the contract), there is clear evidence that the contract or subaward was
improper, the recipient documents its determination that the contract or subaward was not properly awarded, and the original contract or subaward was entered into by the recipient in good faith. Good faith is defined as:
- The contract of subaward followed standard procurement or subaward practices.
- The contract or subaward was not entered into for the purpose of evading the obligation deadline.
Treasury will provide a mechanism for recipients to report contract or subaward replacements after the obligation deadline. Recipients should maintain documentation to justify their determinations.
Again, if a recipient enters into a replacement contract or subaward, the recipient still must expend all funds by the expenditure deadlines noted above.
Conclusion
The November 2023 Obligation Interim Final Rule issued by the U.S. Department of Treasury represents a significant step in clarifying the operational aspects of the SLFRF program. By addressing common questions and concerns
regarding the definition of "obligation," the rule aims to facilitate more effective and compliant use of the funds and provide greater flexibility in use of SLFRF funds. As state and local governments continue to navigate the challenges posed by
the pandemic, such guidance is crucial to ensuring that these vital resources are utilized in a timely and efficient manner.
Additional Resources from Treasury
Under News and Events, you can see a list of documents and events by date so you can look historically or for the most recent information available.
In May 2024, the US Department of Treasury release webinars to help answer questions related to the Obligation Interim Final Rule. You can access the slides from these webinars at the link above and view the recordings on YouTube at
https://www.youtube.com/watch?v=Tf9IZZHvjAA.
Further down in the November 2024 section, you can access all of the relevant documents such as the Obligation Interim Final Rule PDF and the Obligation Interim Final Rule Quick Reference Guide PDF.
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