Yes, ARPA funds are strictly classified as federal financial assistance originating from the U.S. Treasury, even when distributed through state agencies.
Local governments, nonprofits, and businesses often receive checks that seem to come from their state capital. This creates confusion regarding audit requirements and financial reporting. You might see a state agency logo on the grant paperwork. However, the origin remains the American Rescue Plan Act of 2021, a federal statute. This distinction dictates how you handle accounting, procurement, and audits.
Misclassifying these funds leads to significant compliance failures. If you treat a federal award as a state grant, you might skip necessary federal procurement steps or fail to schedule a Single Audit. The U.S. Department of the Treasury enforces specific usage rules (the Final Rule) that apply regardless of who wrote the physical check. We will break down the exact classification, the audit trails involved, and the reporting obligations you face.
Understanding The Source Of ARPA Funding
The American Rescue Plan Act (ARPA) injected $1.9 trillion into the economy. A massive portion of this went to the Coronavirus State and Local Fiscal Recovery Funds (SLFRF). The legislative text designates these monies as federal assistance. Congress authorized the U.S. Treasury to distribute these amounts directly to states, territories, metropolitan cities, and counties.
States received their allocation, but they also acted as pass-through entities for smaller “non-entitlement units” of local government (NEUs). An NEU is typically a smaller town or village serving a population under 50,000. Because the Treasury could not cut checks to thousands of tiny towns efficiently, they sent the money to the state first. The state then forwarded it to the town. This transfer mechanism causes the confusion.
When a state transfers these funds, the money retains its federal character. It does not become “state money” just because it sat in a state bank account for a week. The regulations attached to the dollar follow it from Washington, D.C., all the way to the final vendor or contractor. You must look past the intermediary and recognize the federal source.
Federal Versus State Funding Characteristics
Distinguishing between federal and state awards determines your legal liabilities. The following table outlines the specific attributes of ARPA funds compared to standard state revenue sharing.
| Feature | Federal ARPA (SLFRF) Funds | Standard State Grants |
|---|---|---|
| Origin Source | U.S. Department of the Treasury | State Legislature / General Fund |
| Governing Body | Federal Government (Congress) | State Government |
| Identification Number | Assistance Listing Number (ALN) 21.027 | State Grant ID / Statute Number |
| Audit Requirement | Single Audit Act (Uniform Guidance) | State-level Audit Rules |
| Procurement Rules | 2 CFR Part 200 (Uniform Guidance) | State Procurement Code |
| Spending Deadline | Obligate by 2024; Spend by 2026 | Determined by Fiscal Year |
| Interest Income | Specific federal rules on retention | Generally belongs to the state |
| Reporting Platform | U.S. Treasury Portal | State Agency Portal |
Are ARPA Funds Federal Or State? Classification Rules
The definitive answer for your finance department lies in the Assistance Listing Number (ALN), formerly known as the CFDA number. All ARPA State and Local Fiscal Recovery Funds carry the ALN 21.027. If you see this number on your grant agreement, notice of award, or check stub, the funds are federal. No exceptions exist.
The Role Of The Pass-Through Entity
States act as prime recipients. When they send money to a smaller town or a nonprofit, they become a “pass-through entity.” The smaller town becomes a “sub-recipient.” In this relationship, the state has the responsibility to monitor the sub-recipient. They must verify that the smaller entity spends the money according to federal law. This adds a layer of bureaucracy, but it does not change the color of the money.
Sub-recipients must follow the same rules as the prime recipient. If the U.S. Treasury says you cannot spend ARPA money on debt service, a small town cannot do it, even if the state government didn’t explicitly mention it in their transmittal letter. The federal restriction overrides any silence or ambiguity at the state level.
Assistance Listing Number 21.027 Details
Finance directors use the ALN to track expenditures on the Schedule of Expenditures of Federal Awards (SEFA). You must list ALN 21.027 distinct from other CARES Act funding or FEMA reimbursements. Mixing these up causes major headaches during an external audit. CARES Act money (CRF) has ALN 21.019. Keeping these separate prevents auditors from testing your expenses against the wrong set of rules.
You can find the specific details regarding compliance and reporting for this listing number on the official U.S. Treasury SLFRF program page. This resource lists the compliance supplements auditors use to grade your performance.
Impact On Single Audit Requirements
The classification of ARPA funds as federal triggers the Single Audit Act. This federal law requires any non-federal entity (local government, nonprofit, university) that expends $750,000 or more in federal awards during a fiscal year to undergo a rigorous “Single Audit.”
This threshold is cumulative. It includes ARPA money plus any other federal grants you received, such as CDBG, FEMA, or Department of Transportation grants. If you spent $500,000 in ARPA funds and $300,000 in federal highway funds, your total is $800,000. You crossed the line. You must hire an independent CPA firm to conduct a Single Audit.
Calculating The $750,000 Threshold
Count the funds when you expend them, not when you receive them. Many municipalities received ARPA funds in two tranches. You might have received $1 million in 2021 but only spent $200,000 that year. In that scenario, you did not trigger a Single Audit for 2021 based on ARPA alone. The clock starts when the cash leaves your account to pay for goods, services, or payroll.
Standard financial statement audits look at the accuracy of your balance sheet. A Single Audit looks at compliance. The auditors test whether you followed federal procurement laws, eligibility rules, and reporting deadlines. They report findings directly to the Federal Audit Clearinghouse. These findings become public record.
Alternative Compliance Examination
The Treasury provided a slight relief for certain recipients. If your total federal expenditures are over $750,000, but they come only from SLFRF (ARPA), you might qualify for an “Alternative Compliance Examination Engagement.” This is a narrower, slightly less expensive review compared to a full Single Audit. It focuses strictly on the compliance requirements of the SLFRF program without looking at other federal programs you didn’t touch.
Procurement Standards Under Uniform Guidance
Because ARPA funds are federal, you must adhere to the Uniform Guidance procurement standards found in 2 CFR Part 200. This is where many local governments stumble. State laws usually have bidding thresholds. Federal law has its own.
Micro-Purchases And Small Purchases
Federal rules break purchases down by size. “Micro-purchases” (typically under $10,000, though local policies can adjust this) do not require competitive quotes, but the price must be reasonable. “Small purchases” (up to $250,000) require you to obtain price or rate quotations from an adequate number of qualified sources. You cannot just pick your favorite vendor because you have used them for twenty years.
Sealed Bids And Proposals
For projects costing more than the simplified acquisition threshold ($250,000), you generally need formal sealed bids or competitive proposals. This involves public advertising, clear written specifications, and a rigorous scoring process. If you used ARPA money to pave a road and just hired the local paving company without a formal federal-compliant bid process, you might have to pay that money back.
Many recipients incorrectly assume that following their state’s purchasing laws is enough. It is not. If the federal rule is stricter than the state rule, you follow the federal rule. If the state rule is stricter, you follow the state rule. You always adhere to the standard that creates the highest level of competition and transparency.
Reporting Obligations To The Treasury
Direct recipients of ARPA funds report directly to the Treasury. NEUs (the smaller towns) typically report to the Treasury as well, even though the money flowed through the state. The Treasury established the Project and Expenditure (P&E) Report. This digital form tracks how you used every dollar.
Project And Expenditure Reports
Reporting frequency depends on the size of the municipality. larger metropolitan cities and counties report quarterly. Smaller NEUs report annually. The report asks for specific data points: project descriptions, expenditure categories, sub-award amounts, and civil rights compliance info.
Failure to submit these reports freezes future funding and puts your entity on a non-compliance list. The data entered here must match your internal general ledger. Discrepancies between what you tell the Treasury and what your books show will trigger audit findings.
Civil Rights Compliance
Federal money comes with federal strings regarding discrimination. Recipients must ensure that projects funded by ARPA do not discriminate based on race, color, national origin, disability, age, or sex. You might need to track demographic data for beneficiaries of certain programs, like rent assistance or small business grants.
Eligible Uses For Fiscal Recovery Funds
The Treasury’s Final Rule provides broad categories for eligibility. Understanding these categories helps you justify the federal nature of the expenditure to your council or board.
The “Revenue Loss” category serves as the most flexible option. Recipients can calculate how much revenue they lost due to the pandemic using a specific formula. Alternatively, they can claim a “standard allowance” of up to $10 million in revenue loss. Once funds fall under the “Revenue Loss” category, you can use them for almost any “government service,” including roads, police salaries, and cybersecurity.
Other categories remain more restrictive. Public health expenditures must respond to COVID-19. Negative economic impact assistance must target those harmed by the pandemic. Water, sewer, and broadband infrastructure projects have specific technical requirements regarding speed and quality.
Revenue Loss Calculation vs. Specific Projects
Many finance officers choose the standard allowance for revenue loss to simplify compliance. When you categorize funds as “Revenue Loss,” the federal procurement rules still apply, but the eligibility rules become looser. You avoid the burden of proving that a specific road project responds to the pandemic. You simply prove it is a government service.
However, designating funds as “Revenue Loss” does not convert them to state or local funds. They retain their federal identity (ALN 21.027). You still report them on the SEFA. You still need to follow the Uniform Guidance for administrative costs.
Common Compliance Pitfalls
Since we established that ARPA funds are federal, you must avoid specific actions that federal law prohibits. The following table highlights what you can and cannot do.
| Category | Eligible Use (Allowable) | Ineligible Use (Prohibited) |
|---|---|---|
| Financial Health | Replacing lost public sector revenue | Paying down debt service or settlements |
| Tax Policy | Supporting government operations | Directly offsetting a tax cut |
| Infrastructure | Water, sewer, and broadband projects | General economic development infrastructure |
| Pensions | Covering payroll for covered employees | Extraordinary deposits into pension funds |
| Rainy Day Funds | Spending on current government services | Replenishing reserve or rainy day funds |
| Match Requirements | Standalone projects | Using as non-federal match for other grants |
| Legal Settlements | Legal defense for eligible projects | Paying settlements or judgments |
Documentation And Record Retention
Federal audit rules require a long memory. You must retain all financial records, supporting documents, and statistical records pertinent to the ARPA award for five years after all funds have been expended or returned. If you spend your last dollar in 2026, you keep the box of receipts until 2031.
Auditors will ask for the original invoice, the proof of payment (cancelled check or ACH record), the contract, and the proof of procurement (bid tabulation). Missing a single piece of paper can lead to a “questioned cost.” If a cost is questioned and you cannot prove eligibility, you pay the money back to the Treasury.
Written Policies
Uniform Guidance requires you to have written policies for cash management, allowability of costs, and procurement. If your organization relies on “the way we’ve always done it” without a written manual, you are out of compliance. You need to draft specific addendums to your accounting manual that reference 2 CFR Part 200.
The Timeline For Obligation And Expenditure
Federal funds expire. You cannot hold ARPA money indefinitely. The law sets two critical deadlines: obligation and expenditure.
The Obligation Deadline: December 31, 2024
You must obligate all ARPA funds by the end of 2024. An obligation means you have created a legal liability to pay. A signed contract, a purchase order, or a payroll commitment counts as an obligation. Budgeting the money in a spreadsheet does not count. You need a binding agreement with a third party or a formal governing body resolution for internal expenses.
The Expenditure Deadline: December 31, 2026
After you obligate the funds, you have two more years to finish the work and pay the bills. By the end of 2026, the cash must leave your bank account. Any funds not spent by this date return to the U.S. Treasury. This timeline puts pressure on large infrastructure projects. If a sewer plant takes four years to build, you might run out of time.
For detailed regulatory definitions on obligations and timelines, refer to the Electronic Code of Federal Regulations (eCFR) for Grants and Agreements. This source remains the final authority on federal grant definitions.
Sub-Recipient Monitoring Responsibilities
If your entity decides to grant some of its ARPA money to a local nonprofit or another agency, you step into the role of a pass-through entity. You become responsible for ensuring that nonprofit follows federal rules. You must assess their risk level, give them the correct federal award information, and monitor their activities.
Many local governments avoid sub-grants because of this burden. Instead, they treat the transaction as a “beneficiary” payment or a contractor relationship. The classification between sub-recipient, contractor, and beneficiary dictates the level of reporting. A contractor provides goods and services within normal business operations. A sub-recipient carries out a portion of the federal program. Beneficiaries are individuals or entities that receive assistance directly, like a small business grant for economic hardship.
Final Considerations For Finance Officers
Treating ARPA funds as federal is non-negotiable. The oversight mechanisms are robust, and the penalties for misuse are real. The Treasury Inspector General monitors these funds actively. They look for fraud, waste, and abuse.
Focus your efforts on proper classification in your general ledger. Segregate the cash if possible, or use strict fund accounting to prevent commingling. Verify that every vendor contract references federal anti-debarment rules. Check that your payroll allocations for revenue loss claims are supported by accurate timesheets.
The flexibility of ARPA offers a rare opportunity to invest in your community, but that flexibility comes within a rigid federal framework. Adhering to the Uniform Guidance and Treasury Final Rule protects your organization from clawbacks and reputational damage. When in doubt, apply the strictest federal standard available.