Key Deadline Nears for State and Local Fiscal Recovery Funds Decisions

As part of the American Rescue Plan Act of 2021, the Coronavirus State and Local Fiscal Recovery Funds (SLFRF) program delivered $350 billion directly to state, territorial, local, and tribal governments. The program’s primary aims were to help maintain vital public services and build a strong, resilient, and equitable recovery by making investments that support long-term growth and opportunity. The funds went directly to over 30,000 recipient governments, including many entities that had not previously received direct federal funds.

These funds must be obligated by December 31, 2024, and expended by December 31, 2026, according to the Final Rule adopted in April 2022 by the U.S. Department of Treasury (Treasury) to provide guidance on eligible fund uses and key timelines.¹ During the spring and summer of 2024, new guidance was released encouraging recipients to reconsider how they use the funds. The primary changes involve an expanded definition of “obligation” and expanded rules that serve to encourage using funds for affordable housing development. 

With very little time left before funds must be obligated, recipients need to quickly review their project portfolios and determine the most effective, compliant deployment of outstanding funds to keep them within their communities.

Using SLFRF for affordable housing

Eligible fund use was designed to be flexible so that governments could respond effectively to public health emergencies, mitigate negative economic impacts, offer premium pay for essential workers, make essential infrastructure investments, and replace lost public sector revenue. Newer guidance has established eligible uses for emergency relief and investments in surface transportation and Title I projects.

Within the public health and negative economic impact categories, government decision-makers have attempted to respond to pandemic-driven needs while simultaneously addressing pre-existing concerns, including the dearth of affordable housing. Several months after the Final Rule was published, Treasury released specific guidance to develop and preserve affordable housing—a critical issue for many communities throughout the country as 45% of renters nationwide spend more than 30% of their income on housing costs.²  This guidance clarified the use of SLFRF for long-term affordable housing loans and significantly expanded presumptively eligible uses that allowed recipients to layer funds with traditional affordable housing capital sources.

In support of that aim, Treasury created an “Affordable Housing How-To Guide” to describe the funding pathways that align with traditional affordable housing financing products. The guide illustrates the path to eligibility for projects that intend to serve residents below a certain income level (imposed through a covenant lasting at least 20 years). It also features loan flexibilities that reduce recipient administrative burdens and allow for co-financing with traditional housing programs such as the Low-Income Housing Tax Credit (LIHTC) program.

Most importantly, the guide lays out a set of clear presumptions for determining eligibility of housing projects. Categorical eligibility is now presumed under the LIHTC and a range of HUD-administered housing programs and funds, including:

• HOME Investment Partnerships Program
• Housing Trust Fund
• Project-Based Rental Assistance program
• Public Housing Capital Fund
• Section 202 Supportive Housing for the Elderly Program
• Section 811 Supportive Housing for Persons with Disabilities Program

A complementary Treasury fact sheet includes examples of how state, local, territorial, and tribal governments could use SLFRF to keep families in their homes and build more affordable housing.³

By late 2023, hundreds of jurisdictions across the nation had committed over $6 billion to affordable housing development, preservation, and innovative approaches to expanding housing supply by capitalizing on these flexibilities and pathways for compliance.^4,5

New guidance to streamline processes and increase eligibility

With the obligation deadline approaching, Treasury has made investing SLFRF in housing preservation and development easier and more attractive of an option for recipients. After strongly encouraging this use, the agency updated its affordable housing guide in June 2024.

Key changes include increasing the maximum tenant income for presumptively eligible projects from 65% of area median income to 120% and expanding the range of presumptively eligible federal programs to include:

• Project-based vouchers
• Choice Neighborhood Funds
• Projects financed under the Section 108 Loan Guarantee Program
• A range of USDA loan programs such as Section 514/516 Farm Labor Housing Direct Loans and Grants, Section 515 Multifamily Direct Loan Program, Section 538 Multifamily Housing Loan Guarantees, and Section 502 Single-Family Housing Guaranteed Loans

Financial support for an affordable housing project is also now presumed to be SLFRF-eligible if it’s:

• Financed with a loan purchase by Fannie Mae or Freddie Mac and considered fully or partially “mission-driven” under the Federal Housing Administration’s definition
• Purchased through specified programs such as Freddie Mac’s Workforce Housing Preservation Program or Fannie Mae’s Sponsor-Dedicated Workforce Housing Program or Sponsor-Initiated Affordability Program

While the new guidance offers more pathways for recipients to fund needed housing preservation and development—especially those serving low- and very low-income residents—projects can be difficult to finance. That’s why collaboration is essential to identify projects in need of capital sources to fill gaps and ensure that investment in affordable housing projects can happen before the SLFRF obligation window closes.

Expanded obligation guidance

Recipients received good news that Treasury recently expanded the definition of “obligation” in its Obligation Interim Final Rule published in November 2023 and associated FAQs published in March 2024.⁶  This states that:

• Recipients may obligate funds through means other than contracts or subawards, such as through an interagency agreement (including an agreement in the form of a memorandum of understanding)
• Contracts may be amended or replaced after the obligation deadline in certain circumstances
• Recipients have flexibility to use funds to cover increased costs attributable to any change orders or contingencies included in contracts that were entered into before December 31, 2024—as long as the contract stays substantially within the original scope and purpose

This means that agencies can obligate funds quickly through mechanisms such as an interagency agreement with a local or state housing finance agency that has achievable plans to expend funding within the relevant timeframe. Even if they take advantage of this greater flexibility, though, all funds (excluding closeout costs) must still be expended by December 31, 2026, the stated end of the performance period.

Acting quickly to meet the moment

With the obligation deadline nearing, recipients must act quickly to consider new pathways as outlined by Treasury and allocate remaining funds. For those seeking to meet affordable housing needs, this represents a key opportunity to align with local housing agencies and identify projects well into development that could use a gap financing source. Alternatively, recipients can explore such innovative models as modular development housing to apply funds toward before the deadline arrives.

Doing so will require agile interagency and cross-sector collaboration. Recipients may need to turn to a consultant such as Guidehouse to identify project types that can be implemented within the timeframe, depending on account project readiness and construction schedules. Our teams support more than 60 state, county, and city governments with federal grant implementation, leaning on our deep expertise with housing, disaster recovery, grants management, resilience, and sustainability. We structure projects compliantly and match subsidy sources while collaborating with government offices to consider long-term community needs, practical implementation methods, and continuity of program support.