Cities Work to Make the Most of Federal ARPA Funds

By Mary Jane Smetanka

For Houston, a small city in Minnesota’s southeastern corner, fixing and replacing old water and sewer pipes is an expense that stretches the city budget.

But City Administrator Michelle Quinn says that if city officials decide to tackle those projects, Houston finally has the resources to finish replacing lead water service lines to homes and work on sealing a leaky sewer main.

The money for that work would come from the federal American Rescue Plan Act (ARPA), the massive COVID-19 relief legislation approved last March. ARPA is the second federal relief bill enacted since 2020, and it focuses on helping local governments recover from the impact of COVID-19.

Quinn says the $102,000 Houston will receive will have a big impact in the town of 997 people. “We have aging infrastructure, and this will be huge,” she says. “It will benefit the community as a whole and keep a lid on our tax rates.”

How cities can use ARPA funds

Minnesota counties, towns, and cities will receive $2.13 billion in ARPA funds, with $377 million going to local governments with populations below 50,000. Cities had to apply for the funds, which are being distributed on a per-capita basis and cannot exceed 75% of a city’s annual budget. Cities have received the first half of their money from the state; they’ll receive the remainder in 2022.

ARPA is different from the first COVID- 19 relief bill, called the CARES Act, because it offers the opportunity for a significant and lasting impact on cities, says Lisa Sova, assistant finance director with the League of Minnesota Cities (LMC).

The CARES Act helped cities with their emergency response to COVID-19, and the funding had to be spent quickly. ARPA is intended to help cities recover from the pandemic’s effects, allowing more time to set priorities on how to spend the money.

“With CARES Act funding, cities were reacting to COVID-19 and needed cash flow immediately to meet unbudgeted expenses,” Sova says. “Now, cities are able to be thoughtful about how they use these funds, in the way that’s best for their communities in the long term.”

ARPA funding can be spent in four areas:

• Response to the public health emergency and the negative economic impact of the pandemic. Direct COVID-19 costs, like vaccination programs and contact tracing, qualify as a response to a public health emergency. Assistance to households, small businesses, and nonprofits meets the negative economic impact standard. Cities can help residents in many ways, including increasing affordable housing and providing assistance with food, rent, and utilities. And they can aid businesses with loans and grants to mitigate financial hardship or help with COVID-19 measures.
• Premium pay for essential workers. While offering premium pay for employees was a common use of the CARES Act funding, cities must be more careful with the second funding round, Sova says. Now, cities may provide premium pay to eligible employees to the extent that the employees’ time is dedicated to responding to the COVID-19 public health emergency.
• Revenue replacement for provision of government services. Cities that lost money during the pandemic must calculate their losses by comparing general revenue from all eligible sources at the end of 2020 and each year end through 2023 to the general revenue for 2019. The funding cities receive can help replace this lost revenue. The federal funds can be used for the provision of government services but can’t be used to pay outstanding debt, replenish reserve funds, or pay settlements or judgments.
• Investments in water, sewer, and broadband infrastructure. Any project that meets federal standards under the Environmental Protection Agency’s Clean Water State Revolving Fund or Drinking Water State Revolving Fund is eligible, but in most cases, money cannot be spent on new development. Sova says many cities have asked about replacing roads, but so far, funding can be used on streets only if they need to be fixed or replaced because of underlying water or sewer work or if the funds originally qualified under revenue loss. As for broadband, projects that are designed to provide internet access to unserved or underserved areas are eligible.

Providing funding to replace aging infrastructure is one of the most exciting things about ARPA, Sova says. While those funds can only be spent on water, sewer, and broadband, “it’s not often that the federal government provides such broad funding to our cities,” she says. “Most cities have aging infrastructure that is very expensive to replace. This is a great opportunity for cities to meet that need.”

Funds ease city worries

In Houston, city officials are still deciding how to use the funds, but Quinn is pleased that the federal money would allow the city to finish replacing lead water pipes. The city is also considering using its funding to line a sewer main that has problems with groundwater infiltration.

Over the years, Quinn says, Houston has been steadily replacing deteriorating infrastructure, but she’s been concerned that rising debt from those projects could pull down the city’s bond rating. The new funding would allow work on those priorities to continue without worry about that.

Red Wing (population 16,547) will receive a total of about $1.7 million from ARPA. The city’s financial consultants verified that the city’s overall 2020 revenue dropped from the previous year. This means the city can use ARPA funds as revenue replacement for the provision of government services. City Council Administrator Kay Kuhlmann says the causes of those losses included unpaid taxes, enterprise funds that lost money, and an overburdened ambulance service.

The federal funding “is huge,” Kuhlmann says. “We see this as helping us [recover from] COVID, but we also can be strategic in how we invest in the community. It’s $1.7 million we never knew was coming, so we can think a little differently.”

Some of that ARPA funding will probably be invested in Red Wing’s city-owned ambulance service, she says, and the city is also considering a second round of loans and grants to businesses that still suffer from COVID-19 fallout.

Funding immediate COVID-19 needs

Savage (population 32,465) will get $3.4 million in ARPA funds, and City Council members are interested in spending it on economic recovery needs, housing, and broadband and water infrastructure, says City Administrator Brad Larson. The council also wants input from residents on how federal dollars should be used, so the city created a public engagement website and hired a temporary worker to manage it.

But Savage is also using funds for the immediate need of testing unvaccinated city employees for COVID-19. The city hasn’t mandated the shots, Larson says, but is asking those who haven’t had the vaccine to get tested every week if they spend a significant amount of time in city facilities.

That effort, which started in September and tests about 30 people per week, costs roughly $11,000 a month. The city hired a vendor who visits twice a week to test and report back on any positive results.

Larson says the project does not have an end date. “While we are in high or substantial COVID spread, we will do this.”

A variety of uses

Larger cities may end up using their federal funds in a lot of different ways. For example, in Duluth (population 86,697), the City Council has approved a plan to use its $58 million in ARPA funds on a long list of projects.

In addition to replacing lost revenue, the city will use funds for projects such as affordable housing; investments in public works, utilities, and broadband; and improving ventilation in City Hall. The city will also use funds for public safety programs involving social workers, as well as crisis and violence intervention. And the city plans to offer aid for businesses and organizations that were negatively impacted by the pandemic.

Affordable housing is the biggest investment, at $19.2 million. “Housing is a challenge here, and we could spend that many times over,” says Jen Carlson, Duluth’s finance director. The focus will probably be on building new housing, but details are still being worked out.

Almost $13 million will go toward public works and utilities, including replacing all home water meters, developing a program to replace lead water lines that run to homes, and buying street sweepers, which help with clean water by keeping debris out of storm sewers.

Long before the pandemic hit, Duluth officials were concerned about the antiquated ventilation in City Hall, Carlson says. Clean air wasn’t circulating in the 1928 building. About $12 million will be directed to that project.

“This addresses some longstanding infrastructure needs that the city otherwise would have had to place on taxpayers,” Carlson says. “Without this funding, we’d be in a very different place, and I’m not sure how we would tackle these projects that have big numbers.”

Extra time to be thoughtful

ARPA rules give cities until 2024 to spend the new federal funds, or 2026 if projects are in process. In Savage, Larson says, the city wants to take time developing its plans to invest that money.

“We’re trying to be creative in helping the community recover; that’s our number one goal,” he says. “The City Council wants to look at projects with the goal of having a long-term impact.”

Mary Jane Smetanka is a freelance writer.