Department of the Treasury—Observations Regarding the Purpose Availability of Amounts Appropriated for Payments to State and Local Governments

B-336106

December 2, 2024

Congressional Requestors

Subject: Department of the Treasury—Observations Regarding the Purpose Availability of Amounts Appropriated for Payments to State and Local Governments

This letter responds to your request for a legal decision regarding the Department of the Treasury’s (Treasury) implementation of the Coronavirus State and Local Fiscal Recovery Funds (SLFRF) through an interim final rule (IFR) issued November 20, 2023.[1] SLFRF amounts remain available both for “costs incurred” and “obligations” made by recipients before December 31, 2024. 42 U.S.C. §§ 802­–803.[2] You asked us about Treasury’s interpretation of these terms and implementation of this approaching deadline.[3] As explained below, we are unable to issue a legal decision on this matter; however, we have identified several issues that Congress could consider for oversight. In addition, we are sharing this letter with Treasury and the Treasury Office of Inspector General.

In accordance with our regular practice, we contacted Treasury to seek factual information and its legal views on this matter.[4] Treasury responded to our letter.[5] We also considered publicly available documents from Treasury, including the IFR ,[6] training materials for SLFRF recipients,[7] and a document addressing recipients’ frequently asked questions.[8]

Application of the relevant statutes and legal principles will depend on the decisions that Treasury ultimately makes as it carries out SLFRF and decides whether to permit recipients to use program funds for specific expenses that arise after the December 31, 2024, deadline. Because Treasury necessarily will not make these decisions until after the deadline has passed, it is impossible at this time to draw any firm conclusions on the consistency of Treasury’s actions with applicable law. As such, we are unable to issue a decision on the merits as you requested.

However, in light of the December 31, 2024, statutory deadline, we offer observations through this letter that you may find helpful as you exercise oversight of Treasury’s SLFRF implementation. As we discuss below, although some aspects of Treasury’s interpretation of this deadline may fall within Treasury’s range of reasonable discretion, other aspects of its implementation may fall beyond this permissible range of discretion. We also question Treasury’s conflation of the terms “costs incurred” and “obligations” and share our thoughts on the meaning of each term.

We are sending a copy of this letter to Treasury so that it may consider our observations as it continues to shape SLFRF implementation. We are also sending a copy of this letter to the Treasury Office of Inspector General. We remain available to provide you with informal technical assistance as you oversee Treasury’s SLFRF implementation. Also, upon your request, we are available to provide you with a legal decision on the permissibility of one or more SLFRF payments as specific facts materialize.

BACKGROUND

Sections 602 and 603 of the Social Security Act authorize SLFRF, which provides assistance to states, localities, territories, and tribes (recipients) to mitigate COVID-19’s economic effects. 42 U.S.C. §§ 802–803. The Consolidated Appropriations Act, 2023 (2023 Appropriation) expanded SLFRF uses to include additional infrastructure investments. Pub. L. No. 117-328, div. LL, § 102, 136 Stat. at 6097, 6097–6104.

For amounts available to mitigate Covid-19’s economic effects, recipients may use the funds only “to cover costs incurred” by December 31, 2024. 42 U.S.C. §§ 802(c)(1), 803(c)(1) (emphasis added). Similarly, amounts available for other infrastructure investments “shall remain available for obligation” through December 31, 2024. 42 U.S.C. §§ 802(c)(5)(E), 803(c)(6)(D) (emphasis added).[9]

In implementing SLFRF, Treasury initially defined obligation as “an order placed for property and services and entering into contracts, subawards, and similar transactions that require payment.” 86 Fed. Reg. 26786 (May 17, 2021). Treasury then expanded its definition of “obligation” to include “a requirement under federal law or regulation . . . to which a recipient becomes subject as a result of receiving or expending funds.” 31 C.F.R. § 35.3. Treasury’s IFR directed recipients to submit estimates for anticipated costs necessary to ensure compliance with these requirements. 88 Fed. Reg. 80584 (Nov. 20, 2023). Although the relevant statutory provisions use different terms—“costs incurred” and “obligation”—in different sections, Treasury has applied its definition of the term “obligation” across all uses of SLFRF funds, including those for which the relevant statutory requirement uses the phrase “costs incurred. See 88 Fed. Reg. at 80585­–86. Consequently, Treasury did not separately define the term “cost incurred”.

DISCUSSION

Under the purpose statute, appropriations are available only for the purposes for which Congress appropriated them. 31 U.S.C. § 1301(a). When an appropriation does not plainly authorize an expense, we apply a three-step analysis to determine whether the expense is an authorized use of the appropriation. First, the expense must bear a logical relationship to the appropriation. Second, the expense must not be prohibited by law. Third, the expense must not be otherwise provided for. Because we are unaware of any prohibition or alternative appropriation available for Treasury’s SLFRF implementation, we focus our purpose analysis on step one.

To determine whether a reasonable, logical relationship exists between the appropriation and the expense, we begin with the appropriation’s text. See Carcieri v. Salazar, 555 U.S. 379, 387 (2009). While agencies retain a level of discretion to carry out statutory programs, the relevant question is whether “the expenditure falls within the agency’s legitimate range of discretion, or whether its relationship to an authorized purpose or function is so attenuated as to take it beyond that range.” B‑333826, Apr. 27, 2022, citing B-223608, Dec. 19, 1988. In the presence of unambiguous language, the ordinary meaning of the statute controls. See Carcieri, 555 U.S. at 387; B-332003.1, Oct. 5, 2022 (appropriation available for employee back pay was not available for employer tax payments or retirement contributions); B-303927, June 7, 2005 (appropriation for a grant payment to a workers’ compensation board for processing claims related to the terrorist attack of September 11, 2001, was not available to make payments to other state entities).

Under the purpose statute, Treasury may only permit recipients to use SLFRF funds consistent with the appropriation’s terms, which provide that some SLFRF amounts are available only for “costs incurred” by December 31, 2024[10] while other amounts are available only for “obligations” the recipients make by that same date.[11] We caution that Treasury could violate the purpose statute if it permits recipients to use SLFRF amounts either for costs incurred or obligations made after December 31, 2024.

We now consider the meanings of “costs incurred” and “obligation.”

Costs Incurred

The SLFRF statute directs that recipients of certain program funds “shall only use the funds … to cover costs incurred” by December 31, 2024. 42 U.S.C. §§ 802(c)(1), 803(c)(1). Treasury states that “incurred” lacks a “clear meaning and interprets “incurred” to mean “obligated.” 86 Fed. Reg. at 26811. As discussed above, in implementing SLFRF, Treasury initially defined obligation as “an order placed for property and services and entering into contracts, subawards, and similar transactions that require payment.” 86 Fed. Reg. at 26820. Treasury then expanded the definition of “obligation” to include requirements under federal law or regulation to which a recipient of SLFRF funds becomes subject. 31 CFR § 35.3. For example, recipients must provide a detailed accounting of their use of funds and any modifications to their tax revenue sources. 42 U.S.C. §§ 802(d)(2). Treasury deploys its definitions of “incur” and “obligation” to argue that recipients “incur” costs when they “become liable for or otherwise subject to a requirement to cover that cost under law, regulation, or the recipient’s grant agreement.” Response Letter, at 4.

Treasury asserts that this interpretation aligns with Congress’ intent for broad post-pandemic fiscal recovery. Response Letter, at 2. Treasury posits that because Congress provided for a “wide range of infrastructure investments”, the statute “contemplates that recipients will take on complex new projects” with “significant compliance efforts.” Id. at 4. On this basis, Treasury asserts that this definition of “costs incurred” comports with Congress’ intent. Id. at 2.

We question Treasury’s conflation of “costs incurred” and “obligation,” and we seek to give separate meaning to each term. To understand the meaning of “costs incurred” we begin with the plain meaning of the text and then turn to the federal courts.

In common usage, one “incurs” a cost when liability has attached.[12] Judicial precedents illustrate this definition. In Black v. Secretary of Health and Human Services, appellants sought compensation under a public health statute providing that people with certain vaccine-related injuries may qualify for the act’s compensation program if they submit documentation demonstrating that they incurred expenses exceeding a statutory threshold. 93 F.3d 781 (Fed. Cir. 1996). The court faced a question of whether the term “incurred” in the statute referred to petitioner’s “anticipated payments or obligations for which liability has not already attached.” Black, 93 F.3d at 785-86. The court applied the ordinary meaning of "incur," which is to “pay or become liable” and found that “incur” does not refer to “any and all expenses that may ultimately be traceable to a particular event.” Id. at 785. Thus, Black held that costs are incurred at the moment of payment or when liability attaches. Id. At 785-86.

In a subsequent ruling, McCulloch v. Secretary of Health and Human Services, the Federal Circuit applied Black in the context of future anticipated expenses. 923 F.3d 998 (Fed. Cir. 2019). The court applied the same public health statute to consider whether a petitioner had already “incurred” guardianship-maintenance fees, even though the petitioner would not pay those fees until a future time. Id. at 1000, 1002‑04. The court applied Black’s conclusion that expenses are incurred at the moment liability attaches and added that in “common usage, a person becomes liable for yet-to-arise expenses at the time of undertaking an obligation to pay those expenses if and when they arise.” Id. at 1003. The court noted that the guardianship-maintenance fees were legally required and that the petitioner’s ongoing payment of the fees was a “precondition for continuing receipt of the compensation granted in the judgment.” Id. at 1003. Accordingly, the court concluded that the petitioner had indeed “incurred” the cost of the guardianship-maintenance fees even though they had not yet been paid. Id.

Similarities may exist between these legally required guardianship-maintenance fees and, for example, expenses that recipients will face to comply with SLFRF’s reporting requirements. Recipients’ payment of these compliance costs could function as a precondition of continuing participation in SLFRF, just as payment of appellant’s guardianship-maintenance expenses constituted a precondition for continuing receipt of compensation. Thus, taken together, Treasury’s explanation of the meaning of “incur”, coupled with relevant Federal Circuit precedent, may suggest that Treasury would operate within its range of discretion if it permitted SLFRF recipients to use the funds for expenses related to compliance with reporting requirements.[13]

However, Treasury’s discretion to permit these expenses reaches its apex with statutory provisions that condition the availability of SLFRF funds on compliance with SLFRF provisions. Notably, under its evolving implementation of SLFRF, Treasury’s guidance contemplates SLFRF funds use for expenses recipients face when meeting other requirements “under federal law or regulation.” 88 Fed. Reg. at 80586. Treasury lists compliance with environmental regulation, including costs required to obtain permit renewals, as one such example. Id.

Black and McCulloch suggest that the permissibility of incidental SLFRF expenses may not be unlimited. As discussed above, under McCulloch, costs necessary to meet legal requirements that condition the availability of program funds are incurred on receipt of these funds. Here, qualitative differences exist between expenses resulting from compliance with a direct SLFRF statutory requirement and expenses arising from other independent federal laws such as environmental regulations. While liability to comply with SLFRF statutory provisions attaches immediately upon receipt of SLFRF funds, we are aware of no statutory or other indication that SLFRF funding is contingent on compliance with broader federal law outside of SLFRF statutory provisions. We also are unaware of any indication that compliance with these broader laws is a precondition of receiving SLFRF funds. Black and McCulloch cast doubt on whether liability attaches for broader compliance costs that do not constitute preconditions on the availability of SLFRF funds.

In addition to Treasury’s IFRs, we are also aware of Treasury’s evolving website guidance implementing SLFRF that permits recipients to use funds for expenses beyond those that the most recent IFR addresses.[14] For example, Treasury plans to permit SLFRF recipients to use the amounts for specified employee payroll and benefit costs arising from hours their employees work until December 31, 2026, a date two years after the statutory deadline of December 31, 2024.[15] Such costs must be associated with permissible SLFRF uses, and the employee must be serving in a position established before the statutory deadline. Id. For example, under Treasury’s website guidance, a recipient could charge payroll costs to its SLFRF funds for employees overseeing SLFRF broadband projects as long as the positions were established before December 31, 2024.[16] Additionally, Treasury plans to make the amounts available for such costs arising between December 31, 2024, and December 31, 2026, only if an employee is serving in a position established before the statutory deadline of December 31, 2024.[17]

Standing alone, Treasury’s broad website guidance appears to permit recipients to use SLFRF funds for payroll costs that arise after the statutory deadline of December 31, 2024, based solely on the pre-existence of the position and the general consistency of these expenses with SLFRF purposes. Though the guidance is broad on its face, and Treasury directs recipients to follow it,[18] we located no substantive explanation in the guidance on how to resolve its broad terms with the narrower provisions in the IFR. The SLFRF statute, the plain meaning of “incur”, and judicial precedent cast significant doubt on an interpretation that would permit recipients to use SLFRF funds as broadly as Treasury’s website guidance, standing alone, may suggest. Therefore, we caution that Treasury could violate the purpose statute if it permits recipients to use SLFRF amounts for such costs arising between December 31, 2024, and December 31, 2026.

Obligation

Unlike the majority of SLFRF funds whose availability depends on the “costs incurred” language discussed above, the availability of infrastructure funds depends specifically on the meaning of “obligation.” The SLFRF statute directs that infrastructure funds “shall remain available for obligation . . . through December 31, 2024.” 42 U.S.C. §§ 802(c)(5)(E), 803(c)(6)(D). When analyzing the plain meaning of the statutory language, we consider the whole statute and begin with the presumption that when Congress uses a different term, it intends a different meaning. See B-329605, June 2, 2022. Here, because Congress employed the term “obligation”, we presume its meaning differs from the meaning of “cost incurred.”

Despite this statutory context, Treasury interprets the definition of “obligations” as synonymous with “costs incurred.”[19] We disagree with Treasury’s conflation because “obligation” carries a meaning distinct from the meaning of “costs incurred. Both the plain meaning of “obligation” and our relevant decisions give this word a narrow, concrete definition. Several dictionaries link “obligation” to a definite legal commitment to pay, or liability.[20] In federal appropriations law, an obligation is “a definite commitment that creates a legal liability of the government for … payment.”[21]

Our decisions bolster the nexus between “obligation” and liability. For example, we concluded that written reports of estimated costs related to infrastructure projects did not constitute obligations. B-136642, Oct. 20, 1958. The Bureau of Public Roads wanted to report anticipated administrative and engineering costs of highway construction as obligations. Id. We found that projected costs alone cannot constitute valid obligations prior to their “authorization and actual incurrence” because these projections were not included in the contracts for the infrastructure projects. Id. Thus, written estimates and other documentation justifying these estimated expenses did not meet the threshold required for a binding obligation. Id.

Our other decisions reinforce actual incurrence of a liability to pay as the key prerequisite to establish an obligation. See, e.g., B-322147, July 6, 2011; B‑300480.2, June 6, 2003; B-300480, Apr. 9, 2003. We acknowledge that the SLFRF statute uses “obligation” to describe actions taken by non-federal entities, who generally are not custodians of appropriated funds and therefore do not obligate federal appropriations in the same way that agencies do. See 43 Comp. Gen. 697, 699 (1964). Nonetheless, non-federal entities do obligate their own funds. Therefore, we are informed by the meaning of “obligation” in appropriations law, which requires a legal liability. Thus, obligations of SLFRF amounts arise when a legal lability of the recipient to pay has attached, and obligations require something beyond mere estimates or anticipated expenses.

Treasury’s broad wording throughout its website guidance implementing its expanded definition of “obligation” adds to our concerns. Above, we noted our uncertainty surrounding how Treasury will utilize its website guidance in interpreting the phrase “costs incurred” and whether this application will cohere with law. These concerns acquire greater force when considering Treasury’s interpretation of “obligation”, a word with a narrower and more established meaning than that of the broader term “costs incurred.”

Treasury argues that Congress ratified Treasury’s interpretation of “obligation” when Congress included this term in the SLFRF infrastructure provisions in the 2023 Appropriation.[22] It is not clear to us that an enactment that makes no reference to agency action could nonetheless ratify that action’s definition of a word that retains well-established meaning in the federal fiscal context. We also note that the SLFRF timeline casts doubt on this claim of ratification. The 2023 Appropriation became law on December 29, 2022, which is prior to Treasury expanding its definition of “obligation” in its IFR published on Nov. 20, 2023. See Pub. L. No. 117-328, 136 Stat. 6097; 88 Fed. Reg. 80584. Congress did not have access to Treasury’s not-yet-published expansion, so it could not have ratified Treasury’s definition of “obligation” as including anticipated costs. Indeed, when Congress enacted the 2023 Appropriation, Treasury’s published definition of “obligation” was a narrower one more consistent with the term’s usual meaning in federal appropriations law.[23]

In light of the plain meaning of “obligation”, its meaning in the appropriations law context, and possible shortcomings in Treasury’s arguments supporting its expanded definition of “obligation,” we caution that Treasury may act beyond the reach of its permissible range of discretion if it applies its interpretation of “obligation” to permit recipients to use SLFRF funds for some anticipated costs for which they do not yet bear any liability. These tenuous costs include those arising after December 31, 2024, that are necessary for compliance with the SLFRF statute, its implementing regulations, or the grant agreement. Though such expenses might be permissible for funds subject to the broader “costs incurred” requirement, Treasury must consider that the statute more narrowly requires an “obligation” for the infrastructure funds.

CONCLUSION

Although some aspects of Treasury’s interpretation and implementation of the December 31, 2024, SLFRF deadline may fall within Treasury’s range of reasonable discretion, other aspects may fall beyond that discretion. We are available to provide you with informal technical assistance related to this matter, as well as to provide a decision that you may request as factual details about actual payments under SLFRF materialize.

If you have any questions, please contact Shirley A. Jones, Managing Associate General Counsel, at (202) 512-8156 or JonesSA@gao.gov, or Omari Norman, Assistant General Counsel for Appropriations Law, at (202) 512-8272 or NormanO@gao.gov.

Sincerely,

Edda Emmanuelli Perez
General Counsel

Cc: Addar Levi
Acting General Counsel
Department of the Treasury

Cc: Richard K. Delmar
Acting Inspector General
Department of the Treasury

Signatory of March 7, 2024 Letter

The Honorable Eric S. Schmitt
United States Senate

Signatories of December 18, 2023 Letter

The Honorable James Baird
House of Representatives

The Honorable Troy Balderson
House of Representatives

The Honorable Andy Biggs
House of Representatives

The Honorable Josh Brecheen
House of Representatives

The Honorable Eric Burlison
House of Representatives

The Honorable Kat Cammack
House of Representatives

The Honorable Ben Cline
House of Representatives

The Honorable Michael Cloud
House of Representatives

The Honorable Mike Collins
House of Representatives

The Honorable Eli Crane
House of Representatives

The Honorable Byron Donalds
House of Representatives

The Honorable Jeff Duncan
House of Representatives

The Honorable Chuck Edwards
House of Representatives

The Honorable Pat Fallon
House of Representatives

The Honorable Scott Fitzgerald
House of Representatives

The Honorable Scott Franklin
House of Representatives

The Honorable Bob Good
House of Representatives

The Honorable Lance Gooden
House of Representatives

The Honorable Glenn Grothman
House of Representatives

The Honorable Harriet M. Hageman
House of Representatives

The Honorable Kevin Hern
House of Representatives

The Honorable Erin Houchin
House of Representatives

The Honorable Ronny Jackson
House of Representatives

The Honorable Rich McCormick, MD, MBA
House of Representatives

The Honorable Alex X. Mooney
House of Representatives

The Honorable Barry Moore
House of Representatives

The Honorable Doug LaMalfa
House of Representatives

The Honorable Ralph Norman
House of Representatives

The Honorable August Pfluger
House of Representatives

The Honorable Keith Self
House of Representatives

The Honorable Austin Scott
House of Representatives

The Honorable Claudia Tenney
House of Representatives

The Honorable Beth Van Duyne
House of Representatives

The Honorable Randy Weber
House of Representatives

The Honorable Joe Wilson
House of Representatives

The Honorable Rudy Yakym
House of Representatives

 

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