Accounting and Reporting Guidance for CARES Funding and the COVID-19 Pandemic

Thursday, June 4, 2020

Accounting and Reporting for CARES Act Funding:

The federal government passed the Coronavirus Aid, Relief, And Economic Security Act (CARES Act) on March 27, 2020. The Act provides funding to cover COVID-19 expenses for the public health emergency that were not budgeted as of March 27, 2020, and are incurred between March 1, 2020, and December 31, 2020. These funds are not intended to fill revenue gaps resulting from the global pandemic and the resulting economic shutdown. The funds provided by the Act are intended to help state and local governments cover costs directly associated with the emergency, such as medical and public health needs and effects of the emergency, for example, economic support of those suffering from unemployment or business interruptions caused by COVID-19.

Local governments with populations exceeding 500,000 were eligible for direct payment of CARES funding. Four local governments in North Carolina qualified: Guilford, Mecklenburg, and Wake Counties and the City of Charlotte each received a direct distribution. North Carolina also received a direct distribution (of just over $3.5 billion) as a part of the Act. In its ACT TO PROVIDE AID TO NORTH CAROLINIANS IN RESPONSE TO THE CORONAVIRUS DISEASE 2019 (COVID-19) CRISIS (Session Law 2020-04), the NC General Assembly allocated amounts to each county from the State’s CARES allocation. Each county will decide if and how it will share its allocation with its municipalities. Keep in mind that the restrictions follow the funds no matter who receives them.

Based on NC General Statute 159-26(b)(2) and GASB Statement 54, CARES Act funds should be budgeted and accounted for in a special revenue fund. If the funds are utilized for more than one function, then separate accounts should be established within the fund to account for those functions separately. Local governments should keep adequate records to improve transparency and demonstrate that funds have been used appropriately and within the limitations of the Act. Per the Frequently Asked Questions (FAQ) (as of the date of this post, the most recent update was May 28, 2020) document on the US Treasury website,  the interest earnings from specific investments of CARES funds should be used only to cover eligible CARES fund expenditures. If governments spend their full allocation of CARES funding and deposit the CARES funding into the general cash account, then they may use the interest earnings to meet immediate cash management needs related to eligible expenditures. However, we advise units to allocate interest earnings on CARES funds to restricted accounts until they are certain they will spend down all the CARES funding that the state or federal government has allocated to them.

All funds that are unspent as of December 30, 2020, must be returned to the U.S. Department of Treasury along with any restricted interest earnings and the proceeds of disposition of assets purchased with CARES funds that are disposed of prior to December 2020. There is no specific guidance available at this time as to how the funds are to be returned; we will update you when that information becomes available. Tyler Mulligan of the NC School of Government posted a  May 11  blog with guidance for governments considering how to use their CARES Act funds beyond the December 30 date with the use of loan programs that may extend funds over several years. We urge you to review his blog and consult with your attorney to determine how to utilize these funds for your community.       

Regardless of the source of the CARES Act funding, government use is restricted to the specific public health emergency uses indicated above as set forth in section 601(d) of the Social Security Act. For specific questions about eligible expenditures, please refer to the NC Office of State Budgeting and Management website.

The US Treasury has determined that CARES Act funds are considered federal financial assistance and have been assigned a CFDA No. 21.019 and given the program name “Coronavirus Relief Fund.” The granting agency is the US Department of Treasury. According to the FAQ, updated May 28, 2020, CARES Act funds are subject to federal single audit requirements found in subpart F of the Uniform Guidance (2 CFR 200). In addition, the US Treasury states that fund payments are subject to Uniform Guidance sections regarding internal controls (§200.303) and subrecipients monitoring and management (§§200.330 to 332). Other subparts of the Uniform Guidance are excluded. For more information on Coronavirus Relief Fund (21.019), go to https//beta.SAM.gov.

At the federal level, the Office of Management and  Budget (OMB) released two memoranda  to federal agency heads, M-20-11 and M-20-17, that address administrative relief for recipients of federal assistance that are directly impacted by the COVID-19 pandemic. Documents located on the US Treasury website further explain how CARES funds are to be used; “Coronavirus Relief Fund Guidance for State, Territorial, Local, and Tribal Governments” (April 22, 2020), and “FAQ” (May 28, 2020). The Treasury is updating the FAQ document as questions arise and are subsequently addressed. These documents and the list of governments that are receiving these funds are linked on the US Treasury website. NC local governments should continue to monitor both the state and federal websites for additional expenditure guidance as it is provided. Until more guidance is available, we urge local governments to manage these funds with the same administrative level of detail that you would treat FEMA funds, which we are unfortunately more familiar with.

We will also continue to research the compliance and reporting requirements associated with the CARES Act funding and the recent COVID-19 Relief Aid provided by Session Law 2020-4, and update our website as we learn more. It is unclear at this time what existing federal or state programs will be utilized to channel funds to recipients and what authoritative sources are applicable. Unfortunately, local governments and their auditors may not have more information on how to audit COVID-19 relief programs for some time. We understand that OMB is planning to release its compliance supplement for existing programs in late June 2020. Guidance for new programs, including new programs funded as part of the COVID-19 relief program, will be issued in fall 2020.

Additional Accounting Guidance Associated with COVID-19 Pandemic:

Modified Accrual Revenue Impacts: 

On March 31, 2020, the NC Department of Revenue (NC DOR) provided penalty relief for taxpayers that fail to file a tax return or pay the related taxes for various items noted on the Department’s press release. Numerous taxes that local governments receive either monthly or quarterly are included in this extension that is effective for taxes due on March 15, 2020, through July 15, 2020, including sales and use taxes, scrap tire disposal taxes, and white goods disposal taxes. There is no deferral of the taxes, but relief from late action penalties, effectively allowing delayed payment of at least some portion of taxes included if the taxes are paid by July 15, 2020. If the delayed due dates extend beyond the end of the fiscal year end, but taxes are received by the unit within the 60 to 90-day window that local governments recognize as their availability period for modified accrual revenues, then governments may choose to accrue those revenues into the 2020 fiscal year. However, any changes in timing and the reasons for the change should be disclosed in the notes (NCGAI 3, para. 11, as amended by GASB 54, para. 5).     

In North Carolina  Session Law 2020-03, Section 4.7.(e), the NC General Assembly extended motor vehicle taxes due dates by five months for taxes due between March 1, 2020, and August 1, 2020. Motor vehicle taxes are due when the related vehicles are registered; therefore, governments should NOT accrue the revenues for motor vehicle taxes with extended due dates beyond the typical June 30, 2020, fiscal year end date. However, those amounts that the State of NC has collected on behalf of the local government prior to June 30 that are remitted to the local government subsequent to year end should be accrued at year end, if material. Any change in in the timing of revenue collections for motor vehicle taxes should not affect the tax collection percentage rate reported at the end of the year.  

Modified Accrual Expenditure Impacts: 

Also included in the March 31, 2020, action taken by the NC DOR was a delay in late penalties for the employer share of withholding taxes for March 15, 2020-July 15, 2020 dates. No delay was authorized in payment of the withholding taxes, only in the late penalty payments, effectively delaying the taxes and providing some cash flow relief for NC local governments that are exempt from the payroll protection funding as long as taxes are paid by July 15, 2020. The federal CARES Act also allows employers to defer payments of the employer share of Social Security taxes that are required to be made between March 27, 2020, and December 31, 2020. Half of any deferred taxes will need to be remitted to the federal government by December 31, 2021, and the full amount of the deferred taxes should be remitted by December 31, 2022. Regardless of when the payroll taxes are remitted to the federal government, any amounts due and payable on June 30, 2020, should be reported as fund liabilities. Further information concerning deferred employer payroll taxes can be found here.

Full Accrual Accounting - Proprietary Fund Revenues and Expenses:

The impacts of the Governor’s Executive Order No. 124 issued on March 31, 2020 (and extension of that order with Executive Order 142), have been addressed and numerous documents on our COVID-19 Resources page assist with questions. With the order’s moratorium on cutoffs, we expect reduced water and sewer collections that will potentially result in higher uncollectible amounts on June 30, 2020, than in prior years. Local governments impacted by the Executive Order should review their accounts receivable on June 30, and assess whether the allowance for uncollectible accounts is adequate to cover any balances outstanding at the end of the year that are unlikely to be collected.