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April 3, 2025
With the recent cancellation of several high-profile public health and education grant programs - programs that most state and local governments had long assumed were safe from federal clawbacks - a sudden and unsettling picture is beginning to emerge. One that suggests the new administration may be far more aggressive than previously anticipated when it comes to rescinding unspent federal funds, particularly those disbursed under the last administration and tied to COVID-19,
For many in state and local government, the assumption has long been that the American Rescue Plan Act (ARPA) funds - especially the State and Local Fiscal Recovery Funds (SLFRF) - were largely untouchable. Fully allocated, widely reported on, and heavily relied upon for long-term recovery and reform efforts, SLFRF dollars have become foundational to countless infrastructure, housing, and workforce programs.
But that sense of security may be misplaced.
A closer look at the underlying legislation and the subsequent rulemaking paints a much more fragile picture. And with a critical reporting deadline of April 30 fast approaching, there's real reason to be concerned.
What the Law Actually Says
The American Rescue Plan Act, passed in March 2021, set aside $350 billion in direct aid to state, local, tribal, and territorial governments
through the SLFRF program. The law was intentionally broad, granting recipients flexibility to respond to the COVID-19 public health emergency and its economic fallout.
That said, and flexibilities aside, the statutory language imposed a clear deadline: all SLFRF funds must be obligated by December 31, 2024. But what the law does not specify is a clear final expenditure deadline. Instead, the Treasury- administrator of the SFLRF, released a Final Rule (31 CFR Part 35, released January 2022) establishing a default liquidation period extending to December 31, 2026, giving recipients two additional years to spend down obligated funds beyond the explicit obligation deadline.
But here's an interesting and now concerning detail buried in the Final Rule that previously had no great bearing on SLFRF implementation: Treasury, just like all Federal grantors, reserves the right to modify the liquidation timeline since it's not an originating component of the legislation.
This means that while the legislation establishes the obligation deadline as 12/31/2024, the expenditure deadline is established by administrative rule, which can be altered. This can be taken to mean that the current administration, as it strives to wrestle accountability of previously allocated federal funding, could use this provision to accelerate the liquidation period in the hopes of creating the opportunity to justify recoupment. In doing so, recipients could be forced to spend all obligated funds by an earlier date, possibly as soon as mid-2025.
Perhaps naively, SLFRF recipients treated the statutory silence on the liquidation deadline in the original legislation as a false sense of a long runway and many used SLFRF proceeds to fund multi-year infrastructure projects or provide budgetary support for mental and public health, education support or safety net programs that extend into 2026.
Why This Should Concern All SLFRF Recipients
It's no secret that COVID-19 has become a political flashpoint. In recent months, we've seen Republican leadership on the Hill demand detailed accounting of COVID-era spending, with increasing skepticism about funds that remain unspent years after the state of emergency has ended. And while the American Rescue Plan Act was designed to address both the direct and indirect impacts of the pandemic, the current Administration has already taken concrete steps to reclaim ARPA funding - even when legally obligated - particularly in the public health and education sectors. These rescissions were a shot across the bow, signaling a shift in how pandemic-era funds are being viewed, and more importantly, how aggressively they may be recouped.
Consider the following excerpt from the actual rescinssion notices issued on March 28th to Department of Education grant recipients of ESSER funds:
"After careful review, the Department is modifying the liquidation period to end on March 28, 2025. The Department has concluded that the further extension of the liquidation period for the aforementioned grants, already well past the period of performance, was not justified. You and your subrecipients have had ample time to liquidate obligations."
This should be raising alarms for SLFRF recipients. The flexibility to use SLFRF for infrastructure, economic development, housing, and even climate-related initiatives was always rooted in a broad interpretation of pandemic recovery. But with each passing month since the COVID-19 emergency officially ended, the connection between these investments and the pandemic becomes more tenuous - and more susceptible to political scrutiny. Especially under an administration that didn't pass the law, didn't distribute the funds, and whose ideology may fundamentally conflict with how the dollars have been used.
Now layer in the Secretary of the Treasury's authority under the Final Rule to accelerate the expenditure deadline, and you have a perfect storm.
In theory- and likely in practice under a Trump administration - the Treasury could come for unobligated balances under the guise of fiscal discipline, fraud prevention, or even national debt concerns. But in reality, it would likely become a highly politicized move, aimed squarely at states and localities that have used SLFRF funds for projects perceived as inconsistent with the new administration's policy priorities.
Think equity-focused grant programs, green infrastructure, municipal broadband, affordable housing initiatives tied to tenant protections - any of these could be swept into a new round of audits or funding challenges. And if the expenditure deadline is accelerated, recipients could find themselves not only defending their outcomes, but fighting to prove their projects were even eligible in the first place.
The looming risk is that eligibility could become retroactively interpreted through a political lens. That is, if a project looks like pandemic recovery to one administration, but looks like progressive policymaking to another, Treasury's enforcement posture could shift dramatically-creating financial and reputational exposure for recipients, no matter how thoroughly they documented their decisions.
What's clear is this: the belief that ARPA dollars - especially SLFRF - are immune from clawback is not grounded in the current legal or political reality. If the new administration chooses to make this a fight, the statute, the Final Rule, and the shifting political winds give them plenty of room to maneuver.
SLFRF Reporting Snapshot: Q3 2024
To underscore the scope of the potential issue, we can look at the most recently available reporting data associated with SLFRF - which covers obligations and expenditures through September 30, 2024 - just three months before the obligation deadline. Treasury data reveals significant outstanding balances that underscore the vulnerability many jurisdictions now face. IMPORTANT CAVEAT: It is logical to assume that all SLFRF recipients have fully obligated their funding by 12/31/24. The purpose of this analysis is to underscore the likely significant unliquidated balances, even if funds are fully obligated.
• Of the $350 billion allocated under SLFRF, only $292.1 billion had been obligated by the end of Q3 2024.
• This leaves more than $57.8 billion in funds not yet obligated as of September 30, 2024-just weeks before the December 31 obligation deadline.
• More concerning, of the funds that had been obligated, over $130.6 billion remained unexpended, highlighting the vast scope of projects still in progress or not yet underway.
This snapshot paints a stark picture: nearly 40% of total SLFRF allocations remained unspent as of Q3 2024, and over $50 billion had not even been obligated. These figures set the stage for intensified federal scrutiny and reinforce the need for recipients to adopt aggressive mitigation strategies in anticipation of possible expenditure deadline accelerations or political reinterpretation of program intent.
Is SLFRF Exposure A Partisan Issue?
As scrutiny intensifies over the pace of SLFRF fund expenditures, further evaluation of the data suggests that this may not only be a fiscal risk - but a political one. Analyzing unexpended balances by state and cross referencing them with gubernatorial party affiliation reveals a noticeable trend: states led by Republican governors are disproportionately represented among those with the highest percentage of unexpended SLFRF funds.
For example, states like Oklahoma (80%), South Carolina (79%), Tennessee (78%), and Mississippi (74%) all reported that more than three-quarters of their obligated SLFRF funds remained unexpended as of Q3 2024. These are all states led by Republican governors, and collectively they account for billions in unliquidated balances.
In contrast, Democratic-led states such as California (13%), Pennsylvania (9%), and Illinois (5%) appear to have moved significantly faster in expending their SLFRF funds - potentially placing them at lower risk of recapture should the expenditure window be shortened.
This pattern matters, especially in the current political climate. As the new administration attempts to account for not yet used ARPA funds, Republican-led states could find themselves disproportionately vulnerable to their own party's policy shifts. The irony is sharp: the same governors who may have favored conservative fiscal restraint or longer timelines for project execution could now face the brunt of a federally imposed clawback effort aimed at accelerating COVID-era fund closures.
That doesn't mean the issue is purely partisan. Some blue states also show signs of exposure - New Jersey (61%) and Michigan (45%) among them.
But the data suggests that red states are at higher relative risk of leaving substantial dollars on the table.
In this light, what once may have been considered a question of local execution speed now becomes a political liability. With nearly $131 billion still unexpended nationwide and partisan divides shaping how funds were allocated, prioritized, and spent, the pressure to justify - or surrender - unspent balances is set to become not just a fiscal story, but a political one.
A Hypothetical (But Plausible) Timeline
In reading the tea leaves, it's becoming increasingly clear that a deliberate strategy is unfolding-one that could reposition unexpended ARPA funds, especially SLFRF, for heightened scrutiny and potential recapture. While technically obligated, tens of billions in SLFRF dollars remain unspent, creating an opening for the Administration to question not just timelines, but the legitimacy of projects themselves. This isn't an accident-it appears to be a calculated effort to reframe pandemic-era flexibility into post-pandemic fiscal discipline, with a clear intent to reclaim funds that no longer align with evolving federal priorities.
Consider the following scenario:
• April 30, 2025: States and localities submit their Project and Expenditure Reports, detailing all obligations as of 12/31/24. This will be the first complete data set for all recipient types that Treasury has to analyze and act on.
• Summer 2025: Treasury conducts a review and determines that a significant portion of obligated funds remain unspent. Citing concerns over delayed project execution and evolving federal priorities, Treasury announces an accelerated expenditure deadline of September 30, 2025 - effectively cutting off the liquidation period by a year.
• Fall 2025: Recipients scramble to liquidate funds, but many projects - particularly those reliant on multi-year contracts or construction timelines - cannot be completed in time. Unspent balances are recaptured by the federal government.
This is not speculative. Similar accelerations have just occurred with NIH, CDC, and Department of Education grants, where unobligated funds were abruptly rescinded despite prior assurances of flexibility and approved expenditure timeline extensions.
What All SLFRF Recipients Should Do Now
The obligation deadline of December 31, 2024, has come and gone - but accounting for use of funds is far from over.
As recipients finalize their Project and Expenditure Reports due this month, many are realizing that how they've categorized obligations - and how well those obligations align with Treasury's standards - will have long lasting implications. The good news? There's still time to course-correct.
Treasury's Final Rule provides meaningful flexibility for recipients to re align expenditures against previously utilized non-SLFRF sources - and if done correctly - thereby liquidating SLFRF balances while freeing up non SLFRF sources to continue with critical projects outside of the preview of SLFRF administration - and timelines thereby mitigating recapture.
More specifically, the Final Rule includes several built-in flexibilities that can help recipients proactively manage their risk:
• Revenue Loss Provision: The Safest Harbor
ARPA allows recipients to claim up to $10 million (or a calculated revenue loss amount) as a general government revenue replacement, effectively converting SLFRF into unrestricted funds. Unlike project-based obligations, revenue replacement funds can be fully expended upon obligation, meaning they could provide immunity to future expenditure deadline adjustments.
Mitigation Strategy: Jurisdictions with unallocated funds should evaluate the ability to reclassify remaining balances under this provision.
• Administrative Costs: A Flexible Expenditure Pathway
The Final Rule permits up to 10% of a recipient's total allocation to be used for administrative expenses, including payroll, IT systems, and
compliance staffing. Unlike capital projects, these costs are easier to liquidate quickly and less susceptible to delays.
Mitigation Strategy: Recipients with unobligated balances could consider shifting remaining funds into eligible administrative expenditures if project execution timelines are uncertain.
• Avoiding Over-Reliance on MOAs as "Obligated"
Many jurisdictions have used Memorandums of Agreement (MOAs) to document obligations by the 12/31/2024 obligation deadline, which is a sound obligation strategy. But these must be done correctly: the Final Rule emphasizes that obligations must be tied to enforceable contracts, subawards, or direct expenditures - not just internal agreements which could leave them susceptible to subjective scrutiny if that additional step has not been taken.
Mitigation Strategy: Audit existing fvlOAs to ensure they meet Treasury's binding commitment standard. If not, convert them into formal contracts/subawards as soon as possible.
Legal Challenges Are Possible - But Shouldn't Be Relied On
While lawsuits currently making their way through the courts - brought by States challenging legality of unilaterally rescinding obligated funds - these cases focus on programs with more rigid statutory protections.
SLFRF, by contrast, was built on administrative flexibility, which could make it an easier target if federal priorities shift.
This flexibility fundamentally weakens any potential legal challenge. Treasury can argue - credibly - that any change to the liquidation period falls squarely within its administrative discretion. And courts have typically deferred to agencies on questions of implementation, especially when the statute leaves room for interpretation.
The stark reality is that the best defense is overall compliance, expedited - even retroactive - expenditures, and timely liquidation.
Key Takeaways - How To Protect SLFRF Program Funding
The lesson from recent federal grant clawbacks is clear: assumptions of flexibility can vanish overnight. For ARPA recipients, the time to act is now
-before the window closes. SLFRF across the country, regardless of administration political affiliation, should immediately consider the following strategies to protect SLFRF unliquidated balances:
• Accelerate spending now-prioritize projects that can be fully liquidated by mid-2025.
• Maximize revenue replacement-shift eligible funds into this flexible category before.
• Evaluate over-reliance on MOAs that have not yet been converted into binding contracts/subawards - ensure obligations meet Treasury's strict definition.
• Prepare for an accelerated deadline-assume Treasury could shorten the expenditure window with minimal notice.
How We Can Help
At Ambipar I Witt O'Brien's, we've supported SLFRF recipients across the country from day one - and we understand the operational, political, and compliance pressures you're facing as the landscape shifts.
Our team is available to perform a rapid assessment of your SLFRF portfolio, identifying areas of potential exposure, reviewing obligation documentation, and recommending targeted mitigation strategies aligned with Treasury guidance and best practices.
Whether you're concerned about eligibility, liquidation timelines, or simply want a second set of eyes before the next reporting deadline, we're here to help you protect the investments you've made - and the communities counting on them.
