Capitol Hill is usually a hive of offices buzzing with action and deal-making, but the anxiety about the state of the economy was palpable when I was walking the halls of Congress during early March 2009. When I met with Representatives, Senators, and their senior staff members, nearly every conversation included discussion or debate about Washington’s recent attempt to stimulate the nation’s economy through passage of the American Recovery and Reinvestment Act of 2009 (the “Stimulus Act”).
Despite numerous articles, commentaries, and websites dedicated to the Stimulus Act, it remains for most of us a confusing mix of sound bites and spin. There are many projections and general announcements on official government websites such as www.recovery.gov and www.ncrecovery.gov, but there are very few specifics. The Stimulus Act is 402 pages long, but makes very general allocations and leaves the details to federal and state agencies. Indeed, because of the swiftness of the law’s passage, the Stimulus Act’s impact on America from Wall Street to Main Street is not fully appreciated. No one knows for sure how much money is coming to North Carolina.
Overview of the Stimulus Act
What does the Stimulus Act actually do? It allocates $789.5 billion in an attempt to alleviate the ongoing economic crisis and save jobs. Of that $789.5 billion, approximately $288 billion is dedicated to tax cuts and credits (the “Tax Stimulus Provisions”), while $501.5 billion is appropriated to the federal and state governments (the “Appropriated Funds”). Of the Appropriated Funds, $225 billion is allocated among the states based on existing formulas, and $276.5 billion is appropriated directly to various federal agencies to be spent on existing and future needs. In theory, the Tax Stimulus Provisions directly impact individuals while the Appropriated Funds increase the spending capability of government agencies.
Governor Beverly Perdue reports that North Carolina will receive about $6.1 billion in Appropriated Funds, but that amount is subject to change as the federal agencies work through their grant regulations. The $6.1 billion in Appropriated Funds has been allocated to the following general purposes:
- $1.5 billion for existing state budget needs, $1.16 billion of which will go to K-12 educational programs, facility maintenance, and school construction;
- $912 million for transportation infrastructure construction and improvements;
- $137 million for water and sewer projects;
- $207 million for state-selected energy and weatherization projects; and,
- $3.4 billion for public health, Medicaid, welfare programs, public housing, non-K-12 educational programs, and law enforcement.
We calculate that approximately $1.14 billion of the Appropriated Funds allocated to North Carolina will be spent on the construction of roads, bridges, and water/sewer systems. As of mid-March, about $466 million of the road and bridge funds had been allocated to specific “shovel-ready” projects. The remaining $674 million will be spent over the next two years, mostly on projects already on the planning boards. The only buildings that are funded by the Stimulus Act are schools.
What You Need to Know
Whether one believes the Stimulus Act is good or bad policy, it is an important law that needs to be understood. The Stimulus Act contains important regulations that mostly have been overlooked by the media and government websites. There are several important issues that have not been widely discussed, at least one of which appears to be unrelated to purely economic considerations:
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The Stimulus Act imposes new regulations on health care providers and their business associates. New regulations impose additional limits on the transfer of protected health information (“PHI”) among health care providers and their business associates. If PHI is mishandled, the Stimulus Act requires those harmed (the patients) to receive notice of the problem, and the law allows the patient to receive part of the increased fines paid by the health care provider. This is likely to increase the number of complaints and a more intensive review of PHI safeguards. In addition, the North Carolina Attorney General now can enforce major parts of the Health Insurance Portability and Accountability Act (“HIPAA”).
- New “Buy American” requirements are imposed. Although the Stimulus Act’s “Buy American” regulations are much less protectionist than earlier versions of the legislation and are designed to not violate existing United States international trade agreements, they do require contractors to keep track of the origin of raw materials and components. If the raw materials or components to be used are not made in the United States, the contractor must follow the funding agency’s particular regulations for allowing exceptions to the “Buy American” requirements. Each funding agency has its own variation of the “Buy American” rule. For example, all U.S. Department of Homeland Security uniforms now are required to be purchased from United States manufacturers. Thus, contractors must assess their particular situation carefully.
- Every dollar of Appropriated Funds must be spent through a government program. The Stimulus Act does not allow the government to make direct grants or loans of Appropriated Funds to individuals or businesses. Although many will receive some tax cuts and credits, all actual spending for services and goods will be funneled through existing federal and state agencies.
- The Tax Stimulus Provisions of the Stimulus Act include many changes to the federal Internal Revenue Code. The federal government expects about $280 billion in tax cuts and credits to be realized during 2009 and 2010 through more than 50 major revisions to the Internal Revenue Code. These changes include, but are not limited to, income credits; a $250 payment to many elderly and disabled persons; a first-time homebuyer tax credit; a new car income tax deduction; and education, child, and energy conservation tax credits.
- The Appropriated Funds are subject to the federal prevailing wage law. The federal law, commonly called the Davis-Bacon Act, requires government contractors and subcontractors to pay the “prevailing wage” to all workers for work performed on a federally-funded project. The “prevailing wage” is determined by the federal government and is highly regulated. Most state and local government projects funded by the Stimulus Act, including school construction, will be subject to the Davis-Bacon Act.
- A new federal agency, the Recovery Accountability and Transparency Board (“Board”), will monitor and oversee all Stimulus Act funding. The Board is charged with preventing fraud and waste, and it must report its findings to Congress. If the Board identifies any fraud, waste, or other violation of the Stimulus Act, it can conduct formal investigations, subpoena witnesses, and refer matters to the U.S. Department of Justice for criminal or civil prosecution. The Board’s investigative powers will extend to both general contractors and subcontractors on projects funded by the Stimulus Act. In addition, the President will appoint a Recovery Independent Advisory Panel which will monitor the Board’s investigations of fraud and waste. Even for businesses with significant government contracting experience, there is a need to appreciate and understand this new oversight process.
- The Stimulus Act provides whistleblowers with additional protections. To assist in achieving the goal of reducing waste and fraud, the Stimulus Act imposes extensive and complicated procedures designed to encourage federal, state, and private employees to report possible wrongdoing. For purposes of the Stimulus Act, wrongdoing includes not only illegal acts, but also mere wasteful spending and danger to the public associated with the use of federal funds. The reporting employee is afforded additional protections from retaliation. Private contractors who work on Stimulus Act projects are subject to this new provision. Therefore, all contractors working on Stimulus Act projects should review the whistleblower provisions in their government-funded contracts carefully and ensure that their practices comply with the new requirements.
Conclusion
The Stimulus Act presents many challenges for businesses and individuals wanting to benefit directly from the increased federal spending. The Appropriated Funds portion of the Stimulus Act helps to ensure that existing programs and projects receive funding, but it is unlikely to bring sustained investment in completely new projects. Contractors, service providers, and individuals should identify the Appropriated Funds of most interest to them and investigate the opportunities to benefit from the funding. In addition, individuals and businesses should investigate the new tax rules, credits, and programs in the Tax Stimulus Provisions to maximize the tax benefits of the Stimulus Act.
For further information regarding the issues described above, please contact James W. Norment.
