Chart 1

The $1.9 trillion American Rescue Plan (ARP) was signed into law a year to the day after COVID-19 was declared a pandemic. This is the sixth stimulus bill passed since the onset of the pandemic and the largest to date. In aggregate, enacted COVID-19 relief funding is $5.2 trillion. The federal government's swift action on monetary and fiscal policy initiatives over the past year has supported credit quality across U.S. public finance sectors and the plan offers significant and direct aid for most. In addition to the sector support, the expansion of unemployment benefits, stimulus checks, and tax credits will boost consumer spending and accelerate economic recovery. S&P Global Ratings also believes the enhanced federal funding and policy focus to speed vaccination and contain the coronavirus will have marked economic benefits.

Chart 2

Chart 3

States: Direct And Flexible Aid Bolsters Fiscal Outlook

ARP provides $195.3 billion for states and the District of Columbia (DC). An additional $10 billion, available for states, territories, and Tribal governments, is carved out for critical capital projects to be determined at the state government level.

The $195.3 billion will be distributed in two primary buckets and states must spend their share by Dec. 31, 2024. The first amount is an even distribution of $500 million to all 50 states and DC. Then an additional $168.5 billion will be distributed based on a formula influenced by a state's number of unemployed workers. The last of the money, about $755 million, will be allocated to DC to retroactively adjust previous stimulus provisions to equate the district's allocation to that of a state government.

Flexible aid

Unlike the previous stimulus bills, this money has a wide range of allowable uses. States can replace budgeted revenue they couldn't collect due to the pandemic to balance budgets. They can use the funds to spur economic activity. And they can improve essential infrastructure such as water, sewer, and broadband. Two notable restrictions on this stimulus money are: States can't use it to reduce state level taxes, and they can't use it for pension payments.

Structural budget alignment will be key

We view this as a generous allocation. Many states have weathered the budgetary impact of the pandemic through using reserves, adjusting revenue expectations, and cutting expenditures. Furthermore, the conservative revenue estimates many states adopted for the fiscal year ending June 30, 2021, are being exceeded year-to-date, helping buoy budgets. We will review each state's approach to spending the stimulus money and what the implications might be for future structural budget alignment.

Local Governments: Direct Funding Supports Fiscal Stability

The previous stimulus funding helped cover costs, but for many local governments in fiscal years 2020 and 2021, budget gaps were sizable, which required cutting costs and reducing reserves. Given limited restrictions on the use of ARP funding, local governments should be able to replenish their reserves, and in many cases they will still have plan dollars to use for new projects. However, even with this windfall and signs of overall economic improvement, historically, recovery takes longer to arrive for many local governments, and so, to maintain fiscal stability they will need to balance use of the ARP money for current and future budget gaps and for funding new projects. For example, property tax-reliant governments may not see valuation-related reductions in collections until 2022, and will need to be prepared to address those, particularly if there are major decreases.

Education funding gets a significant boost

For K-12 public schools and charter schools, $125 billion from the ARP comes on top of $54 billion in stimulus from the package passed in late December and $13.5 billion in CARES Act funding earlier in 2020. Many school districts and charter schools ended fiscal 2020 with a surplus because they were not operating buildings during pandemic shutdowns and had received CARES Act funding. In addition, about 25% of charter schools that we rate were approved for loans under the Paycheck Protection Program. All these sources of liquidity were key in supporting schools' operations and providing financial flexibility for the near term. However, the $204 billion allocated to states via ARP may play as critical a role for schools as the one-time money does; better results at the state level mean less chance of per pupil state aid cuts, a key risk for the stability of school district and charter school operations since the start of the pandemic.

How funds are deployed will be key

How local governments use the one-time revenue will be an important factor for long-term credit stability and ratings. For those facing multiyear structural imbalances, the stimulus may be a lifeline arriving just in time to avert major expenditure reductions. For those that saw less revenue softness during the pandemic, they could use stimulus money to accelerate projects that will have economic benefits. And for the many governments that fall in between, management teams will have to balance the demands of reserve replenishment against the potential for fueling economic growth. We believe this final round of stimulus supports credit quality and economic expansion for the sector but we will monitor issuers for the longer-term economic and revenue implications of the pandemic.

Transportation Infrastructure: More Support Creates A Recovery Path

Public transit systems and airports continue to benefit from very substantial federal support. After receiving over a combined $60 billion in federal aid under both the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) enacted March 27, 2020, and the Coronavirus Response and Relief Supplemental Appropriation Act (H.R. 133) (CRRSAA), enacted Dec. 27, 2020, the ARP will fund $30.5 billion across various grant programs for transit operators overseen by the Federal Transit Administration and $8 billion in grant programs overseen by the Federal Aviation Administration. Of the total $30.5 billion in transit money, $26 billion will be made available to larger transit operators under the urbanized area formula grant program that awards more dollars based on metrics like vehicle revenue miles, passenger miles, and population density. Of the $8 billion in airport sector money, $6.9 billion is for airport operators and $800 million for airport concessions. Grant recipients are required to retain jobs.

Additional stimulus buttresses financial outlook

We view this current round of federal aid to the transportation sector as a significant credit strength for issuers, providing both liquidity and certainty to financial operations extending into 2023 or beyond, for some. Uses of federal dollars remain flexible: debt service, operating expenses, and other expenses that would have otherwise been paid for by lost revenue are eligible. Additional support for the airport sector has come indirectly via federal aid to the airline industry. Including payroll support and secured lending programs, airlines have collectively received approximately $82 billion, which, in turn, allows for continued flight operations and schedules that support airport authorities' airline and nonairline revenue performance.

Housing: More Direct Support Helps Renters And Homeowners

Building on initiatives of the previous two relief bills, the ARP further supports the housing sector through both direct payments to individuals and funding specifically targeted to help renters and homeowners meet housing-related expenses including utility bills. The $21.55 billion in rental relief adds to the $25 billion Emergency Rental Assistance Program (ERAP) funded in December's CRSSA. ERAP funding was allocated to states, territories, and cities with populations larger than 200,000. The money can be used for rental payments as well as utility payments for households earning under 80% of area median income that are unemployed or have lost income due to the pandemic. With the Centers for Disease Control and Prevention-mandated eviction moratorium about to expire at month's end, this funding is a critical resource for renter and homeowner stability.

Loan performance remains strong

While there is a risk that that millions of renters could face eviction, and the Federal Housing Finance Agency (FHFA) recently announced the extension to June 30, 2021 of forbearance to qualifying multifamily borrowers, the loan portfolios of housing finance agencies (HFAs) and community development financial institutions have reported few, if any, delinquencies. Similarly, rental housing bond portfolios have reported only marginally higher rent delinquencies, with age-restricted housing the exception.

Assistance for at-risk homeowners

ARP also includes nearly $10 billion for a new Homeowner Assistance Fund. This is the first federal money specifically to assist homeowners in advance of the expiration of various forbearance moratoriums. FHFA and the Department of Housing and Urban Development have extended their respective foreclosure moratoriums through June 30, 2021.This Treasury-administered program will provide money to states, territories, and Tribal governments. Although many HFAs are reporting elevated delinquencies and forbearance, we believe their programs contain sufficient equity and liquidity to withstand this near-term stress at current rating levels.

Not-For-Profit Health Care: Limited Direct Funding But Policy Changes Are Beneficial

While the ARP offers limited direct funds to health care providers (relative to previous legislation), it does have provisions supporting health care institutions, although many are temporary, thereby likely limiting any rating impact. Included in the plan are policies to expand health insurance, which we believe will broadly support credit quality for not-for-profit health care issuers. Despite their temporary nature, some of these provisions could be the gateway, over time, to other changes that expand insurance or could result in future legislation to make benefits more permanent. Below, we've outlined the ARP provisions that we believe would have greater impact for not-for-profit health care providers.

Affordable Care Act supported by expanded coverage

This bill temporarily increases and expands subsidies to a larger group of individuals who can purchase health insurance on the health insurance exchanges. Individuals would benefit because they would be more readily able to seek care and providers would benefit from an expanded pool of covered patients covered by insurance. Furthermore, individuals with expanded premium subsidies might purchase insurance with lower deductibles, thus also minimizing bad debt for providers. The expanded subsidies, however, are only for two years and so benefits would be limited, unless there is an extension or legislation that makes the expanded subsidies permanent. ARP also gives enhanced subsidies for those receiving unemployment benefits in 2021. Another short-term provision is the federal government's full subsidy of premium payments (until September 2021) for individuals who lost their jobs and are on employer-sponsored Consolidated Omnibus Budget Reconciliation Act insurance, which tends to be quite costly. The latter will temporarily aid providers because they can maintain favorable commercial rates for these individuals who can keep their employer-sponsored insurance.

Direct support for rural health

Rural health care providers have been allocated approximately $8.5 billion in direct funding to cover lost revenue and higher expenses related to COVID-19. This could significantly affect this subset of providers, especially as many were struggling even before the pandemic. The plan broadly defines the term "rural health care" and this could widen the eligibility net.

Expanded Medicaid in non-expansion states could be a strength, but initial uptake is likely limited

ARP offers financial incentives to expand Medicaid in the 12 non-expansion states. Whether this will spur any immediate change in those states isn't clear, but to the extent that a state does take this up, we would see it as favorable to providers that previously might not have received any payment, or received limited payment for those previously uninsured patients.

Higher Education: ARP Provides Third Round Of Funding, But Is It Enough?

The plan includes $40 billion in funding for private and public colleges and universities, including community colleges. This bill represents the third time in the past year that federal money has been provided for colleges and students through emergency aid legislation, and it's the largest of the three measures, which total more than $80 billion. Last spring, schools received $14 billion in funding from the CARES Act and in December 2020, they received $22.7 billion from the CRRSAA. As with the previous relief bills, institutions must spend at least half of the money on emergency financial aid grants to students. The formula for determining how much each school receives is based on the relative share of students receiving federal Pell grants that a school enrolls. This federal support comes at a critical time, as U.S. higher education is still under significant COVID-19-related operating strain, with some schools being hit harder.

Almost all schools are facing reduced revenue from tuition and auxiliary income and the uneven economic recovery has caused additional budgetary stress in all other revenue sources. At the same time, pandemic costs related to testing and cleaning have continued to rise. The ARP money will provide welcome fiscal relief but likely won't fully offset the pressures on the sector.

For public universities and colleges, ARP's $204 billion for states is likely to alleviate potential cuts to higher education funding, which has been a key risk for this group. However, although this level of stimulus funding and signs of overall economic improvement are encouraging, we believe that recovery for the sector will take time and will widely vary by school. Should the COVID-19 vaccination effort this year allow economies to recover and revenue to stabilize, while providing herd immunity to students, staff, and faculty, we expect in-person student enrollment will resume for fall 2021.

Two-year community colleges have faced more enrollment stress than expected. Historically, enrollments in two-year programs have increased significantly during a recession, but this pandemic and economic recovery defy comparison. Cutbacks in course offerings and overall health and safety risks resulted in community college enrollment plummeting in fall 2020, which has continued into spring 2021. Schools report that COVID-19-related restrictions have impaired access and affordability for students, and overall, effectively transitioning vocational and technical programs to online formats has been difficult. Enhanced federal stimulus to these institutions, as well as direct aid to state and local governments, should enhance fiscal stability when combined with schools' flexibility to reduce spending.

S&P Global Ratings believes there remains high, albeit moderating, uncertainty about the evolution of the coronavirus pandemic and its economic effects. Vaccine production is ramping up and rollouts are gathering pace around the world. Widespread immunization, which will help pave the way for a return to more normal levels of social and economic activity, looks to be achievable by most developed economies by the end of the third quarter. We use these assumptions about vaccine timing in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.