Chart 1

The movement of sector views to negative from stable and back again over the past year reflects how much the COVID-19 pandemic pressured credit quality compared with pre-pandemic conditions. 2020 started with only higher education and ports (transportation) on a negative sector view; as of April 2021, S&P Global Ratings' sector views of higher education, not-for-profit health care, and parking (transportation) remain negative. In the interim, all USPF sectors spent an extended period on a negative view, with the view returning to stable only after credit pressures had eased.

ARP stimulus is an integral element of stabilizing credit quality across USPF, and we're watching several key issues (see chart 2).

Chart 2

Sectors To Watch

State and local governments

The ARP's $350 billion spread across U.S. states and local governments will help foster a smoother economic and financial landing from the turbulence and uncertainty of the pandemic. ARP dollars and a strong economic growth forecast led us to revise our sector view back to stable. Positive momentum from additional aid and an improving economy will buoy most issuers, but we expect some areas of stress will persist. From an economic and revenue standpoint, pandemic-accelerated changes in where and how Americans work will require ongoing focus to determine if there are permanent shifts that affect credit quality.

Transportation

ARP stimulus will be a lifeline for many operators. The measure includes money for the hardest-hit transport sectors: $30.5 billion for public transportation, $18 billion for airlines and manufacturers, and $8 billion for airports. Money received thus far by transit operators and airports is expected to last until 2022-2023, so additional support will help shore up operations now and in the medium term. Because airports can pass along costs to airlines, transit operators face the most pressure and uncertainty. All eyes are on the Biden Administration's $2.3 trillion American Jobs Plan that addresses infrastructure needs and how it could augment support for transit operators, particularly if customer usage doesn't increase as vaccines roll out.

Higher education

There's a widening divide between stronger and weaker higher education institutions, and along with not-for-profit health care, higher education is one of only two USPF sectors where our sector view remains negative. ARP will be the third round of stimulus to support the sector, and it provides $40 billion in additional direct aid for colleges and universities, both private and public, including community colleges. Demand for big-name private universities and public flagships is up, while less-selective institutions and those with less financial flexibility face more credit pressure. Vaccination rollouts and herd immunity will be front and center through the summer and fall as schools gear up for enrollment.

2021's Round Two For The Federal Government: Infrastructure

The importance of ongoing infrastructure investment for governments across the U.S. can't be understated. Should the long-awaited infrastructure package be approved in 2021, governments would benefit from both the funding opportunities it provides as well as budgetary relief from reducing some pay-as-you-go capital costs. In recent years, other major transportation proposals didn't receive funding; should the latest version pass, it could provide significant support.

The magnitude of the Biden Administration's $2.3 trillion American Jobs Plan also widens the focus beyond transportation infrastructure to expanding home and community care for the elderly, high speed broadband, and school construction. These investments speak directly to the core function of governments, and also channel funding to accelerate investment in issues that focus on the 'S' in ESG (environmental, social, and governance) factors. If the final version of the bill contains these provisions--and passes--it could support the social fabric of local governments and promote long-term credit stability more than roads alone could do.

Chart 3

Infrastructure funding is at a critical juncture

In its report, "Infrastructure After COVID-19: Risk Of Another Lost Decade Of U.S. State Government Capital Investment," published Oct. 29, 2020, S&P Global Ratings detailed the implications of reduced capital spending for infrastructure programs around the country. The Biden plan, as proposed, would help restore some of the growth lost by state and local governments for the past 10 years, including jobs and tax base expansion.

Chart 4

The outcome from a $2.1 trillion infrastructure program (similar in size to the $2.3 trillion recently proposed by President Biden) would inject an additional $5.7 trillion to the economy over a 10-year period, creating 2.4 million jobs by 2024. While many of these project-related jobs would end, the productivity boost to infrastructure would create 713,000 more jobs by 2029 than without an infrastructure plan (see "Infrastructure: What Once Was Lost Can Now Be Found--The Productivity Boost," May 6, 2020).

Regional And Sector Highlights

The federal stimulus, strong economic forecast, and infrastructure proposal should yield positive results for credit stability across the country. The post-pandemic starting point for governments differs, and we expect recoveries will come more quickly in some regions that others. However, projections from IHS Markit don't show significant variation. For example, IHS Markit projects retail sales growth in 2021 of about 8% in all regions, although performance in 2020 and 2022 varies slightly more (chart 5).

Chart 5

Similarly, GSP projections for 2021 indicate growth of about 6% in all states, despite a wider range in variability during 2020 (chart 6).

Chart 6

Unemployment rate projections for 2021 show less variation than the regional averages in 2020, where two regions (Mid-Atlantic and Pacific) both hit nearly 10% (chart 7).

Chart 7

For more information, see table 1.

In Focus: Leisure And Hospitality Recovery Is Poised To Accelerate

Despite improvements in overall credit stability for state and local governments, across the U.S. tax collections from hospitality and tourism taxes remain depressed. With wider vaccine distribution and improvement in the overall economy, this downward trend may be turning the corner for some issuers, but for others--particularly those with less revenue diversity--the pressure could persist longer and affect credit quality.

• Leisure and hospitality employment recovery is far from pre-pandemic levels, which dragged GSP down in all states and was the leading contributor to the declines in 38 states;
• States and local governments with a disproportionally greater concentration of leisure and hospitality taxpayers are forecast to benefit from broad positive economic momentum but some will remain laggards;
• Barring a derailment in vaccination progress, economic stresses are forecast to ease across all regions.

Leisure and hospitality employment was hit hardest

A year removed from the onset of the pandemic, signs of recovery are gaining a foothold in leisure and hospitality, although pressures remain (chart 6). As states took measures to contain the spread of the coronavirus, broad business closures coupled with unevenly deployed mobility restrictions in the early months disproportionately left the tourism sector among the hardest hit.

Chart 8

After bottoming out in April, total employment in the leisure and hospitality sector has inched back up but is still well off its pre-pandemic levels after flattening out through the winter. Among all employment sectors, leisure and hospitality remains the most depressed followed by mining and IT, although they represent the two smallest shares of the total employment at 0.4% and 1.9%, respectively.

Sector size matters, but proportion relative to the state matters more

As stated in "Tourism-Dependent U.S. States Could Face Credit Pressure From COVID-19's Outsized Effects On The Industry" (published April 27, 2020), we believe that tourism would be hardest hit by COVID-19 mitigation efforts and this, in turn, would affect state economies disproportionately reliant on the tourism and travel sector. Even now, as a large share of states have effectively reopened all segments of their economies, it's uncertain to what degree a segment of the population will be averse to resuming leisure activities and travel as they did before the pandemic. Changes in the tourism sector that linger or become permanent could result in a much slower recovery for tourism, adding longer-term credit stress to states and regions whose economic bases have historically been supported by the sector.

When compared with the U.S. as a whole, the 10 states in table 1 have a disproportionate share of employment from the leisure and hospitality sector; six of them ranked among the bottom quartile as most hit by the pandemic, as measured by their decline in GSP. Notably, by year's end Nevada is forecast to lead the national economic rebound among states and rank at the top of the list despite having the highest employment concentration of leisure and hospitality. Reflecting the broad economic rebound forecast for 2021, all but three states won't show net GSP growth gains above their 2019 levels, although they're near the state median of 101.6%.

Table 1

Table 2

Related Research

• Credit Conditions North America Q2 2021: As Outlook Brightens, Risks Remain, March 30, 2021